Sole Proprietorships – A Closer Look
Sole proprietorship is the simplest form of business organization. It is also by far the most popular structure amongst business founders, as 64% of new Canadian businesses chose to register the onset of their business in the form of sole proprietorship. This blog post aims to take a deeper dive into sole proprietorships in Alberta by providing 1) an overview of sole proprietorships, 2) legal requirements of operating a sole proprietorship, as well as 3) briefly evaluate its advantages and disadvantages.
Sole proprietorships come into existence when an entrepreneur start to carry on business for his or her own account without taking the steps necessary to adopt other form of organization, such as a corporation.
A sole proprietor has sole ownership of the business and there is no separation between the sole proprietor, as the individual owner, and its business. This means that the individual owner of the sole proprietor assumes total responsibility over the management and the business’s assets, profits, and losses. The sole proprietor is also exclusively responsible for all torts committed by him or her personally in connection with the business and will be vicarious liable for all torts committed by employees in the course of their employment. Most crucially, a sole proprietor bears unlimited personal liability. As a result of this unlimited liability, the sole proprietor’s personal assets, as well as assets contributed to the business, may be sized in fulfillment of the obligations of the sole proprietor’s business.
2. Legal Requirements and Registration Process
There are two main legal requirements associated with the use of a sole proprietorship: 1) trade name registration and 2) licensing requirements.
The sole proprietor may either use the sole proprietor’s given name or trade name as their business names. Carrying on business under the sole proprietor’s given name does not require registration, unlike operating under a trade name. Under the Alberta Partnerships Act, using a trade name to run a sole proprietorship does require registration. According to Partnerships Act section 110, “[e]ach person who...
(a) is engaged in business for trading, manufacturing, contracting or mining purposes,
(b) is not associated in partnership with any other person or persons, and
(c) uses as the person’s business name
(i) some name or designation other than the person’s own, or
(ii) the person’s own name with the addition of “and company” or some other word or phrase indicating a plurality of members in the firm, shall sign and file with the Registrar a declaration in writing of the fact.”
Trade name registration is a straightforward process. All that the sole proprietor has to complete a Declaration of Trade Name Form (found here) and file it at one of the Alberta Corporate Registry service providers. Note that despite the requirement in Partnerships Act section 110(2)(d) that the Declaration be “filed within 6 months after the time when the business name is first used,” section 110(3) suggests that no penalty will be imposed if the sole proprietor were to file the Declaration over the 6-months limit.
Unlike a corporation, a sole proprietorship does not have perpetual existence. A sole proprietor who wishes to cease carrying on business of the trade name can do so by filing a Cancellation Declaration (found here).
The other requirement for sole proprietorships, which applies equally to all forms of business organizations, is licensing. Licensing requirements will vary from different business types and the levels of government, whether it be federal, provincial, or municipal. The BizPal permit/licensing finder filter can be found here.
3. Advantages & Disadvantages
As mentioned earlier, one of the main characteristic that makes a sole proprietorship attractive to business founders is its simplicity. Unlike incorporation, which comes with certain paperwork requirements, such as filing of articles of incorporation pre-incorporation and bylaws and minute books post-incorporation as well as annual returns in subsequent years, sole proprietorships has virtually no paperwork that needs to be done save for a trade name registration.
Sole proprietors may also be attractive if the businesses incur losses in its early start-up years. This loss may be applied against the income received by the entrepreneur from other sources. If the losses cannot be used in the current year, it can be carried back for three years to recover taxes previously paid or it can be carried forward 20 years to offset future earnings.
On the flip side, a chief disadvantage of the sole proprietorship is unlimited personal liability. All of the sole proprietor’s personal assets may be taken by third parties in satisfaction of obligations of the business. As the scale of the business and related liabilities increase, this exposure to personal liability makes sole proprietorships increasingly less attractive. By comparison, incorporation provides protection against personal liability. While it is true that a sole proprietorship could manage liability risks through insurances or contractual provisions, incorporation is cheaper and in most cases, more effective.
Another problem with sole proprietorship is raising capital. As a business grows, it will require additional investment. Since it is impossible to divide ownership of the sole proprietorship, the only financing option available is debt. Not only that, non-friends and family investors will also be interested in acquiring an ownership interest in the business without being exposed to the venture’s liabilities. In that case, a sole proprietorship could provide neither the liability protection or the equity mechanism.
To conclude, it is the legal nature of the sole proprietorship as an unlimited liability and unincorporated entity that is determinative of its relative advantages and disadvantages as compared to a corporation. While sole proprietorships have its simplicity and loss-offsetting tax advantages to boast at the beginning of a venture, incorporation may provide further capital raising avenues and better protection against liabilities as the business matures and develops. For more information on the registration process of a sole proprietorship or how it compares to a corporation, contact the BLG Venture Clinic for further details.
 Bryce C. Tingle, Start-up and Growth Companies in Canada 4th ed (Lexis Canada Inc, 2018) at page 36.
 Anthony J. VanDuzer, The Law of Partnerships and Corporations, 3rd ed (Toronto: Irwin Law Inc., 2018) at page 6.
 Ibid at page 8.
 Partnership Act, RSA 2000, c P-3 [Partnership Act], s 110.
 Partnership Act, s (110)(2)(d).
 Business Corporations Act, RSA 2000, c B-9, s 21.
 Income Tax Act, s. 111(1)(a).
 Supra note 1 at page 36.
Blog posts are by students at the Business Venture Clinic. Student bios appear under each post.