Generally speaking, there are three ways to register a business in Ontario: sole proprietorship, partnership, or a corporation.
A sole proprietorship business is operated by one person. The income is directly attributed to that person (the “Owner”) as “business income”. The business does not have a separate existence apart from the Owner. Revenue and expenses are included in the in the Owner’s income tax return, and the Owner is fully liable for all debts and obligations.
There is no separation between the Owner’s business assets and personal assets. In fact, if the business is operated under the full legal name of the Owner, it may not even be necessary to register a business name.
A partnership is a business operated by two or more people, “with a view to a profit”.
Partnerships can occur organically, without any paperwork and sometimes without the people even meaning to create one.
However, it is best practice to have a partnership agreement in place, and to set out the rights and responsibilities of the partners involved. This is especially important because the partnership does not have a separate legal existence apart from the partners – income is included in a partner’s personal income tax return, and the partners are all personally liable for debts (except in the case of a limited partnership – where there must be at least one general partner who is fully liable, and there may be other limited partners whose liability is limited). Each partner can bind the partnership, and a partner might be responsible for the actions of another partner.
A corporation, on the other hand, has a separate legal existence from the people who own it.
A corporation, therefore, has separate tax filings, can change ownership, and has a continuous existence apart from the owners/shareholders. Because of its separate legal existence, a corporation can also shield the shareholders from personal liability – except in certain circumstances, a shareholder’s personal assets are protected from the liabilities of the corporation. On the other hand, corporations are closely regulated, and have higher start up and ongoing costs.
People may choose to incorporate for any number of reasons including: collective ownership, succession planning, limited liability, tax advantages, and raising funds, to name a few.
If you choose to incorporate, you will need to file articles of incorporation and set out your shareholders, directors and officers. Shareholders are the owners of the corporation – they are the ones who are entitled to the profits of the business and must approve certain corporate changes. Directors are elected or appointed by the shareholders, and they, as a Board, manage the corporation and make business decisions. Officers are appointed by the directors and the directors define their duties and delegate tasks to them for the “day-to-day” operations of the business. It is possible for the same people to wear all three hats, and this is certainly the case for smaller businesses.
There are other considerations as well for new corporations, including banking, accounting or tax, borrowing, and, often, an agreement between shareholders to set out their rights and obligations. A “unanimous shareholders’ agreement” is an agreement signed by all shareholders, and confirmed by the corporation, that can deal with issues such as: restrictions on transfer of shares, mandatory buy/sell provisions upon death or default; required approvals for certain corporate actions; obligations on shareholders to fund the corporation; confidentiality and non-competition arrangements; etc.
Deciding on a business structure is the first step to starting your new business – it is an important decision, and if it's done properly with appropriate legal advice, can save you time and money down the road.
Get in touch with one of our Business Law experts to learn more.
The content of this article is intended to provide a general guide to the subject matter and is not legal advice. Specialist advice should be sought regarding your specific circumstance.