There are various types of companies. For instance, Limited Liability Companies, Public Companies, Private Companies and so on.
Setting up a sole proprietor firm is one of the most straightforward and affordable forms among other forms of corporations. Sole proprietorships promote self-employment.
Many people wonder if a sole proprietor can have employees, and the answer is YES.
You read it right, though under sole proprietorship there is a single owner who is personally in charge of the sole proprietor firm. But you can still employ other people for the smooth functioning of the firm.
Furthermore, the liabilities, roles and responsibilities, and functioning shall be discussed further in the post.
1. Who Is a Sole Proprietor?
A sole proprietor is a person who establishes a sole proprietorship firm. There is no difference between the firm and the sole trader in the eyes of the law. Hence, a sole trader is personally liable for all aspects of the firm.
There is also no distinction between individual assets and firm assets. Additionally, the sole proprietor pays personal income tax whenever the sole proprietorship’s firm earns a profit.
Additionally, sole owners are responsible for the administration, management, and operations of the firm. It is the sole proprietor who controls every aspect of the firm. Thus, making him liable for every action taken by the firm.
A sole proprietor is employed all by itself, he is his own boss. These business owners are known as sole proprietors and are called sole traders.
2. Sole Proprietorship Firm
A sole proprietorship firm is an unincorporated business under which only one owner exists. Furthermore, these types of firms are free from complexities and cost-effective to establish. As the interference of the government is significantly less.
Additionally, a sole proprietorship firm can also convert itself into other forms of Company. This conversion can be done by the laws laid down.
Other names for Sole Proprietorship are:
- Individual Entrepreneurship
- Sole Traders
- Individual Proprietorship
Let us understand better with the following example:
Any local grocery store, medical shop, electrical shop, local clothes shop, or any other small-scale firm are a few examples of sole proprietorship firms.
A few of the advantages of Sole Proprietorship firms are:
- Easy to incorporate
- Can enjoy full profit
- Fewer rules and regulations
- You’re the boss
- Low start-up costs
- Maximum privacy.
There are a few drawbacks related to owning a Sole Proprietorship firm. For instance, unlimited liability means no distinction between the firm and owner. Hence, the owner is directly liable for any debts that the firm has.
A Few additional drawbacks are:
- Limited capital-raising capacity
- Difficulty in expanding business
- Difficulty in managing daily chores
- No Personal Time
3. Can a Sole Proprietor Have Employees?
Despite not being a formal corporate organization or a limited company a sole trader business can still employ employees. In the eyes of the law, the owner and the business are the same. Thus they are allowed to have as many employees as required. There are a few rules laid by the concerned authority that are required to be followed.
Let us understand what are the requirements to hire employees in a sole proprietorship firm:
3.1. Social Insurance Number (SIN)
If any person whether permanent resident or temporary resident wishes to work in Canada, must acquire SIN.
SIN is also required if a person wishes to avail of benefits and services from the Government through various programs. Hence, a sole proprietor must first obtain SIN within 3 days of employing any person.
3.2. Payroll Account Number
There are payroll deductions such as:
- Employee Insurance Premiums
- Canada Pension Plan Contributions
- National Insurance and
- Personal Income Tax
Hence, it is the responsibility of the sole trader to manage the staff payroll. Additionally, he is required to gather information on the new employees, open payroll account numbers, and calculate and remit the deductions as per law. Also, maintaining proper records is a must.
3.3. Filling Information Return
A sole proprietor is required to file an information return in form T4 and T4 summary. In this slip, he shall specify salary, wages, tips bonuses, vacation pay, and any other remuneration paid to the employee.
3.4. Workplace Safety and Insurance Board (WSIB)
Employers are required to register with WSIB within 10 days of employing employees. This is to safeguard the interest of employees from any workplace injury or illness.
3.5. Additional Requirements
- Employer Identification Number (EIN): Before giving employment employer is required to acquire the EIN of the employee.
- Register as an Employer: The sole proprietors are required to register themselves as an employer with the concerned authority.
- Written Policies and Procedure: All types of organizations whether small or big, formal or informal should have written rules, regulations, and policies. These rules should be in compliance with the law of the state. Hence, even a sole proprietorship firm should have policies written. The policy shall state employment status, pay structures, eligibility to receive benefits, equal employment opportunities, pay equity, and certain other notifications required by law.
- Recordkeeping: It is the responsibility of the employer to maintain the records of the employees. The recordkeeping system should be diligently updated with all required information.
- Gather Information: It is important that before hiring any employee the sole trader should gather all the required documentation to safeguard its interest in the future. These documents serve as proof that employment was done per the law. For instance, a signed offer letter, and bank account details.
4. Salary Payments to Employees
Well, sole proprietors pay employees in a manner that any big organization pays, meaning paying the gross amount after calculating deductions.
4.1. Gross Pay
Calculating Gross Pay includes wages, salaries, incentives, earnings, compensations, commissions, and paid vacations. Additionally, sole traders might provide the staff with a few taxable advantages like vehicle allowances or house allowances.
When you hire employees must take worker’s compensation insurance. After calculating all the deductions and employee benefits the amount payable is known as the employee’s net pay.
4.2. Deductions
The following deductions are to be made by the Sole Trader:
- Federal income tax
- The Canada Pension Plan contribution
- Provincial and territorial income tax
- Employment Insurance premium
Additionally, you can make deductions for any premiums or other benefits paid for on behalf of an employee. For instance, the amount paid for sickness, accident, disability, occupational pension scheme, health savings accounts, and income insurance plan is to be deducted.
4.3. Pay Period
It is the sole trader that decides the pay period for the employees. It is up to the sole trader to decide when to make the payments, it can either be paid each week or each month. Mostly small businesses pay weekly or biweekly remuneration through direct deposit in the bank or via cheque.
4.4. Payroll Management
Furthermore, sole traders can manage payroll on their own as there are many payroll software designed to simplify the payment process. Or they can subcontract it i.e. take the service of a third party for maintaining bookkeeping and payrolls. It is important to note that any discrepancies in maintaining proper records can turn into costly penalties.
5. Frequently Asked Questions
5.1. Is There Any Limit on Hiring the Number of Employees in a Sole Proprietorship Firm?
No, there are no such restrictions in employing employees. You can employ one or more employees as per your requirements. A sole trader shall be responsible for employed-related administration, recordkeeping, and tax obligations.
5.2. Can the Sole Proprietor Employ Himself/ Herself? If Yes, Can He Pay Himself a Salary?
Sole traders are not employees of the firm rather they own it. Hence they are not liable to get a salary, but they get remuneration through an owner’s draw from their business equity.
5.3. Can the Sole Proprietor Employ Any of the Family Members Including His/ Her Spouse or Children?
Yes, a sole proprietor can hire a spouse/ children / any other family member as an employee of a sole proprietorship firm. But he must follow all the rules and regulations in compliance with employee law laid down by the concerned authority.
Additionally, extra precautions must be taken when employing children as the law related to employing minors is more strict.
5.4. Is There Any Particular Employment Law That a Sole Proprietor Should Follow?
There is no such separate law laid down for sole proprietorship firms. There are general rules laid down for all types of businesses which need to be followed upon reaching the mentioned scenarios.
Similarly, there are various federal and state laws for safeguarding the rights of an employee which all businesses should abide by.
5.5. Can a Sole Proprietor Subcontract?
Yes, a sole proprietor can subcontract its work by contacting independent contractors. It’s quite challenging for an individual to handle everything single-handedly related to business. Hence, some portions can be outsourced. It is an ideal choice rather than hiring employees.
5.6. Can Sole Trader Have a Business Partner?
No, a sole trader cannot have any partner. In a sole proprietorship firm, only one single person can act in the capacity of the owner. If a person desires to have a business partner it should modify its business structure and change it into a Partnership Firm.
6. Bottom Line
Hence to conclude this article Can a sole proprietor have employees? The simple answer is YES you can have as many employees as the business requires to function efficiently.
This type of firm lacks a distinct legal status. Hence, it has its own shortcomings. Furthermore, when the business expands the most logical option to adopt is to upgrade the firm structure from a sole proprietorship to a Limited Liability Company (LLC).
An LLC safeguards the interest of the owner and also draws a line between personal liability and company liability.
