- Carrying on Business as a Sole Proprietorship
- March 20, 2015 | Author: Allison Godey
- Law Firm: Singleton Urquhart LLP - Vancouver Office
- In the first of this three-part series of articles (see Letter of the Law, Summer 2014), we discussed one of the key benefits of incorporating a company—the immunity from personal liability that incorporation generally affords to the people who direct a company. While there are many advantages to incorporation, it is not always necessary or desirable to incorporate. This article explores the advantages and disadvantages of a simpler form of business organization—the sole proprietorship.
A sole proprietorship is created whenever an individual starts to carry on a business without taking any steps to structure the business in a more formal manner such as incorporation. In a sole proprietorship there is a single equity investor who may carry on business under his or her own legal name or under another name.
The primary advantage of operating a business as a sole proprietorship is the ease with which it can be created and dissolved. As outlined above, it comes into existence when the sole proprietor starts to do business and it ceases to exist when he or she decides to dissolve it or dies. This is much different from a corporation, which exists separate and apart from its shareholders.
In addition, sole proprietorships are less costly to create and continue than corporations. There are no documents to be filed with the Registrar of Companies, although name registration documents may be necessary. Furthermore, a sole proprietorship is not required to file annual reports with the Registrar of Companies in order to maintain its existence.
There are some disadvantages to a sole proprietorship. Since it is not a separate legally recognized entity, the law does not distinguish between the business and the sole proprietor. The sole proprietor owns the assets of the business and contracts personally with third parties. As a result, the sole proprietor is responsible for performing all obligations entered into during the course of business.
If an act or omission in connection with the business causes damage to a third party, the sole proprietor may be personally liable for those damages. While some business arrangements limit the liability of equity investors to the amount they have invested in the business, that is not the case with sole proprietorships. If a sole proprietor is found personally liable, execution against the sole proprietor's personal assets to satisfy a claim or judgment is possible.
It is important to assess the needs of your business before deciding how it will be structured. The sole proprietorship is an ideal business organization for small businesses with few liabilities. However, as the size of the business and its associated liabilities grow, a sole proprietor should consider incorporation.