So, you’ve got an excellent business idea that you are about to launch. Your business planning is completed, the funding is arranged, and your test marketing tells you that it can indeed be a hit. Perhaps you have thought about your business structure? Probably not, and this is wherever most people’s eyes will undoubtedly glaze over and minds melody out, ah, the lawful stuff… but wait, keep in mind that have to be that way.
A key to being a successful entrepreneur is usually, of course, being informed. This also includes having a basic perception of the fundamental business law models that will affect your business, knowing that it should affect the business judgments you make daily.
Different organizational structures come with their positives and negatives. This article aims to discuss a number of the critical aspects of sole proprietorship so that the entrepreneurs studying it will gain an essential, standard understanding of the legal outcomes of being in business.
This is a general overview of sole proprietorship and the examples drawn upon Nova Scotia (Canada) legislation. There may be similar concepts legally speaking in your area, but you should confirm with a lawyer in your legislation (state, province, nation, etc.).
What is a Sole Proprietorship?
A sole proprietorship is a solely owned, unincorporated company. It is often the structure selected by new small business owners for several reasons. These include the simplicity set up due to minimal signup requirements, relatively low cost to start operating, and few, in case any, annual reporting commitments.
If you started working a business today without having authorized anything at all, you are more than likely the sole proprietor.
No Lawful Entity
A sole proprietorship is not a separate legal business. This means the “business” cannot own any property or even hold any assets within its name. An exclusive proprietorship business is an extension of the business owner or her or herself. Any possessions or property used in the organization are legally owned by the sole proprietor (you) (unless owned by someone else).
Because the business owner and the organizations are the same, the organization cannot employ only the proprietor. An employment relationship is a contractual relationship, and the person can’t be in a contract using him or herself. Therefore, dollars made in the business are not taken out and expensed, while salary is against the business’s income. Sole proprietorship business income will be calculated as, and considered to be, personalized income to the business owner with the tax authority (CRA throughout Canada), customarily called “Self Employment Income.”
When a sole proprietor turns some profit, the profit will be taxed at the higher personal taxation rate in addition to any other taxable income the sole proprietor might have. However, suppose losses tend to be incurred, which is often the case within the early years of the business. In that case, all those losses could be used to balance other taxable income, for example, employment wages from a position (we know that it is common for entrepreneurs to have a day job while trying to get their business from the ground). This could lead to a reduced amount of taxable income payable on your annual taxes.
Legal responsibility of the Sole Proprietor.
The exposure to unlimited liability is a disadvantage to having no individual legal entity as an exclusive proprietor. This means that the master’s assets may be attainable to creditors to satisfy the obligations and liabilities typically on the business. Should the business not necessarily make enough money to cover such a burden, the owner’s items and other assets, such as pocketbook accounts, property, or anything of value, could be available in this circumstance. One potential approach to limit liability could be by way of business insurance. This would nonetheless only be within limits along with coverage of the policy; anything at all over that would still be an individual exposure of the sole founder.
Business Name Registration
In case a sole proprietor wants to make use of a business name that is something other than his or her title, business name searches should be done, and if the preferred name qualifies, it will have to become registered as required within Nova Scotia by the Relationships and Business Names Sign up Act.
The reasoning behind this is, among other things, to avoid replicating business names from being employed, which would confuse the public. Furthermore, it protects from likely later registrants using and trying to use your business identity in the same jurisdiction when you are registered. There is also the thought that it will protect the population by providing transparency in the form of any notice to customers regarding who you are and, thus, who they are in corporate with (i. e., who they are purchasing a product or service from). It is noteworthy, however, to make it very clear that mere business label registration does not give the same level of protection given by trademark legislation; in fact, it is generally limited to the legislation in which the name was signed.
Keep in mind that just because a business label has been registered and is becoming utilized in a sole proprietorship, the size of the sole proprietorship legally has not changed, as discussed above. It very to describe a sole proprietorship as the sole proprietor “carrying on business as,” as well as abbreviated “cba,” and the registered business identify. Therefore you may see, for example, Ronald Duck carrying on a small business as Duck Consulting. At this point, Ronald Duck would be the only proprietor, and Duck Advises the registered business identity of the sole proprietorship.
You will discover potential monetary and 100 % legal consequences to operating a profitable business under an unregistered small business name, including fines plus a restricted ability to bring and defend legal proceedings.
Singular proprietorships may be the most functional option for many entrepreneurs when beginning. However, this decision will depend on several important factors, including the prospective risk involved in operating this business or industry experts. If the industry is a greater risk, it may be best to spend the extra money and integrate the venture. The benefits of this would be discussed with your lawyer when planning your business.
On a final note, should you opt to begin a sole proprietorship to view how things go just before deciding to invest the money in addition to commitment into incorporating a corporation, you may be able to utilize precisely what is referred to as an s. 80 Rollover under the Tax assessment Act (Canada). If your small business qualifies, you’d be able to shift the business assets to the designed company on a tax-deferred basis.
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