Talking To Lawyers (Small Business) Series: The Sole Proprietorship
Updated: Jan 24, 2020
According to British Columbia’s Ministry of Jobs, Trade & Technology there were a total of 501,300 businesses in British Columbia in 2017; of these a full 493,100 businesses (98 per cent) were considered small businesses with fewer than 50 employees (and 302,700 of these businesses (60 per cent) were self-employed individuals with no employees). According to B.C.’s Ministry of Jobs, Trade & Technology, small business in B.C. accounts for 35 per cent of overall gross domestic product (GDP).
Clearly, small business owners and the self-employed represent a significant portion of business conducted in British Columbia.
Usually long before an entrepreneur contacts a lawyer, if they ever do, they have considered the what (as in what business they wish to pursue) and the question of why they want to start a new business. One of the first questions often asked when finally seeking advice is how should the business be structured – more likely, should I incorporate my business or not?
For this series we will set aside consideration of specialized subsets of the structures below like not-for-profits, societies, cooperatives, community contribution companies, unlimited liability companies (ULCs) and business required to be formed under particular statutes.
Generally, there are four potential business structures to choose (or not choose, in some circumstances) from:
Below, we will consider the sole proprietorship.
Many entrepreneurs carry on a business without any formal legal organization – and the perceived advantage of not having spent any money on attending to any formal legal organization. If you carry on business alone and have not otherwise incorporated a separate legal business entity, your business is deemed to be, and is called, a sole proprietorship. Don’t be fooled by the fact that it has a legal sounding name – your business is you, personally, period.
The only legal requirement for a sole proprietorship (other than legislation or statute that may still apply regardless of your business structure including municipal business licencing or WorkSafeBC, Goods & Services Tax (GST) and Provincial Sales Tax (PST) registration) is that if a person is engaged in business for trading, manufacturing or mining purposes, and uses a business name other than his or her own, that person must register this name with the British Columbia registrar.
Generally, the sole proprietorship is the simplest form of business organization because it is, basically, a business structure by default for an entrepreneur pursuing a business alone; and requires little by way of registration or working capital required for start-up and there is little by way of ongoing regulatory requirements required to maintain the existence of a sole proprietorship. There is no specific legislation or statute that governs a sole proprietorship like there is for partnership and corporations.
With this type of business organization, you are the sole owner (in fact you are the business, it is not a separate legal entity), all of the growth of the business accrues to you personally and you are fully responsible personally for all debts and obligations related to your business.
You have direct control of decision making of the business and generally only you, as the proprietor, has the ability to legally bind the business (although individuals who are or are held to be agents, a term that has a particular legal meaning, of the proprietor can also bind the business).
It must be emphasized that you have personal, unlimited liability for all of the debts and obligations of the business – meaning if there are any claims for payment or damages they can and will be made against your personal assets (like your house and bank account) to pay them off. These debts and obligations, if any, can and will be pursued against your personal estate if and when you pass away, regardless of the fact that your sole proprietorship business is at an end. From time to time sole proprietors will conduct business under an assumed business or “dba” name, often signing documents and issuing invoices in that informal business name as if they were incorporated. While the use of such names may require registration, as set out above, it does nothing to change the conclusion of the business structure used and the liability that business structure imposes - personal liability - on the entrepreneur and his or her personal assets.
There can be some tax advantages if your business is not doing well (for example, deducting your losses from your personal income, and a lower tax bracket when profits are low). However, as income is taxable at your personal rate, if your business is profitable, this could put you personally in a higher tax bracket.
Having a sole proprietorship tends to complicate the idea of passing the business over to a family member or if looking to sell your business to another person – as there is nothing generally to sell, like shares, that represent an interest in the business. Additionally, raising capital can be difficult. You cannot issue shares, and any other interest – say like a royalty or debt – is basically your personal obligation and will be evaluated entirely in respect to your personal reputation, assets and obligations.
As, for individual entrepreneurs, the sole proprietorship structure is really the “do nothing” individual business structure, if should be emphasized that it is not an active business structure that requires you to do nothing. Regardless of how you decide to pursue your business, other obligations may apply and you must turn your mind to, and attend to, such additional requirements like municipal business licencing or WorkSafeBC, Goods & Services Tax (GST) and Provincial Sales Tax (PST) registration.
A sole proprietorship may suitable only for someone who intends to carry on a business alone and who perhaps has very little by way of personal assets, or whose business have very little by way of present and future debts and obligations. It is not suitable if other people expect to participate in the ownership, decision making or the running of the business.
Endeavor Law can assist new entrepreneurs and small business owners consider, implement and maintain the business structure that is right for their particular circumstances. Endeavor Law will always seek to provide competitive pricing for any legal services requested and is pleased to discuss fee arrangements that suit any potential client.
Does not constitute legal or other advice and must not be used as a substitute for legal advice from a qualified legal professional in your jurisdiction who has been fully informed of your specific circumstances. Information may not be up-dated subsequent to its initial publication and may therefore be out of date at the time it is read or viewed. Always consult a qualified legal professional in your jurisdiction.
 SMALL BUSINESS PROFILE 2018 published by the B.C. Ministry of Jobs, Trade & Technology (see here).