CHOICES FOR AN ENTREPRENEUR
LEGAL STRUCTURES - ONTARIO
By: Michel Castillo, Lawyeri
Being an entrepreneur is rewarding, but it is not a journey to be taken without careful planning. Early on, an entrepreneur will have to consider what legal structure to use in running their business. There are different legal structures through which a business owner can own, run, and operate a business. The most common forms are discussed below.
Sole Proprietor
A business owner can operate as a sole proprietor, which is a business owned and operated by one individual. This is simplest and quickest legal structure; setting up and getting going is relatively easy. If you run it under your own name, you do not even have to register your business. Most people choose a business name. Even then, the cost of registering the name is modest. The downside is that, while you are 100% the owner, that also means that you are 100% liable and responsible for the debts and liabilities of the business. Business carries risk and the sole proprietor carries that risk personally. The sole proprietor is also taxed at the regular rate.
Partnership
A business owner might not start or want to run the business alone. There are different types of partnerships, such as general partnership, limited partnership, and limited liability partnership. They have different requirements and features, but generally, they afford the opportunity for two or more entities (that includes a person or a corporation) to pool their resources to operate a business in common with a view to profit. A partnership is not a separate legal entity and the partners are liable for the business. From a tax perspective, each partner reports income and pays income tax on their own income tax return.
Corporation
A corporation is a legal entity regulated by statute. A corporation is a separate legal entity from the owner(s)/operator(s). A business owner or owners can choose an Ontario Corporation or a Federal Corporation. A corporation can offer the business owners limited liability. It also offers a practical and efficient means for raising money, transferring ownership, and succession planning. The corporation can also offer significant tax advantages. The flip side is that there is an upfront cost for incorporation. Further, the corporation will end up with regulatory filings and separate tax returns, creating increased operating costs for the business.
What legal structure to use depends on a variety of factors. What is good for one business situation might not be good for another. Further, although a business can, for example, start as a sole proprietorship and then incorporate, changing from one legal structure to another can be difficult or costly. It is essential that business owners carefully consider their needs in deciding which legal structure suits them best.
Michel Castillo is a lawyer, of the Law Society of Ontario, with over 20 years’ experience.
He assists clients with, among other things, civil and commercial litigation
and dispute resolution needs.
The article contains legal information only;
nothing in this article is intended to be
and it does not represent legal advice.
i
Being an entrepreneur is rewarding, but it is not a journey to be taken without careful planning. Early on, an entrepreneur will have to consider what legal structure to use in running their business. There are different legal structures through which a business owner can own, run, and operate a business. The most common forms are discussed below.
Sole Proprietor
A business owner can operate as a sole proprietor, which is a business owned and operated by one individual. This is simplest and quickest legal structure; setting up and getting going is relatively easy. If you run it under your own name, you do not even have to register your business. Most people choose a business name. Even then, the cost of registering the name is modest. The downside is that, while you are 100% the owner, that also means that you are 100% liable and responsible for the debts and liabilities of the business. Business carries risk and the sole proprietor carries that risk personally. The sole proprietor is also taxed at the regular rate.
Partnership
A business owner might not start or want to run the business alone. There are different types of partnerships, such as general partnership, limited partnership, and limited liability partnership. They have different requirements and features, but generally, they afford the opportunity for two or more entities (that includes a person or a corporation) to pool their resources to operate a business in common with a view to profit. A partnership is not a separate legal entity and the partners are liable for the business. From a tax perspective, each partner reports income and pays income tax on their own income tax return.
Corporation
A corporation is a legal entity regulated by statute. A corporation is a separate legal entity from the owner(s)/operator(s). A business owner or owners can choose an Ontario Corporation or a Federal Corporation. A corporation can offer the business owners limited liability. It also offers a practical and efficient means for raising money, transferring ownership, and succession planning. The corporation can also offer significant tax advantages. The flip side is that there is an upfront cost for incorporation. Further, the corporation will end up with regulatory filings and separate tax returns, creating increased operating costs for the business.
What legal structure to use depends on a variety of factors. What is good for one business situation might not be good for another. Further, although a business can, for example, start as a sole proprietorship and then incorporate, changing from one legal structure to another can be difficult or costly. It is essential that business owners carefully consider their needs in deciding which legal structure suits them best.
Michel Castillo is a lawyer, of the Law Society of Ontario, with over 20 years’ experience.
He assists clients with, among other things, civil and commercial litigation
and dispute resolution needs.
The article contains legal information only;
nothing in this article is intended to be
and it does not represent legal advice.
i
