The Three Basic Business Structures in Ontario

The Three Business Structures In Ontario

We have all thought about starting our own business and being our own bosses. You may even have an idea or a skill you think you can use to build a company. But have you thought through how you will structure your business? Before starting your business, you should take some time and familiarize yourself with the three basic ways to structure a business. In Ontario, entrepreneurs can open a business as a sole proprietorship, partnership or a corporation. Each of these structures comes with unique tax and liability implications and it is important to structure your business appropriately so it fits your needs.

Sole Proprietorship

The simplest way an entrepreneur can structure a business is as a “Sole Proprietorship”. There are very few requirements for opening a sole proprietorship and many small businesses prefer this structure for its low start-up costs. A sole proprietorship only allows for one owner who controls the entire business. Income for the business is included in the income of the owner for tax purposes and the owner is responsible for all liabilities of the company. Therefore, a sole proprietorship offers no protection against lawsuits or tax advantages.

Partnership

In its simplest form, a partnership is two or more people going into business together. This business structure, governed by the Partnerships Act can be further divided into general partnerships and limited partnerships.

General Partnership

General partnerships are automatically created when two or more people enter into business together without any written agreement or corporation. However, many business partners decide to formalize their relationship with a partnership agreement. The income of the company flows through to the partners for tax purposes. You should be careful when entering a partnership without an agreement as your partners can enter into contracts on the partnership’s behalf without your consent and you will be responsible for fulfilling those contacts.

Limited Partnership

Limited partnerships can only be formed by agreement and create two classes of partners. The first class is known as general partners who hold all of the decision-making authority, but also have unlimited liability. The second class of partner is known as limited partners who do not have the right to make decisions, but their liability is limited to the amount of money they have invested in the company. Limited partners usually cannot be personally sued to pay the debts of the company. This business structure is most useful when a business has “silent partners” who wish to put up capital, but do not want to take an active role in the business.

Corporation

A corporation is a legal entity that is registered with the government and carries on business. Corporations are the most complicated and expensive way to structure a business, but they also offer the most protection. The shareholders of a corporation have limited liability, which means they are only liable up to the amount of money they have invested in a corporation. Entrepreneurs forming corporations should pay attention to corporate governance. The rules that govern directors and officers of a corporation are found in the articles of incorporation, corporate bylaws and sometimes shareholder agreements.

An important rule to know when creating a corporation is that directors can be held personally liable for certain decisions and obligations of the corporation. Therefore, it is important for directors to know their rights and obligations.

No matter what business structure you create, it is important to remember that business law is a broad subject. Any business structure can be changed or affected through contracts, regulations, employment agreements or other regulations. However, and understanding of the three basic business structures can help you start your journey to structuring your business in a way that works for you.

If you are starting a business, call us today to talk about your business structure at (647)-494-9599 or email us at info@law365.ca.