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Sole Proprietorship

The simplest form of business association is the sole proprietorship. A sole proprietorship exists whenever an individual carries on business for individual’s own account without using the medium of any other form of business organization or involving the participation of other individuals, except as employees. The individual may employ others in the business but cannot employ himself or herself. Any liabilities that arise from tortiuous acts of the sole proprietor or employees of the sole proprietor are the sole proprietor’s responsibility. All business and personal assets of the sole proprietor may be seized in fulfillment of the sole proprietor’s business obligations and liabilities, including debts incurred by the sole proprietor in connection with the business.

The costs in establishing and running a sole proprietorship are minimal - it is formed without any formality. The profits from the business are taxed to the individual owner and filed on the individual's tax returns. Individuals are taxed at progressive rates which, when combined with the tax rates imposed by Ontario, reach maximum rate of 46.4%. The business is freely transferable by sale, gift or will. Finally, the sole proprietorship may have a relatively short life span because the death of the sole proprietor dissolves the sole proprietorship. Typically, the sole proprietorship is used for small family businesses. However, a sole proprietorship would be inappropriate if there is more than one owner of a startup.

A classic consideration in the choice of entity has generally been the question of limited liability, i.e., limiting the liabilities of the startup to the startup assets. Obviously, a sole proprietor is liable personally for all of the debts and liabilities created by his or her proprietorship. The concept of limited liability, however, is somewhat illusory, since as a practical matter, a creditor extending any significant credit or financing to a new venture will likely require a personal guarantee of the principal owner. Furthermore, many of the risks or potential liabilities may be insurable, limiting the need to protect against risk exposure by the choice of entity.

Similarly, general partners are also generally liable for all of the partnership liabilities, unless the partnership registers as a limited liability partnership. Limited partners, on the other hand, are generally liable only to the extent of their investment in the partnership, unless they actively participate as limited partners in the management of the partnership. With respect to management structure, proprietorships are obviously the simplest form of entity to establish and administer. Corporations, on the other hand, generally are the most rigid. Partnerships generally provide the greatest flexibility in arranging variations in the capital structure, as for example providing priority returns to financial partners over service partners. Of course, corporations may provide for varying classes of shares and debt to allow priority returns.