SOLE PROPRIETORSHIP

A sole proprietorship is an unincorporated business owned and carried on by one individual. It is the simplest form of business organisation in Canada. The business has no legal personality separate from its owner: the proprietor owns the assets of the business directly, is personally liable for all of its obligations, and reports its income on the proprietor's personal income tax return. The proprietorship may nevertheless employ staff, operate under a registered business name, register for GST/HST, and hold licences in its own business name.

PRINCIPAL CHARACTERISTICS

• Ownership: a single individual, who is entitled to all profits and bears all losses.

• Legal identity: none separate from the proprietor. Contracts are entered into, and property is held, by the proprietor personally.

• Liability: unlimited. The proprietor's personal assets are available to satisfy business debts, contractual obligations, and judgments, subject to provincial exemptions from seizure.

• Taxation: net business income is computed on Form T2125 and taxed on the proprietor's T1 return at personal graduated rates.

• Continuity: the business has no existence independent of the proprietor and ends on the proprietor's death or cessation of business, although its assets may be sold or transferred.

• Capital: limited to the proprietor's own funds and personal borrowing capacity; no ownership interests can be issued to investors.

• Compliance: lower formation and ongoing costs than a corporation, with no corporate filings, minute book, or separate income tax return.

FORMATION AND REGISTRATION

• No incorporation or formal constitution is required. A proprietorship comes into existence when the individual begins to carry on business.

• Business name registration: where the business operates under a name other than the proprietor's own legal name, the name must be registered with the provincial or territorial registry. Registration does not confer exclusive rights to the name and does not provide trademark protection.

• Business Number: the CRA issues a nine-digit business number when the proprietor first registers for a program account, such as GST/HST (RT), payroll deductions (RP), or import-export (RM).

• Licences and permits: municipal business licences, provincial permits for regulated activities, and professional licences where the activity is regulated.

• Workers' compensation: registration with the provincial board is required in most industries once the business employs workers; optional personal coverage may be purchased by the proprietor.

• A separate business bank account, while not legally required, is necessary to maintain records that satisfy the CRA's record-keeping requirements.

BUSINESS NAME REGISTRATION BY PROVINCE AND TERRITORY

• Newfoundland and Labrador: Registry of Companies and Deeds; registration of business names is voluntary for sole proprietors in most cases.

• Prince Edward Island: Corporate and Business Services, under the Partnership Act (business names).

• Nova Scotia: Registry of Joint Stock Companies, under the Partnerships and Business Names Registration Act, with annual renewal.

• New Brunswick: Service New Brunswick Corporate Registry, under the Partnerships and Business Names Registration Act.

• Quebec: Registraire des entreprises du Québec; a sole proprietor operating under a name other than the proprietor's own name must register and file an annual updating declaration.

• Ontario: Ontario Business Registry, under the Business Names Act; registration is valid for five years and must be renewed.

• Manitoba: Companies Office, under The Business Names Registration Act, renewable every three years.

• Saskatchewan: Information Services Corporation, under The Business Names Registration Act.

• Alberta: Corporate Registry through authorised registry agents, by filing a trade name registration.

• British Columbia: BC Registries and Online Services, after name approval, by registering a sole proprietorship.

• Yukon: Corporate Affairs, under the Partnership and Business Names Act.

• Northwest Territories: Corporate Registries; Nunavut: Legal Registries.

TAXATION OVERVIEW

• Net business income is added to the proprietor's other income and taxed at combined federal and provincial marginal rates. Federal rates for 2026 range from 14% to 33%.

• The proprietor is taxed on net income as earned, irrespective of the amount withdrawn. Drawings are not deductible.

• Business losses may be applied against other income of the proprietor in the same year; unused amounts are non-capital losses, carried back three years or forward twenty.

• The proprietor pays both the employee and employer portions of Canada Pension Plan contributions on self-employment earnings (or Quebec Pension Plan contributions in Quebec).

• The return is due June 15; any balance of tax is due April 30. Quarterly instalments are required where net tax owing exceeds $3,000 ($1,800 in Quebec) in the current year and either of the two preceding years.

• GST/HST registration is required once taxable supplies exceed $30,000 in a single calendar quarter or in four consecutive calendar quarters.

• Detailed rules appear on the Sole Proprietorship: Tax page.

ADVANTAGES

• Low cost and minimal formality of establishment and dissolution.

• Complete control over decisions, subject only to law and contract.

• Simplicity of tax reporting, with no separate return for the business.

• Business losses, particularly in the start-up phase, may be deducted against the proprietor's other income.

• Freedom from corporate governance and annual corporate filing obligations.

DISADVANTAGES

• Unlimited personal liability for business debts and obligations.

• Limited access to capital, as equity cannot be issued and lenders rely on the proprietor's personal credit.

• All profit is taxed at personal marginal rates in the year earned, with no access to the small business deduction or to deferral through retained earnings.

• Dependence on a single individual for management and continuity.

• Potentially lower credibility with certain suppliers, lenders, and customers compared with an incorporated entity.

RISK MANAGEMENT

• Commercial general liability insurance and, for professional services, professional liability (errors and omissions) insurance.

• Property and business interruption insurance.

• Written contracts with limitation-of-liability clauses where commercially appropriate.

• Separation of personal and business assets, although legal separation is not achieved without incorporation.

INDICATORS FOR INCORPORATION

• Profits consistently exceed the proprietor's personal consumption requirements, so that retaining income in a corporation taxed at the small business rate provides a meaningful deferral.

• The business faces material liability exposure that cannot be adequately insured.

• The proprietor intends to admit investors or partners, or to sell the business in a manner that could benefit from the lifetime capital gains exemption on qualified small business corporation shares.

• The incremental costs of incorporation, annual compliance, and professional fees are justified by the expected benefits.

• Business assets may be transferred to a corporation on a tax-deferred basis under subsection 85(1) of the Income Tax Act.