Legal Brief for February, 2012

What is a Proprietorship?

When a person is starting out in a business they often find it confusing to distinguish between the different types of legal structure that would be most suitable for their venture.  There are three basic types that are available - namely a proprietorship, a partnership and a corporation.  This month's Brief will review what is involved in a proprietorship.

A proprietorship, also commonly referred to as a sole proprietorship, is the most basic structure available.  In its simplest terms, it means that the assets of the business that you have started are owned by yourself personally.  In legal terms there is no separation between you and the business.  You are one and the same.  Or, as Louis XIV is reported to have put it, "l'etat, c'est moi".

Some of the advantages of a proprietorship include the following:

1. low cost - you avoid paying any registration fees that are normally required with incorporations or partnerships;

2. easy to start - you don't have to wait to obtain corporate status or deal with other registration delays;

3. simplicity - you avoid having to file additional tax returns and you don't have to file annual corporate registry returns;

4. you own 100% of the business;

5. you can carry on the business under whatever name you may wish to give it (but in that case you are required to register what is known as a "Trade Name Declaration", so that the public can find out who actually own the business).

Some of the disadvantages of a proprietorship include the following:

1. you may not have as many tax deductions or write offs that you might have if you operate your business as a corporation;

2. if your business has financial difficulties or problems, your creditors can sue you personally, thus putting your personal assets such as your house or savings, at risk;

3. potential difficulty in obtaining financing or other forms of assistance.

If you start with a proprietorship form of business, you are not required to continue with that forever.  You can transition if so desired to a corporate structure for example.  There are options available under the Income Tax Act  to have what is known as a tax free rollover of your operating assets from your proprietorship to your new corporation.

In next month's Brief we will consider the 2nd form of business structure, the partnership.