Business Law

Introduction to Business Structures in Ontario: Corporations, Partnerships and Proprietorships

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Introduction

There are three common legal arrangements used to carry on business. These are:

  • Sole Proprietorship
  • Partnership; and
  • Corporation

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Ontario Corporations

A corporation is a legal entity separate in law from its owners, the shareholders of the corporation. A corporation may own property, carry on business, possess rights and incur liabilities. The shareholders own the corporation through their ownership of shares. The shareholders do not own the business or the property belonging to the corporation, and the rights and liabilities of the corporation are not the rights and liabilities of the shareholders. The shareholders are said to have limited liability because their liability in connection with the property or business owned by the corporation is limited to the value of their shareholding in the corporation.

Because corporations are artificial legal entities, they can sue in their own names and they can have perpetual existence. A corporation also continues notwithstanding the death or withdrawal of a shareholder by the sale of his or her shares.
To Incorporate or Not?

To Incorporate or Not?

Carrying on business as a corporation offers certain distinct advantages over other methods of carrying on business. Whether to incorporate or not will, however, depend upon a number of factors, primary amongst which are:

  • Limited Liability: The liability of a shareholder of a corporation is limited to the amount of capital invested (money paid by the shareholder to acquire the shares of the company). The personal assets of the shareholder are not available to creditors to satisfy the liabilities of the business.
  • Desirability of Perpetual Existence: A corporation can have perpetual existence, which is not affected by the death or withdrawal of a shareholder.
  • Number of Owners: If the number of owners of the business is going to be large, incorporation is the only viable arrangement to carry on such business.
  • Taxation: There are various Income Tax benefits under the Income Tax Act that are available only to corporations.
  • Estate Planning: A corporation can be used as an effective Estate Planning vehicle.
  • Borrowing requirements: A corporation can raise money from the general public by issuing securities.

Incorporation Procedure

In Ontario, one may incorporate either under the federal jurisdiction under the Canada Business Corporations Act or under the provincial jurisdiction under the Business Corporations Act. The main benefit of incorporating under the federal jurisdiction is that a federal corporation can carry on business anywhere in Canada. An Ontario corporation on the other hand cannot carry on business in other provinces, except Quebec, without obtaining an extra-provincial license

Incorporation is available as a matter of right and is accomplished by delivering Articles of Incorporation together with supporting documents and prescribed fee to the appropriate department of Ministry of Consumer and Business Affairs. Incorporation can be done either as a number or a named company. For incorporation as a named company, the proposed corporate name cannot be same or similar to any existing business entity. Therefore, there must be submitted an original Ontario name search report, called the NUANS name search report, on the proposed corporate name.

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Partnership

When two or more persons carry on business together with a view to profit, the relationship is called a partnership and the members of the partnership are called partners. A partnership is like a sole proprietorship in that the partners carry on the business themselves directly. The partnership is not a legal entity separate from its partners. Partnerships are a common form of business enterprise.

The law of Ontario recognizes two types of partnerships. One is a general partnership, normally just called a partnership, which is the more common form of partnership. In a general partnership, the liability of each partner for the debts and other obligations of the partnership is unlimited. General partnerships are governed by the Partnerships Act.

The second type of partnership is called a limited partnership. In a limited partnership the liability of one or more of the partners (general partners) is unlimited and, the liability of one or more of the other partners (limited partners) is limited to the amount which that partner or those partners have contributed or agreed to contribute to the partnership business.

A limited partner is basically a passive investor rather than an active participant in the operation of the business of the limited partnership. A limited partnership is created by complying with the relevant provisions of the Limited Partnerships Act, and is subject to the provisions of both the Partnerships Act as well as the Limited Partnerships Act.

A partnership is not a separate legal entity from the partners, which compose it. Each partner is deemed to be the agent of the partnership and other partners when acting in the normal course of business of the partnership. Accordingly, one partner’s action binds all the partners, and each partner is liable with the other partners to the full extent of his or her personal assets for all debts and obligations of the firm incurred while a partner.

If a partnership is not for a fixed term, it comes to an end at the death or insolvency of a partner. A partnership can also be dissolved by a partner giving notice to the other partners of his intention to dissolve the partnership.

A general partnership cannot carry on business unless the name of the partnership is registered under the Business Names Act.

A partnership itself is not a taxable entity. The income or loss of the business carried on by the partnership is determined at the partnership level and then allocated to the partners. That income or loss is divided among the partners, and each partner’s share of that income or loss is included in computing that partner’s income for tax purposes. Like the sole proprietor, a partner must aggregate his or her share of net income or loss with income or losses from all other sources.

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Sole Proprietorship

A sole proprietorship is the simplest arrangement for carrying on business. There are few legal requirements to start a business as a sole proprietor.

However, before starting any business one should make sure that any licensing requirements that may be applicable have been met.

A sole proprietorship exists whenever an individual carries on business on his own account without using the medium of any other form of business organization or involving the participation of other individuals.

Many small businesses are organized as sole proprietorships.

All benefits flowing from the business accrue to the exclusive enjoyment of the sole proprietor. All obligations associated with the business are also the sole proprietor’s responsibility.

The sole proprietor is personally responsible for carrying out all the contractual relationships relating to the business.

All business and personal assets of the sole proprietor may be seized in fulfillment of the sole proprietor’s business obligations and liabilities, including debts incurred by the sole proprietor in connection with the business.

If a sole proprietor carries on business under a name or style other than his or her own name, he or she must register the business name under the Business Names Act.

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What is bankruptcy?

Bankruptcy is a legal process governed by the Bankruptcy and Insolvency Act, whereby a debtor can obtain a discharge of its obligations to its creditors.

The Bankruptcy and Insolvency Act provides a creditor as well as a debtor remedy. As a creditor remedy, it provides a framework for fair realization and distribution of the assets of the bankrupt, and as a debtor remedy; it provides the debtor with an opportunity to obtain discharge of its obligations and to start again

A debtor may make an assignment in bankruptcy voluntarily if the debtor is insolvent. A creditor can petition the court for an order declaring the debtor bankrupt.

When a debtor has been declared bankrupt, a trustee in bankruptcy is appointed and all of the debtor’s assets vest in the Trustee to be sold and the proceeds distributed to the debtor’s creditors.

Individuals who have never been bankrupt before are entitled to an automatic discharge from bankruptcy nine months after the assignment. With certain exceptions, a discharge releases the bankrupt its debts and liabilities.

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