Methods of Carrying on Business
A sole proprietorship is a business owned by one individual and operated for his or her own account without the involvement of other individuals, except employees. Business decisions are solely the result of the owner's abilities and preferences. The owner receives all benefits flowing from the business, including income and assets, and is correspondingly responsible for all of its liabilities and obligations. This includes an owner being held personally responsible if someone is harmed by his or her product or injured on the business premises. All of the owner's personal property, bank accounts and other assets may be seized to satisfy the liabilities of the business. The income or losses of a sole proprietorship are also combined with the other earnings of an individual, for income tax purposes.
Many small businesses start as a sole proprietorship because these are very easy to establish. If you operate a sole proprietorship under a business name different than your own name (for example, "Joe's Construction"), it will be necessary to register your business name with the Companies and Personal Property Security Branch of the Ministry of Government and Consumer Services for Ontario. Apart from this, there are virtually no legal requirements to start up a sole proprietorship, other than obtaining any necessary licenses or permits from a municipal, provincial or federal authority which are required to conduct your particular business.
Sole proprietorships can be very appealing because of their low cost and absence of regulations and restrictions. On the other hand, a sole proprietor is exposed to different risks than the owner of a corporation and will be unable to take advantage of tax rules that are available to corporations when the business becomes financially successful. For more information to decide whether a sole proprietorship is best for you, consult one of our experienced corporate lawyers.
When two or more persons, whether individuals or corporations, carry on business together with a view to profit, this relationship is called a partnership and the individual members are called partners. A partnership is similar to a sole proprietorship in that they are both relatively inexpensive to establish and there are few legal formalities creating them. Further, the operation of the business is dependent on the individual partners themselves. Subject to the terms of any partnership agreement, should a partner die, quit or declare bankruptcy, the partnership is immediately dissolved.
In Ontario, there are three types of partnerships: general partnerships, limited liability partnerships (LLPs), and limited partnerships. In general partnerships, the liability for each partner for the debts and obligations of the business is unlimited. A limited partnership, on the other hand, has one or more general partners with unlimited liability, but also has one or more limited partners whose liability is limited to the amount that they contributed or agreed upon within a written limited partnership agreement. LLPs are a hybrid of general and limited partnerships in that each partner has full limited liability, however, only certain professionals may create an LLP.
The most common form of partnership is a general partnership. While it is less complicated and less expensive to set up, care must be taken in those chosen to become a partner. This caution is necessary because general partners can legally bind all the other partners to contracts with third parties, even without their knowledge and consent. Consequently, before forming a partnership, you must have complete faith and confidence in your proposed partner(s).
If you would prefer to limit your personal liability and make it easier to continue the business uninterrupted if one partner dies or wishes to leave the business, consider incorporation. If you do form a partnership, a partnership agreement is a necessity. That agreement should clearly define the relationship between you and your partner(s) and is essential to the smooth operation of the business. For more information to decide whether a partnership is best for you or on forming a partnership agreement, consult one of our experienced business lawyers.
In law, a corporation is considered a separate legal entity from its owners. This means that, much like a person, a corporation can own property, possess certain rights and incur liabilities. Although the shareholders own the corporation through their shares, they do not own the assets of the corporation and the rights and liabilities of the corporation are not the rights and liabilities of the shareholders.
Shareholder's liability is limited to the value of assets they have transferred to the corporation (for example money, property or past services) in exchange for shares. Should the corporation incur liabilities in excess of their assets its creditors can demand repayment from the assets of the corporation. Creditors cannot demand repayment from shareholders individually unless the shareholders, in their personal capacity, guaranteed the obligations of the corporation.
Another advantage to incorporation is that a corporation offers more flexible ownership options. If the corporation earns a profit, share ownership can be arranged so that such profits can be spread among your family members in the form of dividends, despite the fact that such family members may not be actively involved in the day to day operation of your corporation. If profits are high enough to create savings and investment options, there are other tax advantages and flexibility which can be reviewed with an accountant and one of our corporate lawyers.
The cost of incorporating and operating a corporation is considerably higher compared to either sole proprietorships or partnerships. Additionally, corporations are more regulated than the other two business models. There are additional forms that must be filed with the government from time to time for matters such as a change in the directorship or a change of address. Separate tax returns need to be filed for the corporation. These costs are well worth incurring however, once a business has become successful, because of the various tax savings that may be available through incorporation.
Where there is more than one shareholder, parties should consider and enter into a Shareholders' Agreement. In addition, there are other matters including director's liability that must be reviewed with your lawyer when forming a corporation.
To determine if incorporating is best for your situation, we encourage you to consult one of our experienced corporate lawyers.