2019-01-15 13:25:30 Self Employed English Learn the advantages and disadvantages of a sole proprietorship & incorporated business, as well as registration requirements in various... https://quickbooks.intuit.com/ca/resources/self-employed/sole-proprietorship/?cid=dis_TB_TOF_QB_CA_QBO&utm_source=taboola&utm_medium=referral&tblci=GiDyZpAM4OGcOuXwcxBnfQ6yBjzgnYphTbHuaF83mSiLLSCS-kM %%title%% %%page%%

What are the Advantages and Disadvantages of Sole Proprietorship?

6 min read

Before you get your business off the ground, it’s crucial to choose a legal structure that best fits your company’s needs. The legal structure you pick for your business has an impact on the amount of taxes you pay, your ability to raise money, the amount of paperwork you’re required to do, and the personal liability you face. Most Canadian small business owners choose from the four major types of business structures: sole proprietorship, partnership, cooperative, and corporation.

At first, you’re likely to choose a sole proprietorship, since it’s relatively simple to set up compared to other legal structures. Also known as a sole trader, a sole proprietorship is the least complex business form for one person who owns and runs the company.

Advantages of a Sole Proprietorship

Registering your business comes with a lot of benefits, including:

It’s simple and affordable

Whether you want to start a food kiosk, a one-person repair shop, or a freelance writing business, a sole proprietorship is a pretty flexible choice for your corporate form. With less paperwork to file, you only need to keep simple documentation for this business setup. You only need to fill out a simple government form to register a fictitious business name, for example. This government site helps you out by explaining the differences between various corporate entities and how to incorporate in Ontario, Alberta, British Columbia, and Quebec. You may also qualify for sole proprietorship tax deductions.

Operating freedom and flexibility

As long as your business remains small, a sole proprietorship is the most flexible business form to change. You can make any change you want, including changing business policies and type of business, without much cost or process. Sole proprietorships also offer a higher degree of control and fast decision making opportunities. Unlike in partnerships or corporations, you don’t need consent or approval from partners or officers to make any business decision.

Disadvantages of Sole Proprietorship

The most common disadvantages of a sole proprietorship business include:

Unlimited liability

In a sole proprietorship, your small business is personally liable for business actions and debts. A sole proprietorship doesn’t exist as an entirely separate entity, and thus, all personal property or wealth is linked to the business. If your business goes bankrupt, you may have to have to dig into your pocket to pay debts.

Difficulty raising capital

As an aspiring business owner, you want your business to grow and take advantage of new opportunities in the next few years. But with a sole proprietorship, finding potential investors and raising capital is no easy task. Investors have less peace of mind regarding the use and security of their investment when it comes to a business with no separate legal entity.

Lack of financial control and difficulty tracking expenses

A sole proprietorship’s looser structure can result in a lax attitude when it comes to preparing financial statements and tracking business expenses. Because you run the business on your own, you may not have enough time to track and separate business and personal expenses. If you’re a sole proprietor, QuickBooks Self-Employed (QBSE) can help you stay organized with easy expense tracking, as well as automatic receipt organization, invoicing processes, mileage tracking, and cash flow summaries.

Requirements for Sole Proprietorships in Different Provinces

Regulations for registering your sole proprietorship business vary by jurisdiction, and taxes can vary from region to region. Check with your provincial and territorial government where you plan to run your business to learn about your legal obligations. You don’t have to register your business if you operate in Labrador and Newfoundland. Here’s what it takes to start a sole proprietorship in Canada’s other provinces:

  • Alberta — If you choose to form a sole proprietorship while using your own name, you don’t need to register the business in Alberta. You will need to seek approval from the provincial Corporate Registry in Alberta if you operate a business under any other name. As a small business owner in Alberta, some of the taxes you pay to the Canada Revenue Agency (CRA) include excise taxes on fuel-inefficient vehicles, certain petroleum products, and automobile air conditioners, as well as excise duties on alcohol and tobacco products.
  • Ontario — If you want to operate your sole proprietorship business in Ontario, you must first choose or create a business name, taking care not to include a legal ending in the name. Registration is not specifically required if you’re conducting the business under your personal name, though the province has a form that you must fill out and send back before starting out. You may also be required to register the business name when opening a business bank account as a sole proprietorship like a corporation would in Ontario, or when you require CRA tax accounts. With other names that are different from your personal name, you must create an account with Service Ontario.
  • British Columbia — In British Columbia, you need to create a business name and conduct a name search to ensure that the name doesn’t exist. Once you get clearance for the name, the BC government requests for your full name, and nature and address of your business before assigning a registration number. If you operate a sole proprietorship under your personal name, you only need to register with the local authorities, not the BC Registrar, to obtain a business licence.
  • Quebec — The province of Quebec allows you to add details to your first and last name. If you’re operating your business under a name other than your personal name, you have 60 days after commencing operations to register your business. When registering a sole proprietorship in Quebec, you must fill out a Declaration of Registration Form and pay an application fee at the office of the Registraire des Entreprises (REQ) in Montréal or Québec City. You must complete this form in English and French.

Why Is It Important To Incorporate a Business?

Incorporation means changing the format of your small business into a registered corporation. This carries many of the same advantages as a limited liability corporation does in the United States, though the LLC form doesn’t exist under Canadian law. The most notable advantage from incorporation is that it protects your personal assets in case someone your company owes claims legal judgment against you.

Unlike in a sole proprietorship where the business dies with the owner, your company continues to exist even when the management changes. Simply put, a corporation is a separate legal entity and is considered a person on its own. The company can file, sue, or be sued, just like real people.

Adding a legal ending, such as Inc., to your business name also brings authority and instant legitimacy. An incorporated business can collect payments, and more easily access loans and capital from different sources. Brand building and marketing can also be easier for corporations because they sell themselves to the masses.

The Bottom Line on Incorporation

If you want to increase profit margins, share losses, more easily access capital, and have financial control over a business that can have perpetual existence, then set up a corporation. As with a sole proprietorship, the steps to incorporate a business vary from region to region. Consult with the CRA and territorial authorities about the rules and regulations of incorporating your business.

Do you want to automate all your business processes and manage them anywhere, anytime? QuickBooks Self-Employed helps freelancers, contractors, and sole proprietors track and manage your business on the go. Join over 5.6 million QuickBooks users today.

Information may be abridged and therefore incomplete. This document/information does not constitute, and should not be considered a substitute for, legal or financial advice. Each financial situation is different, the advice provided is intended to be general. Please contact your financial or legal advisors for information specific to your situation.

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