A sole proprietorship is the simplest form of carrying on business. In a sole proprietorship, a business is operated directly by an owner, without the formation of a corporation or any other intermediary legal structure.
- Compliance for a sole proprietorship is easier and cheaper than a corporation.
- The sole proprietor files only a single personal tax return – the business income is combined with all other sources of income and taxed at the gradual personal tax rates.
- The sole proprietor can split their income by employing or otherwise engaging the members of his family into the business.
- Losses and certain start-up costs can be written off against the proprietor’s other income or be carried over to other taxation years, reducing their overall tax burden.
- The main disadvantage of a proprietorship is unlimited liability. The business owner is liable for all debts and liabilities of the business, including personal liability for unpaid income taxes and GST/HST.
- There are only limited tax planning opportunities as there is no legal separation between the business owner and her business.
Once the business has grown significantly or created a high risk of potential liabilities for business proprietor, the proprietor can transfer the business on a tax-deferred rollover basis to a corporation. It is recommended that proprietors speak with a tax lawyer before implementing any tax-deferred rollover.
TaxChambers LLP is collaborating with Andersen Global® in Canada.