Tips from a Business Lawyer – Ontario Business Structures: Selecting the Right Structure for your Business

Ontario Business Structures: Selecting the Right Structure for your Business

Read time: 3-4 minutes

Businesses in Ontario are typically organized in one of three main business structures: sole proprietorship, partnership or a corporation. Each structure has many advantages and disadvantages, so it is important to consider all three options if you are considering registering a new business.

1. Sole Proprietorship

A sole proprietorship is operated by one individual, and the income and legal identity of the business are directly attributed to that individual.

Advantages:

• A sole proprietorship is the simplest and least expensive type of business organization to establish;
• If the business name will be the same as the owner’s, there is usually no need to register the business name; and
• The owner has complete control over business decisions.

Disadvantages:

• The owner is liable for all debts and obligations of the business;
• There is not a separate legal identity of the business;
• It is more challenging to raise capital as a sole proprietor;
• The business cannot be passed on to another individual if the owner dies or decides to close the business; and
• The owner must declare all revenue and expenses of the business when they file their personal income tax return.

2. Partnership

Partnerships are similar to sole proprietorships but are operated by two or more individuals who work together. The partners share the profits and financial responsibilities of the business. Partnership agreements setting out the rights and responsibilities of each partner can limit disputes between partners.

Advantages:

• Partnerships can be fairly easy and inexpensive to establish;
• The start-up capital of the business can be divided amongst partners; and
• Limited liability partnerships (“LLP”) can provide some protections to partners who do not wish to be fully liable for the partnership’s debts and obligations.

Disadvantages:

• A partnership does not have a separate legal existence from its owners;
• All partners are liable for the debts and obligations of the business, unless there is a limited liability partnership in place;
• Each partner can bind the partnership, which could result in one partner being responsible for the actions of another partner; and
• Partners may disagree on business decisions.

3. Corporation

Corporations are legal entities that can contain one or more shareholders, directors and officers. A corporation has the same legal rights as a natural person. This means that it can sue, be sued, enter into contracts and acquire a loan.

Advantages:

• A corporation has a separate legal identity from its shareholders;
• Shareholders’ assets are shielded from the liabilities of the corporation;
• Corporations have some flexibility with how they disburse income and expenses such as non-deductible expenses, income splitting, and the option to leave some income in the corporation, which can lead to tax advantages;
• Corporations have continued existence, meaning that the corporation can be sold or transferred; and
• It is easier to raise capital with an incorporated business structure.

Disadvantages:

• Incorporating a business is more complex and expensive than either of the above business structures;
• It is necessary to prepare articles of incorporation, setting out the shareholders, directors and officers, and the company minute book is required to be kept up to date;
• Corporations are more closely regulated; and
• The courts can “pierce the corporate veil” in some circumstances to find shareholders, directors and/or officers personally liable for the debts of the corporation. Please see our article, “Piercing Through the Corporate Veil”, for more information.

Conclusion

It is important to consider the various organization options when starting a new venture. Lawyers can provide assistance in deciding which structure will best meet your business needs and can assist with the appropriate steps to establish and register a business in Ontario.

Please contact Michael Paiva for more information, or if you require assistance with a business law matter.