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What form should your business take? Part 1 of 4

03 August 2016

Are you unsure which form is best for you when starting your business? Stay tuned to this four part series from the UVic Business Law Clinic explaining all the ins and outs of the different forms!

Sole Proprietorships

Overview

A sole proprietorship consists of one person, the sole proprietor, who owns the assets of the business and is the ultimate decision-maker. When contracts are entered into in the respect of a sole proprietorship business, the sole proprietor will be the contracting party. Furthermore,

the sole proprietorship is not considered separate from the sole proprietor, so the sole proprietor is personally liable for the sole proprietorship.

Formation

To form a sole proprietorship, one simply begins by carrying on business. While there is no formal formation process, there are licensing requirements and a possible requirement that the business name be registered as specified by the B.C. Partnership Act. The cost of registering is small and a failure to register can result in a fine or imprisonment for up to six months. Consequently, those who wish err on the side of caution register the business name. Name registration helps one identify who the sole proprietor is for credit checks, and for the purpose of starting an action. It also helps avoid deception of persons that might arise when the name of the business suggests a plurality of person, and passing off a claim because they have used a business name that has been used by another person.

Funding

Sole proprietorships are typically financed by the sole proprietor’s own assets or other lenders. Sole proprietorships may also be financed by trade credit (where suppliers of goods and services provide these goods and services on credit), which allows the sole proprietor to have the benefit of these goods and services in inventory without having to pay for them immediately. Another means of financing includes loans from persons other than a bank or similar financial institution, in which case securities regulation may apply.

Dissolution

To dissolve a sole proprietorship, the sole proprietor simply stops carrying on business. Since there is no requirement to register the sole proprietorship, there is no need to register its dissolution. The sole proprietor can keep the proprietorships assets once the debts are paid off.

Advantages

Ease of Formation: No formal steps are required to start up a sole proprietorship. Sole proprietorships are formed simply from carrying on business.

Inexpensive to Set Up: Sole proprietors can declare their proprietorship’s income on their personal income tax return and files only one return. Because only one return is required, a sole proprietorship is less expensive by reducing the costs of accounting and reporting services necessary for the business.

Limited Regulation: Sole proprietorships are not subject to an annual requirement like other forms of organizations such as a corporation.

Tax Advantages: In cases where a sole proprietorship incurs losses, these losses can be used to offset current, future, or past income of the sole proprietor. The same cannot be said for a corporation, where a corporation’s losses can only be used to offset earnings in the corporation.

Ease of Dissolution: There is no formal process required for a sole proprietorship’s dissolution. To dissolve it, the sole proprietor simply stops carrying on business.

Disadvantages

Unlimited liability: Since a sole proprietorship is not considered s separate legal entity, the sole proprietor is personally liable for any liabilities the sole proprietorship incurs.

Lack of continuity: A sole proprietorship does not have perpetual existence. It ends with the sole proprietor’s death.

The Business Law Clinic

This information has been prepared by students at the UVic Business Law Clinic. The BLC provides free business legal information to a wide range of business owners, entrepreneurs and non-profit organizations that operate within British Columbia. For more information or to book an appointment, please leave a message on the BLC's voicemail at 250-472-4522, send an email to This email address is being protected from spambots. You need JavaScript enabled to view it. or send a fax to 250-721-8146.

Read 2829 times Last modified on Wednesday, 07 September 2016

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