Posted by Graydon Ebert, Associate
Spring is often considered a time of new life. New plants are blooming, new wildlife born. I am experiencing this firsthand as the newest member of the Barriston team. Even this blog itself is in its infant stages of new life. After being wonderfully written by Joanne McPhail in the past, she will now be assisted by contributions from the entire Barriston Business Law department.
For many people, this new life will take the form of a fresh and exciting business idea or opportunity. While plans are feverishly being put together to get this business off the ground, one of the most important considerations that must be made is how the business will be structured. There are three typical business structures: sole proprietorships, partnerships and corporations. All of these structures have their own advantages and disadvantages and there is no hard and fast rule as to which structure is right for each individual business.
If the business will be owned by one person, sole proprietorship is a possible option. There are no formalities in law required to start a business as a sole proprietor because the business there is no legal separation between the business and the owner. Everything the business owns and owes is owned and owed by the actual human being who owns the business. This lack of legal separation has implications from both a tax and liability perspective that must be considered before choosing this option. For example, income of the business is taxed in the hands of the owner at the owner’s marginal tax rate. There is one legal formality that must be done if the owner wishes to operate the business under a name other than his or her own. This name must be registered with the Ontario government.
If two or more people are going to be involved in the business, it could be structured as a partnership. Much like a sole proprietorship, there is no legal separation between the business and the owner. The partnership is not a separate legal entity from its owners. A partnership cannot enter into contracts in its own name, and the partnership name must also be registered with the Ontario government. Much like a sole proprietorship, the income of the partnership is taxed in the hands of the owners, although an additional tax form must be filed on behalf of the partnership. Also like a sole proprietorship, there is no limit on a partner’s legal liability for acts of the business, subject to some specialized exceptions.
Regardless of how many people will be involved in the business, incorporation is often the preferred option. Rather than owning the assets of the business, the people involved in the business would own shares, which can be subject to conditions that they choose and are more easily transferable. Corporations are separate entities at law, which can be an advantage for tax and liability purposes. Unlike people, corporations don’t die, and continue on even after the principal shareholders pass away. However, since corporations are separate legal entities, there are additional costs to create and maintain them at law that are not applicable to sole proprietorships or partnerships.
If you are starting a new business, please contact one of Barriston’s Business Law professionals to discuss which structure is best suited to your needs and to assist you in getting your business off the ground.