Business owners often have questions about how to organize their business and whether or not it is appropriate for them to incorporate. An understanding of the different ways a business can be structured is necessary to decide what is appropriate for your business and its needs.
In Ontario a business can be organized in one of four different ways: as a sole proprietorship, a partnership, a limited liability partnership or as a corporation.
1. Sole Proprietorship
A sole proprietorship is when an individual carries on business as an individual. The sole proprietor is liable for the obligations of the business and income is taxed as the individual’s yearly income. A sole proprietorship might make sense when a new business is expected to lose money initially (losses can be deducted against individual income), funds do not need to be raised through an offering and there is negligible risk of liability.
If an individual wishes to carry on a sole proprietorship under a name other than his or her own, he or she is required to register the name with the government under the Business Names Act (Ontario). Failure to do so could cause problems if the individual wishes to commence an action in the name of the business.
A Partnership is similar to a sole proprietorship except that there is more than one proprietor. All partners are jointly and severally liable for the liabilities of the business. A partnership can only deduct losses against the profits of the partnership.
If you are working in conjunction with one or more people in a business venture the business may be deemed to be a Partnership pursuant to the Partnerships Act (Ontario). It is wise for partners to have a partnership agreement that puts the nature of the relationship in writing. If there is no agreement the Partnerships Act (Ontario) will apply.
A Partnership might make sense if two or more people are starting a business, trust one another, and are not concerned about potential liabilities.
3. Limited Liability Partnership
A limited partnership, governed by the Limited Partnerships Act (Ontario), is a partnership where the liability of the partnership is limited to the general partner(s) that exercise control of the business. The general partners must file a declaration in order to form a limited partnership.
A limited liability partnership might make sense for partnerships involving numerous partners where liability is a concern. Professional firms where the practitioners are also owners often use this model. As with a partnership, when forming a limited partnership, it is wise to have a partnership agreement in writing.
A corporation is a separate legal entity set up for the purpose of carrying on business. Most corporations are share corporations where the company is owned by its shareholders. Non-share corporations have members instead of shareholders and are often used for co-ops, not-for-profit organizations and charities.
A share corporation is ideal for companies that wish to protect owners from business liabilities, that intend to raise funds via an offering and/or that are expected to make money and wish to reduce their tax exposure.
This blog and the contents herein are for informational purposes only and do not constitute legal advice. Readers are advised to seek legal counsel prior to acting on any matter discussed herein. I take no responsibility for any third-party sites linked, nor is the presence or absence of a link an indication of my endorsement of views expressed.