Sole Proprietorships in Canada

A sole proprietorship is a registration of a business that is owned by an individual.  The proprietor is said to be self-employed.  This is the simplest form of a business organization.  The proprietor secures the capital, establishes and operates the business, assumes all the risks, accepts all the profits and losses, and pays all the taxes.  Any legal responsibilities arising out of the business activities are the proprietor’s.  All assets, business or personal, can be legally used to discharge the liability. 

If an individual wants to carry on business under his or her own name then he or she does not need to register.  However, if you wish to obtain other types of licenses for your business, you may still need to register.  If the individual wishes to carry on business under a name other than his or her own then he or she must register that name.  An example of a sole proprietorship would be Joe’s Dry Cleaning. 

Sole Proprietorships are governed pursuant to the provincial and territorial legislation in Canada.   Depending on the province or territory in which you live, there will be a different procedure.  However, basically a form will need to be completed and a fee will need to be paid.  In some provinces or territories the name of the sole proprietorship will also need to be cleared and reserved.  In Ontario it is not necessary to reserve the name in advance.

The sole proprietor has control over all decisions related to the business.  All profits of the business revert to the sole proprietor unless he chooses to share some of the profits with his employees.   Minimal legal assistance is required and therefore the startup costs are less.  Less government filings are required as well.  The freedom to make decisions and plan without consultation enables the sole proprietor to react to change and new opportunities more quickly.

On the downside, the sole proprietor is personally responsible for the debts and actions of the sole proprietorship.  A creditor with a claim against a sole proprietor would normally have a right against his or her personal assets.  If the claim was large then this could cause financial difficulties.   Insurance should be considered for such risks.  Since there is only one person if that person does not have the proper expertise then the business could fail.  As well, obtaining financing can be difficult because banks may be reluctant to lend to a sole proprietor with a business idea.  It can be more difficult to sell a sole proprietorship and the person may be restricted to selling the assets alone rather than the business itself.

Business income is taxed in the hands of the owner as personal income.  All business losses, except for some, can be deducted from the owner’s personal income tax.  At lower levels of income it may be more advantageous to be a sole proprietor because the corporate tax rate is greater than the lowest personal income tax rates.  At higher levels the corporate rate may be less.  You should discuss this with your accountant before making a decision on the best form of business to start.

Can you register your own sole proprietorship?  In most jurisdictions in Canada you can.   There are a number of online services available with the use of a credit card or you can attend your local provincial or territorial government to register in person paying cash or by cheque.   Some provinces have Kiosks available where you can register online.

The registration of a sole proprietorship lasts from three to five years depending on where it is registered in Canada.  You must renew it just prior to or on the expiry date.  Some jurisdictions may provide for a grace period.  It is suggested, however, that you renew just prior to the expiry date to ensure that you obtain the same registration number.  There will be a fee payable upon renewal of your sole proprietorship.   The onus is on the sole proprietor to know when his or her registration is going to lapse and to ensure it is renewed.  The government will not let you know when it is about to expiry.

If you do not renew your sole proprietorship registration on time you will need to register your sole proprietorship as a new registration.  It will be given a new registration number.  If this occurs you should let Canada Revenue Agency know about the new registration number so they can connect it to your federal Business Number.    

If any of the information on the form that you initial registered changes an amendment must be filed.

The name of the sole proprietorship cannot be amended.   If you wish to change the name of your sole proprietorship you will need to register a new sole proprietorship and cancel the existing one.

In order to cancel a sole proprietorship you must file a cancellation notice.   There is no fee for this.

If you decide to carry on business under a name other than your own and you do not register pursuant to the legal requirements you could be levied a fine. One of the purposes of registration is to allow individuals and corporations who contract your services to be able to include your contact information on court documents if they wish to sue your sole proprietorship.  If at any time a client or customer determines that you are not registered, a complaint can be filed with the Ministry of Government Services and a fine could be levied. 

On the other hand, if you wish to sue a customer for non-payment or otherwise, if you are not registered as required by law, you will not be able to pursue a lawsuit in any court. 

The internet has enabled potential customers to look into businesses prior to dealing with them.  In order to ensure these individuals decide to use your services or buy your products over others, a legal business is the first step in gaining their confidence. 

On the other side, you can contact a search house to find out about a business you are considering working with.  There are a number of reasonably priced searches available that might give you an idea what type of organization you are dealing with.  I have come across companies in the past who are not registered and have refrained from doing business with them because of this since I knew I needed a service I could trust for future relations.

You can register your sole proprietorship in any or all of the provinces and territories in Canada.  You will need to ensure you are registered in your home jurisdiction.   Secondly, you will need to register “extra-provincially” in any other jurisdiction.  

A sole proprietorship registration will stay in effect for a period of three to five years depending on the province or territory.  The onus is on the sole proprietor to ensure his or her registration is renewed.  The government will not remind you that your registration is going to expire.  It is up to the sole proprietor to keep track of the expiry date and to renew the registration just before that date.  In order to renew a registration you can follow the same procedure as you did for registering the sole proprietorship in the first place.

It is important that the government knows your current address.  The government occasionally changes policies and sends out information to the address on file.  If they do not have your correct address you may miss out on valuable information that could affect your business.