A sole proprietorship is an unincorporated business that is owned by one individual. It is the simplest kind of business structure.
The owner of a sole proprietorship has sole responsibility for making decisions, receives all the profits, claims all losses, and does not have separate legal status from the business. If you are a sole proprietor, you also assume all the risks of the business. The risks extend even to your personal property and assets.
If you are a sole proprietor, you pay personal income tax on the net income generated by your business.
You may choose to register a business name or operate under your own name or both.
If you operate as an individual, just bill your customers or clients in your own name. If you operate under a registered business name, bill your clients and customers in the business's name. If your business has a name other than your own, you'll need a separate bank account to process cheques payable to your business.
While there are costs for small businesses, sole proprietors enjoy very low startup costs. You can start your business without any fees, initial, annual, or otherwise. There are also very limited formalities in terms of registration or operating procedures.
As a sole proprietor, you'll never require approval from shareholders or a board of directors. You can make decisions as you see fit.
In a sole proprietorship, all the profits go directly to the owner. You can also deduct business losses from your personal income, which allows you to sit in a lower income tax bracket. You also won't have to pay unemployment insurance taxes on your salary.
One of the major risks of a sole proprietorship is that the owner assumes personal responsibility for any and all liability. That means that if there's a business debt, creditors are able to satisfy the debt from personal assets like homes or personal bank accounts.
A sole proprietorship is also far more difficult to sell. That's because assets, licenses, and permits have to be individually transferred and the same bank accounts and tax identification numbers cannot be used.
A sole proprietor pays taxes by reporting income (or loss) on a T1 income tax and benefit return.
If you are a sole proprietor, you or your authorized representative have to file a T1 return if you:
You also need to file a return if you are claiming an income tax refund, a refundable tax credit, a GST/HST credit, or the Canada Child Benefit. You should also file a return if you are entitled to receive provincial tax credits.