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Types of Business Entities
There are 3 main business entities an entrepreneur should consider in Ontario:
A sole proprietorship is the simplest form of business organization, it is easily to set up and it is automatically created as soon as you begin to carry on business in your name. You are the sole owner, and fully responsible for all debts and obligations related to your business. All profits are yours to keep. Because you are personally liable, a creditor can make a claim against your personal assets as well as your business assets in order to satisfy any debts.
- Easy and inexpensive to register
- You have direct control of decision making
- Minimal working capital required for start-up
- You can enter into contracts with other people and entities
- You can hire employees
- Some tax advantages (deducting your losses from your personal income, and a lower tax bracket when profits are low)
- All profits go to you directly
- You are solely responsible for your actions and the actions of any employees you may have.
- You have unlimited liability (if you have business debts, claims can be made against your personal assets to pay them off)
- You cannot bring anyone as a partner & can be difficult to raise capital on your own
- Income is taxable at your personal rate and, if your business is profitable, this could put you in a higher tax bracket
- Lack of continuity for your business if you are unavailable
This is the best type of business organization to start off with. Then, as your business grows, you can decide if alternative business is more suitable.
A partnership is automatically formed when two or more individuals or corporations carry on business together with a view of profit.
The Partnerships Act (Ontario) determines the rights and obligations of each partner, unless the partners enter into a formal partnership agreement. In a partnership, your financial resources are combined with those of your business partners and put into the business. You and your partners would then share in the profits of the business according to the legal agreement you have drawn up. The partners are the sole owners and cannot be employees.
In a General Partnership, each partner is jointly liable for the debts of the partnership. In a Limited Partnership, a person can contribute to the business without being involved in its operations. A Limited Liability Partnership is usually only available to a group of professionals, e.g. lawyers, accountants or doctors.
While all of the benefits of the partnership accrue to the partners, each partner is personally responsible for the obligations undertaken in contracts entered into by the partners. This is important because it establishes the terms of the partnership and can help you avoid disputes later on.
Hiring a lawyer to help you draw up a partnership agreement will save you time and protect your interests.
- Fairly easy and inexpensive to form a partnership
- Start-up costs are shared equally with you and your partner(s)
- Equal share in the management, profits and assets
- Tax advantage — if income from the partnership is low or loses money (you and your partner(s) include your shares of the partnership in your individual tax returns)
- There is no legal difference between you and your business
- Unlimited liability (if you have business debts, personal assets can be used to pay off the debt)
- Can be difficult to find a suitable partner
- Possible development of conflict between you and your partner(s)
- You are held financially responsible for business decisions made by your partner(s)
A corporation has its own legal entity. Incorporation can be done at the federal or provincial/territorial level. To set up a corporation, you have to file articles of incorporation with the government. When you incorporate your business, it is considered to be a legal entity that is separate from its shareholders. As a shareholder of a corporation, you will not be personally liable for the debts, obligations or acts of the corporation. Further, the corporation is taxed on its own, and you pay tax on what the corporation pays you, by salary or dividends.
It is always wise to seek legal advice before incorporating.
- Separate legal entity
- Owns assets and has the limited liabilities
- Owns property in its own name and ownership is transferable
- Has continuous existence
- May sue on its name and may be sued
- Can be an employer, you can be an employee
- Easier to raise capital than it might be with other business structures
- Possible tax advantage as taxes may be lower for an incorporated business
- A corporation is closely regulated
- More expensive to set up a corporation than other business forms
- Extensive corporate records required, including documentation filed annually with the government
- Possible conflict between shareholders and directors
- You may be required to prove residency or citizenship of directors