At the start of a new business, it is a crucial consideration to determine the manner which your business will be structured. Decisions made at the earlier stages of a new business might have significant importance and impact the business in the future.
When starting a business, there are a few options to consider:
- Sole Proprietorship
For those who wish to start by themselves, operating as a sole proprietor is an option. In order for you to operate under a sole proprietorship, you’ll need to register a business name, obtain a business number and an HST number if required. It is the most cost-effective and straightforward structure you might choose. On the other hand, as a sole proprietor, you should assume personal responsibility for business debts and liabilities. You will also be paying income tax on your earnings at your personal marginal which can result in higher potential liability and tax burden.
- General Partnership
When starting a business with others, you can opt for a general partnership. As a partner, you’ll typically share personal responsibility for any debts and liabilities of the partnership, regardless of whether you incurred them. Meaning that if you partner takes out a loan, you will also be personally liable.
- Incorporation
Incorporation is another option that you might want to consider while starting a new business regardless of whether you’re starting a business alone or with others. A corporation is a distinct legal entity (a legal person) that possesses all the rights and privileges of a natural person such as owning property, borrow money and entering into binding contracts. A corporation has directors and shareholders as well as legal responsibilities to maintain incorporation documents filed and up to date.
In addition, incorporating your business can have certain advantages such as limited liability protection, tax benefits, credibility of your business etc. A corporation does not necessarily end with the death of its owner as in sole proprietorship. However, if you wish your business to exist, you might have to do some planning with your family or employees or even creating a will. If there is more than one shareholder in your corporation, you might want to consider having a shareholder’s agreement in place to plan for the transition.
Should Incorporate Provincially or Federally?
You have decided your business structure and you want to incorporate. In Canada, incorporations are regulated both provincially and federally. At the federal level, companies are incorporated through Corporations Canada. At the provincial level, each province has its own incorporation services. In Ontario, this is done through the Ontario Business Registry.
Deciding on whether you should incorporate provincially or federally depends on several factors such as the scope of business operations, costs associated with incorporating a business and tax advantages.
If you incorporate your business provincially, you’ll be able to conduct business only in that province whereas a federal incorporation will allow you to do so across Canada. Same thing applies to your business name protection. If you incorporate provincially, your business name will be protected on a provincial level, however a federal incorporation might protect it across the country. If you have other type of concerns about your brand, you might want to consider trademark as well.
As mentioned above, finding the type of business structure tailored to your needs requires a detailed planning process. It involves evaluating the benefits of different business structures and determining which one offers the most benefits and advantages that align with your business goals, needs and future projections.
If you are in search of guidance from a Toronto corporate lawyer, contact us and see how our firm can help you!
The information provided above is of a general nature and should not be considered legal advice. Every transaction or circumstance is unique, and obtaining specific legal advice is necessary to address your particular requirements. Therefore, if you have any legal questions, it is recommended that you consult with a lawyer.
