There are 3 principal forms of business entities: corporations, sole proprietorships, and partnerships. There are 2 types of partnerships: general partnerships and limited partnerships. Each form has distinct advantages and disadvantages. These considerations will be evaluated with you before making a choice. Typically, businesses start out as sole proprietorships or partnerships in order to allow the deduction of start-up losses against other income of the owners. Once they have become profitable, the business is then incorporated in order to provide the limited liability and tax deferral advantages of the corporation.
Our Business Services
Asset sale/purchase transactions
Share sale/purchase transactions
Buying or Selling a Business
Leases (commercial and multi-residential)
A sole proprietorship is the simplest form and it exists whenever an individual carries on business. In Ontario, if you are carrying on business as a sole proprietorship under any business name other than your personal name, you will be required to register with the Ministry of Consumer and Commercial Relations.
The current cost of this registration is $60 and it is valid for five years, after which it must be renewed if you continue to carry on business under the name. Failure to register your business name is an offense under the Business Names Act.
Unlike corporate shareholders, a sole proprietor is personally liable for all the liabilities of the business. These include debts incurred in the ordinary course of business as well as any claims for torts committed by the proprietor or his employees.
While the sole proprietor experiences unlimited personal liability for debts arising from his business, under some circumstances he/she may enjoy a tax advantage over a corporate owner. If the proprietor is experiencing losses, he/she may deduct those losses against income earned from other sources so as to reduce his income. On the other hand, if he/she has income outside of the business, his/her business income would be added to that other income causing him/her to be taxed at a higher rate.
A business corporation is the most common entity for carrying on commercial activity. The main advantages of the business corporation are: limited liability of the shareholders (who may also manage the business), and a lower rate of tax for Canadian-controlled private corporations.
In Ontario, a Canadian-controlled private corporation is taxed at one-half the rate of non-Canadian businesses on the first $200,000 of income.
This rate is substantially lower than the personal tax rate paid by sole proprietors and so may lead to a significant saving or deferral of taxes if the owners can keep the profits in the corporation, such as for reinvestment and expansion. Salaries paid to directors and managers of a corporation are deductible to the corporation but are taxed as the personal income of the directors or managers receiving the income at their personal tax rates.
It is worth noting however that business losses of a corporation cannot be deducted from the personal income of the shareholders or managers.
Under Ontario law, a partnership consists of any two or more persons carrying on a business in common with a view to a profit. There is no need for a written contract to form a partnership. So long as two or more people are carrying on business together to make a profit, they are a partnership.
Every partnership in Ontario must be registered with the Ministry of Consumer and Commercial Relations. As with sole proprietorships, the fee for this is $60 and is valid for five years. Failure to register the partnership is an offense under the Business Names Act.
Like a sole proprietorship, partnerships allow the owners of the business to deduct losses against other income. This is a major reason why some businesses choose partnership over incorporation. Each partner in a firm may also be liable to the full extent of his personal assets for the debts of the business including tortious acts committed by other partners or employees in the course of the business.
It is advisable to have an agreement among the partners setting out the nature of the business, how it is to be managed and carried out, and how profits are to be shared. In addition to these, a partnership agreement may deal with unusual circumstances such as the admission of new partners, the raising of additional capital, and the dissolution of the partnership.
In some circumstances it is desirable to form a partnership while limiting the liability of some of the partners. This can be done with a Limited Partnership. A limited partnership consists of at least one general partner who has unlimited personal liability and who is involved in the management of the business along with any number of limited partners who may not participate in the management of the business and whose liability is limited to their investment in the business.
The advantage of this arrangement is that the limited partners have the limited liability of a corporation along with the ability to deduct business losses against their personal income.
It is highly recommended that anyone considering a limited partnership obtain legal advice.
In most instances, a written partnership agreement should be entered into by the parties. Every Limited Partnership must be registered with the Ministry of Consumer and Commercial Relations. The government registration fee for this is $190 and is valid for five years.
This information is based on Ontario law and does not constitute legal advice. It is intended to inform and not to advise and does not create a solicitor/client relationship. The statements above are general in nature. The individual facts in a given case may alter their application or involve other laws not referred to here. Any amounts referred to are subject to change.