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What are my options for structuring a business in Ontario? The most common way to structure a business in Ontario are as a sole proprietorship, a partnership, a joint venture and a corporation.
What is a sole proprietorship? If you carry on business for your own account without involving other individuals (except perhaps as employees) or as a corporation, you are carrying on business as a sole proprietorship. Many small businesses are organized in this way.
What are the benefits and drawbacks of being a sole proprietor? A sole proprietorship is the simplest form of carrying on business and involves the fewest legal formalities required in operating a business, although some requirements, such a licenses, may still be required. All of the profits of the business flow through directly to the owner. However, as the owner carries on business for his or her own account, he or she is fully liable for all of the debts of the business. In addition, as the profits of the business flow through directly to the owner, these profits are taxed in his or her own hands at the higher individual tax rates.
What is a partnership? If you, together with one or more other individuals or corporations, carry on business in common with a view toward profit, then you are considered to be a partnership.
Are there different forms of partnership? In Ontario there are two types: general partnership and limited partnership.
What is a general partnership? In a general partnership, the most common form of partnership, each partner has unlimited liability for the debts and obligations of the partnership.
What is a limited partnership? A limited partnership is made up of at least one general partner and an unlimited number of limited partners. It is not recognized at law until a declaration is filed under the Ontario Limited Partnership Act. The liability of the limited partner is limited to the amount of money or other property which that partner contributes to the business. The general partners, who manage the business, are liable to an unlimited extent for the debts and obligations of the business.
What are the benefits and drawbacks of a partnership? The structure may be kept relatively simple, particularly with general partnerships. However, we would recommend entering into a partnership agreement in order to define each partner’s duties and responsibilities, which of course, would involve additional costs. Furthermore, as a partnership is not recognized as an entity distinct from an individual partner, the profits and losses of the business flow through to the individual partners on a proportionate basis, and partners must pay tax on any profits at their personal rates.
What is a corporation? A corporation is a legal entity which is separate from its owners (its shareholders). A corporation is considered a legal person and may own property, carry on business, possess rights and incur liabilities all on its own account. The shareholders own their corporation through their ownership of shares.
What are the benefits and drawbacks of a corporation? As the shareholders of the corporation are not personally responsible for its liabilities, this makes it very attractive for a business owner. In addition, since a corporation is a distinct legal entity, it continues in existence regardless of the death of a shareholder or a transfer of his or her shares. Finally, the corporation itself pays tax on its income at a lower rate than the individual tax rate. For all of these reasons, the corporation is the most commonly utilized structure for a business. However, as it is a separate entity, any losses incurred by the corporation cannot be set off against other personal sources of income of a shareholder. There are also the costs of incorporating and maintaining the corporation to consider. In most cases, the benefits of incorporating far outweigh the drawbacks.
What is a joint venture? The phrase “joint venture” is a vague term which encompasses many different business arrangements, whereby two or more persons combine resources (be it goods, services, or capital) to conduct a commercial venture together. It has no recognized legal existence in and of itself. It is sometimes acquainted with a partnership or on other occasions refers to an association of two or more persons for a limited purpose where the parties expressly intend not to be considered partners.
What is a dividend? A dividend is an amount that is paid by a company to its shareholders. A dividend is taxed at a lower rate than salaries or bonuses as the dividend is paid by the company with after tax money. A company is not obligated to pay a dividend and can only do so if it has the financial means to do so. A share may or may not entitle its holder to receive a dividend and different classes of shares may pay a higher, lower or no dividend at all. A dividend can be paid in cash, in shares or in property.
What are annual minutes, resolutions and assemblies? Corporate laws require that an annual meeting of the shareholders be held each year and that the shareholders elect the directors of the company for the upcoming year. In addition to this, the directors will approve the financial statements of the company and present them to the shareholders at this meeting. Lastly, the shareholders will appoint an auditor or accountant and ratify the decisions of the directors of the company. The directors on the other hand will appoint officers to assist them and carry out any other matter required by law.
I have a numbered company. Can this company use a name? A company can register a trade name and use this one with its numbered name. The numbered name will need to be used on all legal documents and contracts but the trade name can be used on exterior signs and marketing materials.
Can a company incorporated in Ontario do business in the rest of Canada? Yes, there are no restrictions as to where a provincial company may operate and a company incorporated in Ontario or any other province can carry out business in any province of Canada.
Can I use a company incorporated in Ontario to do international business? Yes, there are no restrictions as to where a provincial company may operate or carry on business and a company incorporated in Ontario can be used to do international business such as import and export.
What are the advantages of a federally incorporated company versus a provincially incorporated company? The main advantage of a federally incorporated company is that it may establish its head office anywhere in Canada and may change its head office to any other province in Canada. A provincially incorporated company can only have its head office in its province of incorporation.
What is an officer? An officer is a person that is appointed by the directors of the company to carry out the day to day tasks of a company. Officers are often given commonly used titles such as president, vice-president, secretary and treasurer. The functions that each officer may carry out are usually detailed in the general by-laws of a company.
What is a director? The directors of a company are elected by the shareholders of a company. Directors adopt resolutions and enact by-laws. They make the company’s major decisions such as naming the persons responsible for the banking affairs of the company, they sign resolutions to authorize officers and other representatives to sign documents on behalf of the company and they adopt by-laws that set out the rules and procedures for the administration of the company. Directors appoint officers to help them carry out their functions.
How many directors are needed for a company? For a company incorporated in Ontario or federally the minimum number or directors is one and there is no maximum. Generally articles of incorporation provide for a minimum and maximum number of directors. This is done to allow some flexibility in the number of directors and avoid having to file articles of incorporation each time there is a change in the number of directors.
Do the directors of a company incorporated in Ontario have to be Canadian citizens or residents? The Ontario act has been recently amended to reduce the Canadian residency requirement for corporations in most sectors to 25%, except when there are fewer than four directors, in which case at least one must be a resident Canadian.
Do the directors of a federally (Canada) incorporated company have to be Canadian citizens or residents? In general, if there is less than four or only a sole director, then this director must be a Canadian resident. Otherwise, 25% of the directors need to be Canadian residents. There are exceptions to this rule that may be provided by specific laws and statutes so this may change depending on the sector or activity of the company.
What is a shareholders agreement? A shareholders agreement is an agreement entered into by two or more of the shareholders of a company that may address matters relating to the sale and transfer of the shares, the administration of the company, the exercising of voting rights, the election of directors and many other aspects. A shareholders agreement is a bit like a marriage contract or a partnership agreement. A shareholders agreement is called unanimous if it is entered into by all the shareholders of a company in which case it is binding on any future purchaser of the shares providing the share certificates clearly indicate this fact.
Is the company name of an Ontario corporation protected in all of Canada? No, the company name will protect against the registration of an identical company name in Ontario and even then the governmental authorities make no guarantee this. To protect your company name across Canada, you need a trademark.
Am I responsible of the debts of my company? As a general rule, the shareholders of a company are not responsible for the debts of an incorporated company. This is one of the prime advantages of incorporating. You may however be personally liable for debts resulting from fraud or abuse of law, debts which have been personally guaranteed by yourself or, if you are a director of a company, taxes and penalties owing to governmental authorities, such as unpaid sales taxes or deduction at source.
If my company goes bankrupt or closes does this terminate all personal guarantees I gave for my company? No, the purpose of a personal guarantee is to protect the creditor if the principal debtor goes bankrupt or does not fulfill its obligations. As such, you will be responsible for all debts which you undertook to personally guarantee.