Business Structure

Once you have decided to start a business, you need to determine the business structure. The structure will depend on whether or not you plan to run the business yourself or with others in a partnership arrangement. You may also want to consider incorporation. The following provides an overview, including description and advantages/disadvantages of the most common forms of business ownership.

Click on Business Registration & Licensing to obtain information on where you can register your business and/or file your articles of incorporation.

 

Sole Proprietorship

Unincorporated business owned by one person, called a proprietor. The owner does not have separate legal status from the business even if the business is registered under a different name than the proprietor. The owner pays personal income tax on the net taxable income generated by the business.

Advantages Disadvantages
  • Easy and inexpensive to set up
  • Minimal registration requirements
  • Minimal working capital and expense required to start-up
  • All profits go directly to proprietor
  • Easy to dissolve
  • Simple paperwork/filing requirements
  • Direct control over business decisions
  • Unlimited liability – you assume all the risks of the business
  • You are responsible for payment of all business debts
  • No distinction between business and personal assets – creditors can seize personal assets to pay for debts if required
  • Possible tax disadvantages if profits put you in a higher tax bracket

General Partnership

A type of unincorporated business where two or more individuals manage the business and share equal responsibility for the company’s profits and losses, and its debts and liabilities. Partners include their share of income or losses on personal tax returns.

Limited Liability Partnership (LLP) means that partners would not take part in the control or management of the business, but would be liable for debts to a specified extent only. When establishing a partnership, you should ensure that you have a partnership agreement in place.

Advantages Disadvantages
  • Easy to set up and very flexible
  • Partners share in start-up costs
  • Equal share in decision making, management, profit and losses
  • Same tax advantages as a sole proprietorship
  • Similar to sole proprietor:
    • Unlimited liability
    • Partners assume responsibility for  payment of all business debts
  • Possible tax disadvantages if profits put you in a higher tax bracket
  • Business may suffer if disagreements arise between partners

Incorporation

The process of incorporation establishes your business as a distinct, legal entity that is separate from the owners and shareholders. A corporation has to pay tax on its net taxable income and file its own tax return. A corporation can be federally or provincially incorporated. Shareholders of the corporation are not typically held personally liable for the debts, obligations or acts of the corporation.

Advantages Disadvantages
  • Limited liability of the owners/shareholders
  • Ownership is transferable
  • Money for the business can be raised by selling shares (equity) or by issuing debt (a promise to pay)
  • Tax advantages (corporate rate is lower than personal tax rate)
  • More expensive to incorporate
  • Extensive recordkeeping required
  • Tax rules and filing requirements are more complex
  • Paperwork required to meet regulations can be onero

You can choose to complete the incorporation process yourself online or in person. However, it is highly recommended you engage the services of a lawyer to assist with the process and with the name search.

 

Co-operatives

Co-operatives (or “co-ops”) are organizations owned by their members who use their services or purchase their products. Co-ops can provide virtually any product or service, and can be either non-profit or for-profit enterprises. Co-ops serve a range of sectors, including housing, food, worker, agriculture, service, financial, youth, aboriginal and community (from the Ontario Co-operative Association).

The key organizational distinction between a co-operative and other corporate structures is democratic participation through a “one-member, one-vote” process. In a traded company, shareholders are entitled to as many votes as they hold shares. Each member of a co-op is entitled to one vote regardless of level of investment. Decisions are made by the majority, on the theory that communities and memberships ultimately know what is best for them.

For more information on co-ops, contact the Ontario Co-operative Association at www.ontario.coop.
 

Not-for-Profit

A not-for-profit organization is a club, group or business that operates for the purpose of social welfare, civic improvement, pleasure or recreation.  A not-for-profit carries out its activities without the purpose of gain for its members.  While a non-profit corporation can earn a profit, the profit must be used to further the goals of the corporation rather than to pay dividends to its membership.  A non-profit must be incorporated under the Corporations Act as a corporation that does not issue shares.  Although non-profit corporations do not have to be charitable organizations, the organization must apply for charitable status to benefit from tax-exempt status and be able to issue tax deductible receipts to donors.

 

Government of Ontario Non-Profit Guide and Information Sheets

Not-for-Profit Incorporator’s Handbook from the Ministry of the Attorney General

Not-for-Profit Guide from Canada Business Ontario

Starting a Nonprofit guide from Charity Village