What are some of the drawbacks of being a sole proprietor of a real estate brokerage?

Real estate brokers have a real estate license and typically pay fees to a larger brokerage firm, but they often operate as an independent broker. As with anyone who conducts business alone, and who has not organized or registered as a separate business entity, real estate agents and brokers default to sole proprietorship status. From a legal perspective, a sole proprietor is considered one and the same as the business. Therefore, a sole proprietorship may not be the best form of business ownership for a broker.

Sole Proprietorship Defined

1. As a sole proprietor, you prepare Schedule C, D or E to document your business income and expenses. You include this with your personal tax return, Form 1040. Any business expenses or liabilities you incur become your personal debts and obligations if the amount exceeds your business assets and insurance coverage.

Real Estate Broker Defined

1. Real estate law establishes two broker levels. One is the sales broker and the other is the employing broker. As a sales broker, you are a real estate agent or broker licensed to sell real estate in your state. As an employing broker or brokerage, you are a licensed agency that sells real estate directly or through brokers and agents paid on commission. Employing brokers typically have a franchise agreement with a regional or national firm, for example Century 21 or Fonville Morrisey.

Other Ownership Forms

1. As a real estate broker, you may operate as a corporation, a limited liability partnership, or a limited liability company. If you hold a real estate license as a corporation, an LLP or an LLC, then you must serve as the entity’s licensed “natural person” designated broker. You must be a corporate officer, an LLP partner, or an LLC member or manager. As an employing broker, you can only operate as a professional licensed corporation or a professional corporation, depending on your state.

Corporation May Be Optimal

1. Although a sole proprietorship offers many self-employment benefits, the risks of malpractice suits or other business debts can outweigh the benefits. If you are a broker operating as a corporation or LLC, or if you are an employing broker operating as a professional licensed corporation or a professional corporation, that provides the liability shielding that operating as a sole proprietor does not. If you are a broker working with an employing broker that is a professional corporation that has significant malpractice and liability insurance, and has risk-accepting contract language, a sole proprietorship may provide the simplest option at relatively low risk.

Examples

1. A real estate agent operates as a sole proprietorship carrying $100,000 in liability insurance. While showing a house she accidentally left a large window open and a subsequent torrential rain ruined the homeowner's carpet and pricy paintings. The homeowner's insurance company sued the employing broker for repayment of $200,000. The employing broker paid $50,000 through its insurance company but demanded the agent pay the remaining $150,000. Since her company only has $100,000 in liability insurance, the agent is personally responsible for the remaining $50,000.

6 Sole Proprietorship Advantages and Disadvantages in 2022

You’re embarking on a new venture — that’s awesome! As a business owner, you may be wondering about sole proprietorships, particularly when starting out. Finding the key information you need can be a hassle. We’re here to help you answer those questions.

• What is a sole proprietorship?
• Advantages of a sole proprietorship
• Disadvantages of a sole proprietorship
• Requirements for sole proprietorships in different provinces
• Why is it important to incorporate a business?

What is a sole proprietorship?

A sole proprietorship is the simplest business structure. There is a single owner of an unincorporated business who takes on all the responsibilities, including profits and debts, of that company. This is the primary difference from corporations.

What are the responsibilities of the owner of a sole proprietorship? 

According to the government of Canada website’s definition of a sole proprietorship (most recently updated in April 2022):

The owner of a sole proprietorship has sole responsibility for making decisions, receives all the profits, claims all losses, and does not have separate legal status from the business. If you are a sole proprietor, you also assume all the risks of the business. The risks extend even to your personal property and assets.

So, you have “sole” responsibility for making decisions, hence the “sole” proprietorship. 

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What else should you know about starting a sole proprietorship? 

• Know how you’ll get taxed: As a sole proprietor, you will be obliged to pay personal income tax on net earnings of your business
• Decide on a business name (or not): You have the option of a) registering a business name b) conducting business under your own name or c) both

Advantages of a sole proprietorship

1. Affordable and simple

The advantages of a sole proprietorship are simplicity and affordability, particularly when registering with Ownr. But, there are a few things you need to decide before you register as a sole proprietor.

2. You have freedom and flexibility

Freedom and flexibility of running your business as a sole proprietorship are included in this business structure. The process of registering as a corporation is longer and costlier, and business operations as an incorporated business are also more complicated.

As a sole proprietor, you aren’t restricted to complicated and strict regulations. This is particularly attractive to small proprietors who don’t have the labour to continually ensure these strict guidelines are adhered to and carry them out. Sole proprietors also have all the decision-making freedom.

3. Less paperwork

No business owner wants extra paperwork, so some people prefer to register as a sole proprietorship rather than incorporate their business. With incorporation, it’s mandatory to file yearly documentation. With less paperwork also comes less overhead costs of a bookkeeper who is familiar with the legalities of incorporation and securities laws.

Simply put, less paperwork means you can spend more time developing your unique business strategy to help prevent any hiccups down the road.

4. Simpler income tax

Taxes as a sole proprietorship (also considered self-employment taxes) are a lot simpler. As a sole proprietor, there are certain tax advantages that come with small business deductions.

For a small business that uses their own home as a business base, part of housing costs, including utilities, internet, and such, can be written off. This helps reduce personal taxes and possibly even result in a tax refund when you file your personal tax return. You don’t get this advantage with corporations.

5. Say hello to lower business fees

Fees for registering as a sole proprietorship business structure are decidedly lower when compared to an incorporated business, which is among the most attractive advantages.

As a sole proprietor, you and your business are not separate legal identities and in some cases, registering your sole proprietorship business is not necessary. However, if you use a different name than your personal legal name for your proprietorship business, registration is necessary.

Many sole proprietors choose to register their business name regardless of their regional requirements to put the most professional foot forward possible.

6. Straightforward banking

Just like taxes, dealing with complicated banking is a hassle. The beautiful thing about this form of business is banking simplicity. You can choose to keep your personal chequing account as your business account, but you may kick yourself at tax time when you have to separate expenses. In this case, it’s advisable to open a separate business bank account. This can be done quite easily, inexpensively, and even online!

How’s that for straightforward?

7. Simplified ownership

A sole proprietorship is as simple as it gets in terms of business structure. It’s a single owner making the decisions, taking responsibility, and controlling all aspects of the business. For many small business owners, this is ideal as there isn’t the risk of discord between owners of corporations or partnerships. Simply put, a sole proprietor isn’t at risk of losing control.

Disadvantages of a sole proprietorship

1.  No liability protection

Among the drawbacks of this type of business entity is personal liability. You are solely responsible for all the financial aspects of your business. This means all debts and any litigation fall on your shoulders. This puts your own money at risk as your personal assets are exposed. In this case, having separate business insurance is a good idea.

This is among the primary differences between sole proprietorship and incorporation that can be concerning. With incorporation, there is a limited liability that rests solely on the business as a legal entity.

2.  Financing and business credit is harder to procure

As a business entity, you may have a harder time securing financing and business credit than a corporation. An incorporated business is eligible for government funding and can raise funds fairly easily. A sole proprietorship generally can’t. Part of the reason for this is that an incorporated business has a legal distinction that a sole proprietor doesn’t.

3.  Unlimited liability

Among one of the biggest disadvantages of a sole proprietorship is unlimited liability. This liability not only spans the business but the business owner’s personal assets. Debt collectors can access your savings, property, cars, and more to see a debt repaid. When you register your business, it’s important to look into insurance as a precaution.

4.  Raising capital can be challenging

While sole proprietorship startup costs are low, difficulty raising capital can limit growth and possibly even run you in the red for a little while. Because you’re personally liable for business debts, it’s also your responsibility to foot the bill for suppliers, overhead and labour costs, and so on. This is one of the significant disadvantages of sole proprietorships as business owners’ personal assets are limited or tied up in the business.

5. Lack of financial control and difficulty tracking expenses

Because financial reports aren’t usually required as a regular part of doing business and one person plays the role of accountant, manager, marketer, and strategist all in one, sole proprietors sometimes find themselves letting financial business transactions slide.

This can cause a significant lack of financial control and risk blending these transactions with personal income, making keeping track of expenses a challenge. In these cases, profits and losses can go unaccounted for, and tax time will be even more difficult.

Requirements for sole proprietorships in different provinces

Ontario, Alberta, and B.C. have slightly different registration process requirements for sole proprietorships and generally require you to fill out a form and pay a nominal fee.

In Ontario, it’s not necessary to have a legal name separate from your own name. If you do decide to use a different name, make sure legal identifiers like Inc., or Corp. are not included. If you are using your own personal name, registering is not necessary, only if you separate legal names.

Alberta is very similar as you need proof that you are not associated with any partnerships or that anyone else is using the same name. In Alberta, you must also register a Declaration of Trade Name.  In both Ontario and Alberta you can use a NUANS search to check similar business names already being used, but it is not a requirement to do so. In B.C. a name search is required for a sole proprietorship, and you can provide three different name choices.

Why is it important to incorporate a business?

You might find yourself in the position that the disadvantages outweigh the benefits for you, making the transition to incorporate your business an easy one. As your company becomes a separate legal entity, this means limited liability and easier access to funding. For startups, this can be the difference between success and closing down shop. Put simply; there are a lot of advantages to incorporating your business. This also includes incorporating a cooperative.

Whether you are thinking of incorporating or registering a sole proprietorship, Ownr can help.

Ready to start your business? Ownr has helped over 75,000+ entrepreneurs hit the ground running quickly—and affordably. If you have questions about how to register or incorporate your business, email us at [email protected]

This article offers general information only, is current as of the date of publication, and is not intended as legal, financial or other professional advice. A professional advisor should be consulted regarding your specific situation. While the information presented is believed to be factual and current, its accuracy is not guaranteed and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the author(s) as of the date of publication and are subject to change. No endorsement of any third parties or their advice, opinions, information, products or services is expressly given or implied by RBC Ventures Inc. or its affiliates.

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