The sole proprietorship business structure are for businesses that have only one business owner. This type of business structure is simple and inexpensive to set up. If the business is operated under the owner’s personal name, then no registration is needed. Registration is required only if operating under a trade name.
The regulatory burden of the sole proprietorship is light with minimal paperwork and legal costs. Moreover, there are no employees, partners, or investors to contend with, which may be advantageous if your business earns less than $100,000 a year. The simplicity of the sole proprietorship makes a great deal of sense, particularly if don’t envision selling your business or passing on your business to heirs.
A sole proprietorship is a pass-through tax entity. A pass-through entity is a special business structure that is used to reduce the effects of double taxation. That means that there is no tax paid at the sole proprietorship level. Instead, all profits flow to the sole proprietor directly.
In summary, the advantages of a sole proprietorship include the following:
- Easy and inexpensive to register.
- Regulatory burden is generally light.
- You have direct control of decision making.
- Minimal working capital required for start-up.
- Some tax advantages if your business is not doing well.
- All profits go to you directly.
The partnership business structure is for businesses that have two or more partners. Setting up a business as a partnership is more advanced and expensive than a sole proprietorship. The partners must file both a T1 Income Tax and Benefit Return to file personal income as well as a T5013, a Partnership Information Return.
Partners in a general partnership agreement assume personal liability for debit and do not have access to certain tax planning strategies, such as income splitting. However, if the partnership is a professional one (e.g., dentists, doctors, accountants), the partners can set up a Limited Liability Partnership (LLP), which will limit the personal liability of the partners themselves.
Setting up a corporation is complex and expensive, however there are a number of benefits: The benefits of incorporation are limited liability, separate legal entity, perpetual existence, and free transferability.
The most important advantage of setting up a business as a corporation is the income tax savings.
Although there is double taxation, once on the corporate level and again on the shareholder level, once dividends are transferred to shareholders, less tax is still paid overall on income that is earned through a corporation, where the business is a Canadian Controlled Private Corporation (CCPC). Currently, a CCPC in Ontario is taxed at 12.2% on the first $500,000 of ABI in each year, which is 25.5% less than the combined average marginal personal tax rate of approximately 38%.
A corporation can also utilize tax savings strategies such as income splitting and the Lifetime Capital Gains Exemption. It should be noted, however, that a professional corporation, which is a corporation owned by members of certain professions, such as physicians, lawyers, accountants, and doctors, cannot income split with family members.
Finally, a corporation protects the corporation’s owners from personal liability, thereby safeguarding the owner’s personal assets from corporate creditors and/or lawsuits. Sole proprietors are liable to the full extent of their personal assets for the liabilities of their businesses, whereas a shareholder’s liability to creditors of the corporation is limited to the amount of the shareholder’s investment. Directors are not liable at all (except where the director engages in fraud).
A corporation is a legal entity that is separate and distinct from its owners. The technical definition of a corporation is "an artificial creation of the law existing as a voluntary chartered association of individuals that has most of the rights and duties of natural persons but with perpetual existence and limited liability." In other words, a corporation exists as a separate legal structure, almost as if it were a person under the law. Corporations enjoy most of the rights and responsibilities that individuals possess: they can enter contracts, loan and borrow money, sue and be sued, hire employees, own assets, and pay taxes
In the event a corporation becomes insolvent, the owner and shareholders are not liable for the debts or other obligations incurred by the corporation. Yes, the shareholders will lose their investment, but they will not be responsible for its debt.
Separate legal entity refers to a corporation’s operating as distinct from its shareholders, directors, and officers. A corporation (like a person) can own property, enter into a contract, sue and be sued, and be convicted of a criminal offense (corporations pay fines in lieu of imprisonment.) A corporation exists as its own entity, regardless of what happens to the individuals involved in the business.
Perpetual existence refers to a corporation’s continued existence until it is liquidated, dissolved, or acquired by another entity. When a business is incorporated, the owners, officers, and shareholders (the organizers) can choose to give it an end date when the mission of the corporation has been fulfilled. More commonly, a corporation acts in perpetual existence; that is it will continue to exist, until the organizers decide to end it. Even if the executive team and employees were to quit, the business corporation as an entity would continue to exist, and new employees could take their place.
Free transferability refers to the shareholders’ ability to sell shares without the consent of the directors, officers, or other shareholders, unless otherwise restricted in the corporate constitution. That being said, shareholders in a new venture often will want to prevent unrestricted transfer of shares and thus may provide transfer restrictions or buy-sell and redemption agreements in the articles of incorporation, further limiting transferability. There are separate rules and restrictions governing the transfer of shares in a private versus a public corporation.
All businesses, whether you are operating through a corporation or sole proprietorship, require a separate bank account. Bring either your Articles of Incorporation or your Master Business License to your bank or financial institution when you are ready to open a business account. You may also want to open an additional tax account to hold the HST you collect from your customers.
In order to be in good standing with your taxes, you will need to take care of some administrative details when launching a new start up business. Firstly, you will need to register for a business number (BN), HST account if you anticipate making more than $30,000 a year, a payroll account (PR) and a Workplace Safety and Insurance Board (WSIB) account if you have employees, and an Employer Health Tax (EHT) account if your payroll exceeds $450,000.
That depends on the type of business structure that you have. If your business is a corporation, you should organize your corporation set out in resolutions that clearly indicate who the director, officers, and shareholders are and the rights and obligations of each party. If your business is a partnership, then a partnership agreement should be drafted outlining the rights and obligations of each partner and how the profits of the business will be shared.
Finally, if there are more than one shareholder, there should be a shareholders agreement to set out the rights, obligations, and duties of each shareholder, as well as the rules for existing shareholders, buying out of shares, and policies if a shareholder becomes disabled, dies or divorces.
When starting a business, you will likely require business contracts with suppliers, distributors, and service providers. Whether you are in the business of selling goods or services, you will likely need distributor agreements, supply agreements, service agreements, sales agreements, licensing agreements and lease agreements.
There are many online services that claim to incorporate your business for as little as $100. You may incorporate using an online service, however they will likely not complete the incorporation process. They will only complete step 1 of a two-step process. That means, you will receive articles of incorporation, but that does not mean that the incorporation process is complete or valid. It is only complete and valid when you complete step two, which occurs when you prepare organization resolutions and issue shares to shareholders.
You can complete step one by yourself. The provincial and federal government provides this service for free and do not need to spend $100-$200 for a service that provides no extra value at all.
While it is possible to incorporate yourself, it will require a great deal of research yourself. You will have to review the Ontario Business Corporations Act and find out what the required resolutions are. You will have to prepare the resolutions, issue the shares, and obtain a formal minute book. For most people, they are advised to use a lawyer to incorporate, which will ensure that all the legal requirements for incorporation have been fulfilled. Using a lawyer will also help you get set up with all the other aspects of starting a business, from preparing employment, service, and distribution contracts, branding and trademarks, and obtaining the corrects licenses and permits.
If you do not prepare organizational resolutions and issue shares to shareholders, then your corporation is not incorporated legally. The Ministry can dissolve your corporation and you will have to start the incorporation process at that time.
Additionally, you will lose all the benefits of incorporation. You will not have the benefit of limited liability or reap the tax advantages of incorporation. Further, you will not be able to sell your corporation as it was never properly constituted and you will be deficient in your annual resolutions, which under the law require directors and officers of a corporation to approve the financial statements each year.
Almost all businesses in Canada must register their business name in their respective provinces or territories except for sole proprietorships that use only the owner's legal name with no additions. All other forms of business ownership, including partnerships, must register their business names.
The basic procedure to register a business name for a sole proprietorship or partnership is to conduct a business name search, fill out the appropriate business registration form, and pay your fee. The procedure to register a business name for a corporation is more involved. Besides conducting a name search and getting a NUANS report, if you wish to set up a named corporation, you will also have to prepare Articles of Incorporation, a cover letter and an incorporation application to go along with your fee.
You must renew your business’s name it every five years; however, you can renew a registration within 60 days after it expires.
In order to complete registration of your business name, you will need to provide the name and address of the business where legal papers can be served, as well as the name and home addresses of each partner where a partnership has 10 or fewer partner. You will also need to provide a description of the business activity being performed; and a valid email address if you are registering via email.
No it does not. Registering your business name does not mean that you have exclusivity. That will require you to trademark your name. While the Business Names Act does not prohibit you from registering a name that is the same or similar to others, you may find yourself in a lawsuit. That is why it is best to conduct a names search first to make sure that no one else is using the name that you want.
You can register your business name online, mail, or register in person.
To register online, you can register with the following services:
- Service Canada’s Business Name Registration Service
- Service providers Cyberbahn, ESC Corporate Services Ltd, and OnCorp Direct Inc. or
- CRA’s Business Registration Online Service
If registering in person, go to the following address:
Ministry of Government and Consumer Services
Central Production and Verification Services Branch
375 University Avenue, 2nd floor
Toronto, ON M5G 2M2
If registering by mail, write a cheque or money order for $80, made out to the Minister of Finance, and mail to the following address:
Ministry of Government and Consumer Services
Central Production and Verification Services Branch
393 University Avenue, Suite 200
Toronto, ON M5G 2M2
In order for a business contract to be considered valid, there must be:
- Offer and acceptance
- Consideration
- Capacity
- Consent
- Lawful Purpose
In every valid contract, offer, acceptance and consideration are vital aspects. First an offer is made that contains all the important and relevant terms of the contract in a clear and precise manner. Then the offer is accepted, after which something of value, either an object or service is exchanged between the parties as consideration. In every valid business contract, both parties must have the ability or capacity to understand the terms and nature of the contract. Therefore, anyone with a developmental disability, impaired judgement or who is not the age of majority in Canada (18 or 19 years) does not have the capacity to enter into a valid and enforceable contract. Each party involved in the business contract must freely consent or agree to the terms of the contract. That means that a contract is not valid if there has been misrepresentation, fraud, or undue influence. Finally. Canadian law requires that business contracts are lawful in their intent. In other words, no contract can be negotiated for a service or exchange that violates the law.
