Ontario has three primary forms of business structures — sole proprietorships, partnerships, and corporations. Your choice of which form of ownership you choose for your business could depend upon ease of formation, the expense of formation, taxation considerations, liability issues, control over company resources and decisions, and other factors. Each business form has different advantages and disadvantages, and you will have to decide which form best suits your situation and business goals. In this post, we will examine the three most common structures and highlight some of the pros and cons of each structure.
What is a Sole Proprietorship
A sole proprietorship is an unincorporated business that one individual person owns. The owner of a sole proprietorship has unlimited liability, meaning that the sole proprietor is legally liable for all of the debts incurred by the business.
ADVANTAGES OF A SOLE PROPRIETORSHIP
- There are limited legal formalities required in creating a sole proprietorship. In general, no legal documents need to be filed with a government agency to create a sole proprietorship.
- The profits of a sole proprietorship are reported on your personal tax return at the end of the year and taxed according to your individual income tax bracket.
- Minimal start-up costs. A sole proprietorship is automatically created when an individual begins conducting business activities on his or her own behalf.
DISADVANTAGES OF A SOLE PROPRIETORSHIP
- Unlimited liability – while most businesses limit their risk by incorporating, a sole proprietorship does not have that same protection.
- If you should be sued, your personal possessions are fair game. Generally speaking, if a court judgment is awarded against a business owner, creditors can seize both business and personal property to satisfy the debt owed by the sole proprietor to them.
- Sole proprietors are not able to distribute company profits in the way they choose. Instead, business earnings are taxed at the individual tax rates that apply to all personal income.
What is a Partnership
A partnership is also an unincorporated form of business organization in which two or more persons agree to carry on a business in common with a view to profit.
TYPES OF PARTNERSHIP
Two forms of partnerships are generally used in Ontario: (a) general partnership; and (b) limited liability partnership.
In a general partnership, each partner is responsible for all liabilities and debts incurred by the partnership.
In a limited partnership, there are two classes of partners: (a) general partner(s); and (b) limited partner(s). General partners are responsible for all liabilities and debts incurred by the partnership. Limited partners inherit the benefit of limited liability in that their responsibility for liabilities and debts of the partnership is limited to the limited partner’s investment into the partnership.
ADVANTAGES OF A PARTNERSHIP
- It is relatively easy and often inexpensive to form a partnership. However, it is recommended practice that the partners enter into a partnership agreement to set out their rights and responsibilities. Drafting such an agreement can become expensive.
- All income, loss, taxable capital gains, and allowable capital losses of the firm are allocated to the partners.
- Distributions amongst the partners do not need to be proportionate to each partner’s interest in the partnership.
DISADVANTAGES OF A PARTNERSHIP
- In a general partnership, there is effectively unlimited liability for each partner. General partnerships offer no liability protection for business debts and other claims against the partnership or its owners. Each general partner may be held personally liable for all business acts, including any intentional wrongdoing by another partner, employee, or agent.
- While in a limited partnership, the limited partners have limited liability, this shield is granted in exchange for the limited partner agreeing to not engage in the day-to-day management of the partnership. Limited partners are intended to be, for the most part, “silent partners”.
- Partnership is not a separate legal entity, and therefore, partnerships do not own assets or exist beyond the termination of the relationship between partners.
What is a Corporation
A corporation is a legal entity that separates the business from its owner/operator. In Ontario, the formation and management of a corporation is governed by Ontario’s Business Corporations Act (“OBCA”).
ADVANTAGES OF A CORPORATION
- Limited liability. Generally speaking, a shareholder’s liability is limited to amount of capital contributed.
- A corporation is a separate legal entity. That means that a corporation holds title to property in its own name, is responsible for its own taxes, and sue and be sued like a person.
- Corporations (other than professional corporations) can choose a fiscal year-end ending on any day of the calendar year.
DISADVANTAGES OF A CORPORATION
- More expensive than a sole proprietorship to create.
- More expensive to maintain each year. The corporation itself must file a separate tax return in addition to the shareholder(s).
- A corporation is generally subject to more regulatory scrutiny than other business ownership structures. Strict compliance with corporate formalities is required in order to protect shareholder rights. Formal meetings must be held at least once a year, and minutes kept recording the details thereof
- In Ontario, it is necessary to have a registered office in the province. If you live outside of Ontario, you may be required to retain an attorney to accept service for your corporation in Ontario.
Starting a Business in Mississauga?
Are you thinking about starting a business in the Mississauga area?
If so, Beganyi Professional Corporation has the experience and expertise to help you determine what business form is suitable for your needs. Talk to us today!
You won’t find another law firm that will work harder than we do on behalf of our clients. We have over 14 years of experience helping entrepreneurs like yourself start their businesses and grow them into successful enterprises. We are committed to providing excellent service at an affordable price, so call us today!
Call Beganyi Professional Corporation Law Firm now at (647) 977-7749.