Setting up a Sole Proprietorship – Structuring Your New BusinessSeptember 25, 2011 A Blog Post, business law, Buying a Business, entrepreneur, small business, start-up business, starting a business, types of business business name registration,business registration,entrepreneur,entrepreneur law,New business,small business,sole proprietorship,start-up business,starting a business,structuring a business,what is a sole proprietorship
The Sole Proprietorship
Sole Proprietorships in Nova Scotia
by Garnet Brooks, Business lawyer
One of the decisions a new small business entrepreneur faces is how to structure their business. This series will be a brief look at some of the most common ways new small businesses are structured.
A sole proprietorship is a business that is operated / owned by one person without partners. This is the easiest way to start a new business because there are no registration requirements in Nova Scotia, New Brunswick, Prince Edward Island (PEI), or in Newfoundland and Labrador, if the business operates under the owner’s name.
If the business uses a name other than that of its owner’s personal name, a search must be conducted and, provided the business name is approved, it must be registered as required in section 4(1) of Partnerships and Business Names Registration Act, (Nova Scotia). This helps avoid name conflicts with other businesses, provides some protection from potential later registrants using or attempting to use your business name and lets customers know who they are dealing with. Business name registration, however, does not deliver the same level of protection afforded by trademark legislation, and is limited, generally, to the province of registration.
Further, there may be consequences to operating a business under an unregistered name (which is not the name of the sole proprietor him or herself) which may include monetary penalties or fines, and a restricted ability to bring or defend legal proceedings.
With a sole proprietorship, there is no legal separation between the business and its owner. A consequence of this is that an owner cannot employ him or herself because a person can’t contract with him or herself. Business income is calculated and taxed as the owner’s personal income (normally called “Self Employment Income” on a tax return). This can be an advantage when losses are incurred during the start-up phase of the business. The losses can be used to offset other taxable income (such as the common situation when a new entrepreneur keeps a regular job while starting up his or her business) resulting in less income tax payable on the other employment income. However, the opposite is that if a sole proprietorship turns a profit, the money is taxed at the personal income tax rate in addition to other employment income.
A disadvantage with having a sole proprietorship is that the owner has unlimited liability and is personally responsible for all liabilities of the business. Therefore, the owner’s personal assets are available to creditors in satisfaction of liability. One way to limit liability would be through insurance. This would however, only be within the limits and coverage of the policy, anything in excess is still at the entrepreneur’s personal exposure.
A sole proprietorship cannot expand its capital base without incurring debt. If a person or entity makes an equity investment (capital contribution) in a sole proprietorship, it will no longer be a sole proprietorship. (see the legal definition of partnership)
Sole proprietorships may be the most appropriate choice for structuring a new business. However, this decision would depend on the risk profile of the business you are getting into. If the industry is a higher risk one, it may be best to spend the extra money to incorporate the venture. The merits of this can be discussed with your professional advisor.
One last note, if you start a sole proprietorship with the intention to later incorporating, you may be able to do a s. 85 Rollover pursuant to the Income Tax Act (Canada). This will allow you to transfer the business to an incorporated company on a tax deferred basis. (more information on s. 85 rollover’s here).
Garnet Brooks is a Business Lawyer, practicing corporate law and commercial law in Halifax. Click to Contact Garnet.
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Very well said. It’s refreshing to find a blog that I can refer my readers to. Keep up the good work!