When you're considering the legal structure of your business, in Canada you basically have four forms of business ownership to choose from, a sole proprietorship, a partnership, a corporation, or a cooperative.
Each of these forms of business ownership has advantages and disadvantages that you will want to weigh before choosing a particular form of business for your new venture. First, let's look at the advantages and disadvantages of sole proprietorships, the most popular form of business ownership.
The Advantages of a Sole Proprietorship
The simplest form of business is the sole proprietorship, a business owned and operated by one individual. You can operate a sole proprietorship under your own name, or under another name you've chosen (as long as you don't add any of the legal designations of other forms of business, such as Ltd. or Inc.)
There are a lot of advantages to sole proprietorships.
One of the biggest advantages of a sole proprietorship is that setting up and administering the business is comparatively easy and inexpensive. For instance, in most provinces, if you choose the sole proprietor form of business ownership and operate it under your own name, you don't even have to register your business.
(Note that while the basic procedure for setting up a business is the same, no matter what part of Canada you live in, the details are different in each province and territory. For start up information for particular provinces, such as business registration procedures for each form of business, see the Business Registration section of this website.
And even if you do have to register your sole proprietorship with your province or territory, it's a lot more inexpensive to register than a corporation. Nor do you have to make annual filings when you run a sole proprietorship (although in some provinces, such as Ontario, you have to renew your sole proprietorship business registration every five years).Another of the big advantages of the sole proprietorship form of business ownership is the tax simplicity. As a sole proprietor, you declare your business income on your personal income tax form, rather than having to file a separate tax form, (as you would have to do if you chose the corporate form of business ownership).
To many small business owners, however, the best advantage of the sole proprietorship is that as a sole proprietor, you own 100% of your business. You’re the one that runs your small business and no one else can tell you what to do or how to do it.
Disadvantages of Sole Proprietorships
What appears to be an advantage at first look can also be a serious disadvantage. When it comes to disadvantages of sole proprietorship, the sole ownership aspect can be disastrous if things go badly.
If you set up your business as a sole proprietorship, legally your business is considered to be an extension of yourself, meaning that you assume all responsibilities for the business. This means that as a sole proprietor, you are personally responsible for all the debts and liabilities of your business. So if your business fails, any of your assets, including your personal assets, can be seized and used to discharge the liability you’ve incurred.
This personal liability is the biggest disadvantage of choosing to operate as a sole proprietorship. Other disadvantages of sole proprietorships include a lack of tax flexibility, the increased difficulty of raising money and the potential for weak management if the sole owner doesn't have all the skills or knowledge necessary to lead the company well.
Let's look at your other choices of forms of business ownership. for legally structuring your business. Continue on to the next page to read about the advantages and disadvantages of the partnerships form of business.