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Tips for the New Entrepreneur Part 1: How Can I Best Organize My New Business?

This is the first blog of a new series entitled "Tips for the New Entrepreneur" aimed at providing a New Entrepreneur with practical tips and pointers for exploring legal issues when setting up and growing a new business in Ontario. These blogs may also provide, for your convenience, key official sources of reference.

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With the excitement of turning a new endeavour into reality, the decision-making and multitude of choices and considerations related to the actual setting of your new business may quickly become overwhelming - not to mention somewhat confusing when trying to decipher and assess what is best from the vast array of information contained on the Internet or provided freely from peers, family and friends.

This blog brings together information from various sources to serve as a guide to some of the key considerations when trying to take one of the first decisions concerning your business.

What Is the Business Structure Best Suited for My Business?

This is often one, if not the first, question of most New Entrepreneurs in Ontario. Most technical nomenclature usually refer to three different forms of business structure: the sole proprietorship, a partnership or a corporation.

Generally speaking, in a sole proprietorship which is a non-incorporated business, you will be the sole owner of the business with full responsibility for its debts and obligations. You will be able to keep all of the company's profits but will also be personally liable to its creditors should the business revenues and assets not be sufficient to pay the company's expenses and debts.

A partnership, also a non-incorporated business, is a structure whereby two or more people, the partners, combine their financial resources, knowledge and experience to create the business. You and your business partners will share the profits and each partner will be jointly responsible for the debts and obligations of the business.

The third business structure is the corporation, which is created by application to either the federal government or a provincial/territorial government. The corporation is a separate legal entity from its owner, namely the shareholder. This means that as a shareholder of the corporation, you will be usually only liable for the maximum amount that you have invested in buying your shares in the corporation.

When choosing the business structure that is most suitable for your business endeavour, you may wish to assess certain factors such as the type of business, the number of people involved, your risk tolerance, tax considerations and financial requirements. For the New Entrepreneur who is still undecided, it may also be useful to align its business structure with its long-term business plan. It is important to mention that some entrepreneurs may launch their business using one form of business structure, for example a sole proprietorship, and decide to change it, for example moving to a corporation model, at a later date as the business is growing.

At a glance, this is an overview of some key considerations when choosing your business structure.

Sole Proprietorship

Partnership

Corporation

Advantages

  • Fairly easy and inexpensive to set up
  • Less regulations
  • Owner has direct control of decision-making
  • Owner keeps all profits and business losses can be written off against other income
  • Low set-up costs shared among the partners
  • Broader base of skills, experience and financial resources of the partners
  • Sharing of financial risks
  • Some limited regulations
  • Partners can deduct business losses against other income
  • Owners (shareholders) liabilities limited to their respective investment in the business
  • Ownership can be transferable
  • Continuance and longevity of the Corporation
  • Advantageous rate of taxation (specially for the Canadian Controlled Private Corporation - "CCPC")
  • Opportunity to raise more capital

Disadvantages

  • Proprietor has unlimited liability for all debts and obligations of the business
  • Income taxable at owner's personal rate
  • Longevity and raising capital may become issues
  • Suitability and potential of partners' disputes
  • Unlimited liability with the partners usually jointly liable for all debts and obligations of the business
  • Sharing of decision-making
  • Partner's liabilities for debts and obligations survive death or retirement of partner
  • Set-up costs and complexity of organization
  • Additional regulations
  • Requirements for Canadian residency/citizenship of directors
  • Annual update of corporate records
  • Annual losses cannot be written off against other income of owners (shareholders)

When Should The New Entrepreneur Incorporate Its Company?

As you may have noted, each form of business structure has its advantages and disadvantages. Therefore, there is not one formula that meets the objectives of every business. This is often a decision that the New Entrepreneur will be making in consultation with its professional advisors, including its business lawyer.

Together, they will assess a number of elements in order to determine the correct form of business structure. Some of these factors include:

  • Tolerance for risk
  • Protection of the owner's personal assets
  • Credibility to secure business financing
  • Growth and longevity of the business
  • Optimization of tax benefits and tax deferrals for the business and owners
  • Attracting and hiring qualified employees and contractors
  • Commercial dealings with other corporate entities (such as commercial contracts and leasing agreements, licenses)

That's it for this inaugural post in the Tips for the New Entrepreneur blog series. As demonstrated above, it is clear that starting a new business involves a multitude of decisions. For experienced advice on your best course of action regarding the structure of your business, contact the business law team at Merovitz Potechin LLP. And stay tuned for Part 2 in this series, coming soon.

Additional Sources of Reference

This series of blogs will only provide an overview and does not constitute legal advice. It is recommended to consult a lawyer who specializes in business law to help you navigate the complex transactions related to starting or expanding your business.

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