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Ontario|Business LawSole Proprietorships 206 Sole Proprietorships: Advantages & disadvantages A sole proprietorship is a business that is owned by one person. It is the simplest type of business to start. There are several important features of a sole proprietorship. First, the business and the owner are considered to be one entity under the law. Second, all of the assets of the business are personally owned by the sole proprietor. Third, the sole proprietor is not considered an employee of the business. Because of this, the sole proprietor is not eligible for employment insurance if the business fails. The sole proprietor is not paid a salary, but instead can take money from the business through personal drawings.
Owning a sole proprietorship has several advantages and disadvantages, including important tax implications.
- Advantages
One of the advantages of being a sole proprietor is that you can be your own boss. You can make business decisions without having to ask anyone else. You also get to keep the profits from the business and you have the freedom to end your business whenever you want. A sole proprietorship is the easiest form of business to start. And, although you need to keep separate accounting records for the business, you only need to file one tax return.
- Disadvantages
Owning a sole proprietorship also has disadvantages. The owner is personally responsible for all aspects of the business. If the business is being sued, so is the business owner. If the business owes money, the business owner is responsible for the debt, and the owner may have to use personal assets to pay. If the owner cannot pay the debts of the business, he or she may have to claim personal bankruptcy. The only way to transfer ownership of a sole proprietorship is to sell the entire business to someone else. Otherwise, the life of the business ends when the sole proprietor dies.
- Tax implications
There are also important tax implications of operating a sole proprietorship. Net business income from a sole proprietorship must be included as part of the sole proprietor's personal income. However, if the business suffered a loss, the owner can deduct the loss from other income he or she has received for that year. This will lower the overall taxable income of the owner and reduce the amount of personal income tax that must be paid. If the business made a profit, the profits are taxed at the owner's personal income tax rate. In general, it is better from a tax standpoint to be a sole proprietor if you expect the business to lose money in its early years and you have income from another source, such as employment income.
Business taxation can be very complicated, and it is usually a good idea to contact a tax lawyer or a chartered accountant to determine the tax implications of your particular situation.
Normally, sole proprietorships are best for businesses earning a small profit which do not have significant liability concerns.
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