by Carly Harris
Starting a business can be overwhelming. There are many different things to consider such as marketing, financing, operations, and what type of business structure you should choose. In Ontario, there are three main business structures: sole proprietorships, partnerships, and corporations. It is important to understand the difference between them to determine which one will best suit your needs.
A sole proprietorship is the simplest form of business structure. It is an unincorporated business that has just one owner. The owner has full responsibility for making decisions and receives all profits. Setting up and administering a sole proprietorship is easy and inexpensive. This often includes registering your business name and taking out commercial insurance. As the owner, you pay personal income tax on the net profits of your business.
With a sole proprietorship there is no separation between the business and the individual owner. As a result, no separate legal entity is created. The owner of a sole proprietorship is personally liable for claims arising from the business. Therefore, the debts and risks of the sole proprietorship are the debts and risks of the owner. If your business fails, your assets can be seized and used to pay your debts.
A partnership is an arrangement between at least two parties to manage and operate an unincorporated business. Decisions are made with the other partners and the partners share the profits of the business. In a general partnership, all partners are personally liable for business debts and obligations.
With this form of business structure, it is critical to have a Partnership Agreement to define the management responsibilities, how the partnership can be terminated, financial obligations, allocation of profits, and interests in the business.
Three types of partnerships exist:
In a general partnership each partner shares the management and control of the business but he/she is jointly and severally liable for all debts and obligations of the business.
In a limited partnership, while there are general partners who have unlimited liability, as a limited partner you do not share control or management of the business. The liability of a limited partner is restricted to the amount of money or interest he or she has invested in the business.
In a limited liability partnership all partners are protected from personal liability for the negligence, malpractice, incompetence, errors, or omissions of other partners. The partnership itself can be held liable for the negligence of its partners, associates, and employees. Therefore, the assets of the business are at risk.
A corporation is regarded as a legal person with its own rights and responsibilities, therefore producing a distance between the business and its shareholders for taxation and legal purposes. Shareholders and directors of a corporation are generally not liable for its debts or obligations (with a few exceptions). It is generally easier to obtain capital and loans to help build your business within a corporate structure.
There is a bit more paperwork required to setup and operate a corporation such as holding shareholder meetings, filing a separate tax return for the business, and filing annual reports with the corporate registry.
It is important to consider the advantages and disadvantages of each business structure. Simmonds Law can provide you with assistance and legal advice to determine which structure would best suit your needs.
All content on this website and within the article is intended for general information only and should not be construed as professional (legal, tax, financial, or otherwise) advice.