Note: This article is provided for educational purposes only. This is NOT LEGAL ADVICE.
Sole Proprietorship is the simplest way to conduct a business. The cost of starting up is low, and the owner and the business are seen as one entity in law.
Registration
In Ontario, there is no requirement to register your business name per se, especially if you are conducting your business under your own name, e.g., Pei-Shing Wang.
However, if you want to open a bank account in a business name that is different from your personal name, you will need to register your business name with the provincial government and obtain a master licence for your business. The cost of registration is nominal, about $70 at the moment.
Although there is no mandatory requirement to register your business, there may be other considerations that encourage you to do so. For example, retailers are often required to register with the CRA (Canada Revenue Agency) and collect GST and PST.
In certain industries, you may be required to be licensed by the regulating body. The regulating body may require proof of your business. However, if you have a master license from the province, you simply comply with the regulations without further need to prove the existence of your business.
Liabilities
In law, there is no distinction between the owner and the business; the owner and the business are seen as one. Therefore, all net income from the business (revenues minus expenses) is treated as the owner’s income, and is taxed accordingly. If an owner owns several profitable businesses, the aggregated income from all businesses may push the owner into the highest tax bracket.
On the other hand, if the business is unprofitable, the owner is liable for the business debt. For example, if the owner borrows money on behalf of the business, and the business is unable to come up with the payment when it is due, the owner will be required to pay back the loan from his or her own pocket. If the owner does not have the money, the owner will be required to sell his or her own assets to satisfy the debt, or to declare bankruptcy.
Beyond the obligation to be responsible for the business debt, the owner is also personally liable for all civil and criminal liabilities incurred during the operation of the business. For example, if the business is being sued by a customer for a slip-and-fall accident, and is found liable, the owner will be held personally liable for the damages. The potential liability of a business owner operating under sole proprietorship in a lawsuit is unlimited.
When a business grows to a certain size, the potential risks of liabilities quickly outweigh the benefits of operating under a sole proprietorship. I generally advises my clients to seek other operation methods when the business has grown sufficiently large.
