Start a Company

Choosing the best method of carrying on a business

Cost Liability Control No. of owners
Sole proprietorship Low High High Low
Co-ownership Medium to low High Medium Low
Joint venture Varies High Medium Low
Franchise or licence Medium to high Varies Low Low
Partnership Medium to low High Medium Usually low
Corporation High Low Usually low, but varies Varies
Registered charity or NPO Varies Low Varies Varies

Sole proprietorship

Characteristics of a sole proprietorship

Ownership One person
Liability Owner
Profits and losses Owner
Shares None
Process of formation Registration
Governing legislation Business Names Act

Co-ownership

Characteristics of co-ownership

Ownership More than one person
Liability Separate, unless specified by contract
Profits and losses Separate, unless specified by contract
Shares None
Process of formation Registration
Governing legislation Co-ownership agreement

Joint venture

Characteristics of a joint venture

Investment More than one person
Liability Separate, unless specified by contract
Profits and losses Separate, unless specified by contract
Shares None
Process of formation Joint venture agreement

Franchise

A franchise is a contractual right to use a brand or branded merchandise. The franchisee doesn’t own the business. The following subsections explain the characteristics of a franchise and its advantages and disadvantages.

Characteristics of a franchise

Ownership Franchisor
Liability Joint
Profits and losses Joint
Shares None
Process of formation

Advantages and Disadvantages of a franchise

Advantages Disadvantages
  • the franchisor doesn’t have to grow the business from scratch
  • the franchisee acquires goodwill in an established business (e.g., if you buy a McDonald’s franchise you don’t have to worry about marketing it)
  • the startup cost can be very high (e.g., it costs $1-2M to open a McDonald’s)
  • standardization of business procedures means you have limited control over it (e.g., you must have certain storefronts and uniforms)
  • the franchisor must disclose certain information about the business and its finances so the franchisee can make an informed decision

Licence

A licence is a contract whereby the owner of intellectual property, know-how or technology grants the licensee the right to use it. A licence doesn’t transfer ownership of intellectual property, but the right to use it.

Characteristics of a licence

Ownership Lincensor
Liability Joint
Profits and losses Licensee
Shares None
Process of formation Licensing agreement

Partnership

There are three types of partnerships:

    • general partnership
    • limited partnership
    • limited liability partnership

Characteristics of a partnership

Ownership Partners
Liability Depends on the partnership agreement and the type of partnership
Profits and losses Joint
Shares Each partner owns a partnership interest (similar to a share)
Process of formation
  • Partnership agreement (sets out the object of the partnership and the rights and obligations of partners)
  • Partnership Act

General partnership (all for one and one for all)

A general partnership is the most basic form of partnership. The following table and section describe the characteristics of a general partnership and how to dissolve it.

Characteristics of a general partnership

Ownership Property belongs to the partnership, profits belong to partners
Liability
  • Partners are jointly and separately liable for the debts and obligations of the partnership
  • Even when a partner dies or retires, the claim can go against the estate of the partnership
Rights and obligations
  • Sign agreements on behalf of the partnership
  • Loyalty and good faith toward the partnership
  • Must account for transactions relating to the partnership
  • Can’t compete with the partnership (e.g., a can’t bid on a supermarket for the partnership and personally)
Profits and losses Proportional to contribution
Shares Partnership interest (like a share) proportional to contribution
Process of formation
  • Partnership agreement (sets out the object of the partnership and the rights and obligations of partners)
  • Partnership Act

How to Dissolve a General Partnership

There are five ways to dissolve a general partnership. Ways 1-4 can be amended by written agreement.

    • expiration: the partnership agreement may include a term which says the partnership will expire after any number of years
    • termination of its object: the partnership agreement may include a term which says the partnership will terminate once its object (e.g., the construction of a supermarket) is accomplished
    • notice: a partner may give notice of intention to dissolve the partnership
    • death, retirement, incapacity or insolvency of a partner: partnerships are rarely structured to end this way; usually a mechanism will be devised so that if a partner dies or becomes insolvent there’s a way to bring a new partner or decide to terminate the partnership
    • court order

Limited partnership

The difference between a limited partnership and a general partnership is that there are two types of partners, viz.

    • limited partners and
    • general partners.

A limited partner avoids assuming the risk of a general partner. However, a limited partner can’t control the partnership. The following tables show the characteristics of a limited partnership and differences between a general and a limited partner.

Characteristics of a limited partnership

Ownership
  • At least one general partner and one limited partner
  • Property belongs to the partnership, profits belong to partners
Liability
  • General partners are jointly and severally liable for the debts and obligations of the partnerships
  • Limited partners are liable up to their contribution (e.g., a limited partner who contributes $10,000 to the partnership can’t be liable for more than $10,000)
Profits and losses Proportional to contribution
Shares Partnership interest (like a share) proportional to contribution
Process of formation Limited Partnerships Act

Differences between a general and a limited partner

General Partner Limited Partner
Rights
  • Sign agreements on behalf of the partnership
  • Control and operation of the partnership
  • Profit proportional to contribution
  • Inspection of records
  • Full disclosure
  • Profit proportional to contribution
  • Advise management

Note: Anyone who controls the partnership will be deemed a general partner and be liable for all the debts and obligations of the partnership (e.g., if a partner signs on behalf of the partnership, it is deemed to control it)

Duties
  • Loyalty and good faith
  • Must account for transactions relating to the partnership
  • Can’t compete with the partnership
Same
Liability Unlimited liability for debts and obligations of the partnership Liability limited to contribution

Dissolution of a limited partnership

A limited partnership is dissolved in the same way as a general partnership, except limited partners can dissolve a limited partnership if they demand a return for their contribution and it’s not returned, unless the partnership can’t pay its debts. The ‘waterfall provision’ in s. 24 of the Limited Partnerships Act sets out the order partners are compensated in the event of a dissolution:

    • limited partners for their share of profits and other compensation by way of income for their contributions
    • limited partners for their contributions
    • general partners for other than capital and profits
    • general partners for profits
    • general partners for capital

Limited liability partnership (LLP)

A LLP is a special type of partnership for permitted professions such as law firms and accounting firms. A LLP must be a permitted profession whose governing body requires the profession to maintain limited liability insurance (e.g., the minimum insurance threshold for law firms is $1M) whose name is registered under the Business Names Act and contains the words “Limited Liability Partnership” or “LLP.”

Characteristics of a LLP

Ownership Property belongs to the partnership, profits belong to partners
Liability Limited liability partners are jointly and severally liable for the debts and obligations of the partnerships
Profits and losses Proportional to contribution
Shares Partnership interest (like a share) proportional to contribution
Process of formation

Corporation

A corporation is established (incorporated) under federal or provincial legislation, depending on whether it is a federal or provincial corporation. Shareholders own a corporation through ownership of shares. A corporation is a separate legal person with the same rights as a natural person. This means it can sue or be sued in its own name and is responsible for its own debts and obligations. Shareholders aren’t personally liable under a corporation.

Characteristics of a corporation

Ownership Shareholders
Liability Corporation only
Profits and losses Proportional to shares
Shares Issued by the corporation to shareholders by the agreement of the board of directors or as otherwise specified in the Articles of Incorporation
Process of formation

Federal vs. provincial corporation

Advantages and disadvantages of federal incorporation over provincial incorporation

Advantages Disadvantages
  • Federal corporations are more prestigious. E.g.,  they provide international recognition as a Canadian corporation.
  • Federal corporation is the preferred method of carrying on business across Canada and internationally
  • Federal corporations have more rights and protections. E.g., federal corporation can use its business name across Canada, even if a business in another province uses the same name
  • The business name of a federal corporation must be sufficiently distinct and will be reviewed by Corporations Canada for approval
  • Provincial corporations are only protected in the province where they are registered. E.g., if a business uses the corporation’s name in another province, the corporation won’t be able to register in that province
  • Federal corporations must file each year whether there have been changes or not, whereas provincial corporations don’t have to
  • Both provincial and federal corporations must issue a Notice of Change if there’s been a change to the board of directors, corporate officers or location of the company
  • While federal incorporation is less expensive at the outset, the annual costs outweigh these savings in the long run. E.g., registration of a federal corporation costs $250 and registration of an Ontario corporation costs $399 + HST.
  • A federal corporation must apply for an extra-provincial license in each province it wants to carry on business
  • Provincial corporations are easier to register, since provinces will accept a business name as long as there is no exact match
  • Provincial corporations are more familiar to professionals–especially bankers, lawyers and accountants–which can simplify things and save time and money

Professional corporation (PC)

Characteristics of a PC

Ownership Shareholders
Liability Corporation only
Profits and losses Proportional to shares
Shares Issued by the corporation to shareholders by the agreement of the board of directors or as otherwise specified in the Articles of Incorporation
Process of formation Steps:

Articles of Incorporation must include:

  • Article 5: “The corporation may not carry on a business other than the practice of law, but this paragraph shall not be construed to prevent the corporation from carrying on activities related to or ancillary to the practice of law, including the investment of surplus funds earned by the corporation.”
  • Article 8: “All of the issued and outstanding shares of the Professional Corporation shall be legally and beneficially owned, directly or indirectly, by one or more persons who are licensed to practise law in Ontario (such person or persons being hereinafter individually and collectively referred to as a “shareholder”), but this paragraph shall not be construed to prevent such shares from being transferred to, or otherwise owned by the estate trustee (or by the estate trustees, if more than one) of any deceased shareholder in accordance with the Law Society Act R.S.O. 1990, c L.8, or the Business Corporations Act R.S.O. 1990, c. B.16, for the purposes of administering the shareholder’s estate, but not for the practise of law.

Regulation re holding companies:

  • Holding companies are permitted as shareholders. The ownership of shares in a holding company must be restricted to licensee(s). Shares in a holding company may not be owned by family members or non-licensees. In addition, the business of a holding company must be restricted to holding the shares of the professional corporation. Applicants who intend to use a holding company must submit the Articles of Incorporation for the holding company along with their Application for a Certificate of Authorization.

Requirements for Certificate of Authorization:

Benefits of a PC

Many of the benefits of a PC arise from holding and investing after-tax profits in the corporation over the long- term. The main benefits are as follows:

    • Tax deferral and remuneration flexibility: business income can be saved in a corporation where it is taxed at a lower rate than a personal bank account. The first $500,000 of business income is taxed at 26.5% in the hands of a corporation, whereas business income is taxable at a rate of 53.53% in the taxpayer’s hands. Thus, one can save a great deal of money over the years by paying oneself dividends from the corporation, after tax, that is sufficient to cover lifestyle expenses and maximize RRSP and TFSA contributions, while saving the rest of the money in the corporation where it is taxed at a lower rate. The more expensive alternative is to pay oneself dividends consisting of all the profits of the corporation, use an amount that is sufficient to cover lifestyle expenses, maximize RRSP and TFSA contributions and save the rest of the money in a personal bank account where it will be taxed at a higher rate.
    • Income splitting: a corporation can be used to pay dividends to lower-income family members (or a trust for their benefit) who are shareholders by using after-tax funds accumulated by the PC, which are then taxed at their low tax rates. However, there may be restrictions whether family members of the professional or a trust can own shares of the PC depending on the legislation governing each profession within each province. (In Ontario, for instance, only lawyers can own shares of a legal PC.)
    • Lifetime capital gains exemption: shareholders of a PC can sell their shares and claim the capital gains exemption to receive the first $824,176 of the capital gain tax-free. This benefit is only available on sale of PC shares rather than assets.

PCs also receive limited protection from creditors.

Not-for-profit organization (NPO)

Characteristics of a NPO

Ownership Can be carried on as:

  • an unincorporated association of individuals
  • a trust
  • a corporation
Liability Depends on the type of business organization
Profits and losses
  • Must be carried on without monetary gain for its members pursuant to the Canada Not-for-profit Corporations Act
  • Uses surplus revenue to further its objective rather than distribute it as profit
Shares Depends on the type of business organization
Process of formation Canada Not-for-profit Corporations Act

Registered charity

Characteristics of a registered charity

Ownership Can be carried on as:

  • an unincorporated association of individuals
  • a trust
  • a corporation
Liability Depends on the type of business organization
Profits and losses Resources must be devoted to activities with an exclusively charitable object that promote a recognized public benefit
Shares Depends on the type of business organization
Process of formation
  1. Incorporate NPO
  2. The NPO must satisfy the criteria of a “registered charity” under s. 248 of the Income Tax Act
  3. Create an application document checklist
  4. Apply to become a registered charity (submit your application)
Relevant laws

Bankruptcy and Insolvency

Practical Resources

Relevant Laws

Corporate Reorganization

Practical Resources

Relevant Laws

Business Organizations

Practical Resources

Relevant Laws

Privacy

Practical Resources

Relevant Laws

Purchase and Sale of a Business

Practical Resources

Relevant Laws

Securities
Taxation

Practical Resources

Relevant Laws