Business Law
Starting A Business
Most people run their business in one of three ways: as a Sole Proprietor, in a Partnership; or as a Corporation.
Sole Proprietor
This is still a very common method of running a business. That is due to the fact it is the simplest. Even a child may set up a lemonade stand. While simple to set up it is not without legal pitfalls. The sole proprietor must still be concerned that in whatever field of endeavour they meet the standard requirements to carry out his or her work competently. For example, many lawyers continue to practice this way. You would not want the legal advice of a person claiming to be a lawyer when they have not passed the Ontario Bar Exam. Therefore, depending on the field, licensing is required.
There are government requirements to be considered such as the municipal by-laws on land use, and registration under the Business Names Act.
“Being your own boss” is attractive as all business decisions are made by the owner. Money flowing to the owner is theirs to manage. They get the benefits. However, they also get all the responsibilities that runs with the business. Therefore, attention to issues of liability is a must. You will need legal help to write your contracts with clientele and suppliers to ensure any potential liability is limited.
Any business loss is a personal loss. Personal property, as well as business property is subject to seizure for the satisfaction of liabilities.
The sole proprietor is personally responsible for carrying out all the contractual relationships relating to the business.
Partnership
General Partnership
Two or more people working together in a business for profit is known as a partnership. They are “partners”. You may consider a partnership as a grouping together of sole proprietors in a common business enterprise. There are many ways in which the partnership may be organized. You will need help in writing a partnership agreement that regulates such matters as responsibilities and profit share. This arrangement is known as a “general partnership” or “partnership”. Keep in mind that the liability for each of the partners is unlimited for the partnership. The Partnerships Act governs general partnerships.
Limited Partnership
The limited partnership is characterized by one (or more) partners having unlimited liability AND one (or more) partners having limited liability equal to the amount the partner contributed to the business. The Limited Partnerships Act stipulates how a limited partnership is established. Note: the limited partnership is also subject to the Partnerships Act.
The Business Names Act requires the name of the partnership to be registered.
Keep in mind that a partnership is not a legal entity separate from the partners. Each partner’s actions bind all the other partners, and all the partners are personally liable for the actions of all in accordance with the type of partnership to which they belong. Therefore, it is extremely important to ensure that potential partners are properly screened to ensure a good fit for the partnership.
Partnership, not being a legal entity, has income tax implications as the income and loss is divided among the partners to be included in their respective tax returns to CRA.
The partnership agreement may set time limits on the partnership. If not, a partnership ends at a partner’s death or insolvency. It may also end with a partner giving notice that he intends to break up the partnership.
Incorporation
The advantage of incorporating is that the corporation is a legal entity separate and apart from the shareholders. It may own property and incur debt along with other liabilities as it operates its business. The shareholders’ liability is limited to the value of their shares. With perpetual existence it can pursue litigation long after the life of its shareholders or the sale of shares.
How do you know if incorporation is best for your business?
Every person, every circumstance is different. We can help you make that decision when reviewing your goals, how you want to operate and your comfort level of risk. Consider the following:
Limit Your Liability: Is your business subject to a lot of liability in the marketplace? If so, then incorporating will mitigate such risk with the public. However, keep in mind that some entities, such as banks, demand personal guarantees on any loans your corporation should borrow.
state Planning: incorporating your business is an efficient tool to implement your succession plan.
Multiple Owners: if there are many owners then the most effective organization will be to incorporate.
You can incorporate either under the federal Canada Business Corporations Act or under the one may incorporate either under the federal jurisdiction under the Canada Business Corporations Act or under the Ontario Business Corporations Act. With a federal incorporation you can do business anywhere in the Country. An Ontario incorporation will require (except Quebec) an extra provincial license from each province where the corporation does business.
There are a number of steps to incorporate including the name search report to ensure there is no other corporate or similar name being already in use. We can help you with those requirements.
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