When starting a business, there is a lot to consider. Items such as money, partners, services and products immediately come to mind. However, choosing the right way to organize and govern your business may be the most important decision you ultimately make. To begin to understand what method of organization might be best for you, this three-part article will take a look at the five options available under Ontario law and highlight the fundamental characteristics of each.
A corporation is an independent entity that has a separate legal personality from its owners (shareholders). The individuals that manage a corporation’s business are its directors and officers and it is created upon the filing of Articles of Incorporation with the government; these articles, along with the corporations’ by-laws govern the behavior of the company’s management. Because a corporation has its own legal personality, its shareholders are not typically liable for its debts or obligations. If choosing to incorporate, a shareholder’s agreement should be drafted to address the relationship between the shareholders as the company evolves. Some issues that a typical shareholder’s agreement contemplates include: a shareholder wishing to sell his or her shares, the timing and frequency of dividend (profit) issuing, the election of the board of directors, raising additional capital, and the winding up of the business.
A sole proprietorship is a business entity owned and operated by one individual; there is no separate personality between the business and its owner. The owner receives all profits (subject to taxes) and has unlimited responsibility for all of the business’ losses and debts. Furthermore, because there is no separate legal personality, the owner can personally encounter civil, and potentially, criminal liability for any wrongs or unfulfilled obligations of the proprietorship. A common misconception is that a sole proprietorship is a one-man business. This is not true. A sole proprietor may hire employees, but again, it is possible for the proprietor to be held personally liable for the wrongs or negligence of employees during their course of employment. As such, before choosing this type of business organization, careful consideration needs to be given to the size of the business, the industry being entered, the employment of others, income tax considerations, and the proprietors’ personal wealth and family obligations.