This volume of the legal entity review series will cover sole proprietorships in Ontario. Sole proprietorships are a popular and flexible choice for entrepreneurs and business owners who work alone and prefer a flexible and low maintenance business structure. Similar to our post reviewing general partnerships, we will review a sole proprietorship’s formation, liability risks, and dissolution in the context of Ontario law.
The sole proprietorship is the simplest form of business structure characterized by an individual carrying on business in their own name. Many small businesses operate as sole proprietorships. The distinguishing factor of sole proprietorships is that there are no other owners and no legal distinction between the owner and the business. This is important when considering legal liability, which will be discussed below.
As with many businesses in Ontario, the sole proprietorship must comply with the Business Names Act. Specifically, section 2(2) states that:
“No individual shall carry on business or identify his or her business to the public under a name other than his or her own name unless the name is registered by that individual.”
If the potential sole proprietor intends to carry on business in a name other than their own, it must be registered with the province. Otherwise, there are no other legal steps to take as the sole proprietorship is automatically formed when an individual begins doing business in their name.
However, this does not exempt the business from other legal requirements, such as having the necessary permits to perform services, filing business taxes, maintaining insurance, and registering for HST.
The minimal formal requirements to register and form a sole proprietorship may make it seem like the most attractive option for the business owner. However, this benefit is counterbalanced by the lack of legal protection a sole proprietor offers.
Unlike general partnerships and corporations, a sole proprietor is not a distinct legal entity from its owners. This means that the owner is personally responsible for all aspects of the business, including its finances, liabilities, and day-to-day operations. If an action is commenced against a sole proprietor, the personal assets of the owner may be seized if damages are awarded against them. Even if the sole proprietor incurs debts for the business, the owner’s home or savings may be used to satisfy those obligations.
The primary protection of a sole proprietor is through contract or insurance. Further, it is not uncommon for sole proprietors to maintain (or be required to maintain) commercial general liability insurance. If the sole proprietorship is sued, the Business Name Act states that leave of the court is required to defend the lawsuit under a different name than that of the business. Depending on the specifics of the case, however, this may be difficult to achieve.
In order to cancel or dissolve the sole proprietorship, the business owner must close the business by filing the appropriate request with the provincial government to cancel the Master Business License.
Under the Income Tax Act, individuals with business income must report that income on a calendar-year (fiscal period) basis. This requirement also applies to sole proprietorships. However, the sole proprietor may elect to use a non-calendar-year fiscal year, such a request to be filed with the Minister of National Revenue (“MNR”).
Similarly, the income or losses from the sole proprietorship must be amalgamated with the business owner’s personal income or losses, and this total amount is subject to the applicable tax rate under the Income Tax Act. Sole proprietors are permitted to offset their income from other sources and carry it back to reduce income in any three previous taxation years in the 20 years following the year of the loss.
There could be various tax benefits for business owners choosing between a sole proprietor versus another type of legal entity so it is important to consult experts when making this important decision.
The experienced business lawyers at Bader Law regularly help business owners organize their business structures and help them choose the appropriate entity to carry on business under. Our lawyers provide clients with a review of their specific needs and work closely with them to design contracts and business structures that align with their goals and contemplate future potential issues. Whether you run a small family business or manage a large corporation, our team has the requisite knowledge to effectively address the needs of your organization.
Our business law team also regularly advises clients on corporate transactions, shareholder agreements and disputes, and business organizations. To schedule a consultation with one of our corporate lawyers, call us at 289-652-9092 or contact us online.