When is a Sole Proprietorship the Best Choice?
June 7, 2007 1:00 AM
Filed Under: Ask A Lawyer Ask BCCC
One of the most essential decisions in a business, in addition to determining which products or services to offer, turns on which structure to use for your business. The basic types of business organizations available in Canada are: sole proprietorship; partnership (general or limited); and incorporation.
The sole proprietorship is a common form of business and exists where an individual owns and operates a business. Sole proprietorships are often the default organization for running businesses. There are no steps required to create them beyond someone carrying on business and they cease to exist when the individual stops carrying on business. A sole proprietor can hire employees but at all times retains the authority for making the managerial decisions relating to the business.
A sole proprietorship is operated as an extension of the owner/manager because all profits of the business are included as the owner’s and all liabilities become the personal liabilities of the owner. In other words, the sole proprietor is personally responsible for the financial successes and failures of the business (and to some extent of its employees). Indeed, one of the main drawbacks to sole proprietorships is the unlimited personal liability that the owner is exposed to.
Concentrating ownership and management in the same person makes the sole proprietorship attractive to many small business owners when one person can effectively manage all aspects of a business. On the other hand, when a business becomes larger or the need for additional investment and/or management extends beyond what an individual can offer, the sole proprietorship becomes less attractive.
Whether to incorporate a company, enter into a partnership or run your business as a sole proprietor depends on many factors and is essentially a business decision that must be made in the context of Canadian business laws.
An excellent resource that describes in further detail the law governing business organizations in Canada is:
- The Law of Partnerships and Corporations, by J. Anthony VanDuzer (Irwin Law Inc. 1997).
Another valuable resource that assists in evaluating your business environment, and then choosing the best organizational model based on this evaluation is:
- Structure in Fives: Designing Effective Organizations, by Henry Mintzberg (Prentice Hall, 1992).
