Entrepreneurs - Frequently Asked Questions
Sole proprietorship, partnership, or incorporation?
The most frequently used methods of carrying on a business include sole proprietorship, partnership, and incorporation. An individual carrying on business for themselves constitutes a sole proprietorship, where they are using no other form of business organization. Generally, the sole proprietor's assets are at risk of being seized in fulfillment of the business obligations and liabilities.
A partnership exists where two or more persons, whether individuals or corporations, carry on business together with a view to profit. Partnerships may be either general, with unlimited liability, or limited liability partnerships. A corporation, as opposed to a sole proprietorship or a partnership, is a legal entity separate in law from its owners. The owners of a corporation are the shareholders, and the shareholders have only limited liability with respect to the business.
There are tax implications resulting from this decision as well. An individual at a higher personal income tax rate can defer tax payments by incorporating their business and taking advantage of the small business deduction available to most Canadian emterprises. These profits can then remain in the business and be paid to the shareholder when it is advantageous to do so.
Each separate way of carrying on business has its own advantages and disadvantages, and these must be given careful consideration when determining which method of carrying on business is most suitable.
How do you Incorporate?
Whether incorporating provincially or federally, incorporation is available as a matter of right and is achieved by delivering Articles of Incorporation in prescribed form to the appropriate government office, as well as any requisite supporting material and fees. Corporations may be incorporated with either a number name assigned by the relevant government department (e.g. 123456 Ontario Inc.), or with a name provided by the incorporator. All corporation names must contain the words "Limited", "Incorporated" or "Corporation", their French equivalent, or the corresponding abbreviation. If the incorporator wishes to provide the name for the corporation rather than using a number name, the incorporator must obtain an automated name search system (NUANS) search from Industry Canada not more than 90 days before the date of submission of the Articles of Incorporation, showing that the proposed name is available for use by the new incorporation.
It is possible to file a federal incorporation online. Some provinces also permit online incorporations.
Federal Incorporation vs. Ontario Incorporation
A federal corporation may carry on business anywhere in Canada and may use its name in any province as of right, subject to provincial licensing requirements. Due to the Canada-wide protection given to the name of a federal corporation, it may be somewhat more difficult to obtain the name an incorporator wants if incorporating federally. Ontario is not as stringent in its naming requirements as the federal authority is. While fees change regularly, as of October, 2005 it was cheaper to incorporate federally than provincially in Ontario.
What Should be Included in Partnership Agreements?
There is no requirement for a written partnership agreement, although a written agreement will often prevent or ease the resolution of difficulties when a dispute arises. Some basic issues that should be clarified in a partnership agreement include a clear definition of the business to be carried on by the partnership, any restrictions on the partners carrying on other businesses, the partnership name, how new partners are admitted and how partners are removed or retired, how the partnership will be managed, how the partnership will be funded, the method of profit sharing among partners, and when and how the partnership will be dissolved.
What are the Legal Implications of Not-for-Profit Business?
A not-for-profit organization is composed of members rather than shareholders, and is typically created for social, educational or philanthropic purposes with the aim of benefiting the community or some segment of the community. As the name implies, the objectives of the organization are not to create or distribute profit to its members. A not-for-profit organization can be legally structured as a trust, an unincorporated association or a corporation, and provided they meet certain criteria, they enjoy tax exempt status.
What are Shareholder Agreements?
Shareholder agreements are agreements between two or more shareholders of a company. An agreement between all of the shareholders of a company is called a "unanimous shareholders' agreement". Shareholder agreements set out certain rules for the relationships between the shareholders and the corporation, and vary widely in terms of the issues covered by the agreement. Generally, shareholders agreements deal with when the agreement begins and how it is terminated, restrictions on transfer of shares by both the corporation and the shareholders, rights of first refusal for current shareholders to purchase the shares of a shareholder who wishes to sell their shares, mandatory transfers of shares where a shareholder breaches the agreement, the method of appointing directors, restrictions on management of the corporation, and how disputes between shareholders are resolved. Shareholders agreements can be quite complex, and it is recommended that, at a minimum, experienced legal counsel review any agreement prior to its execution.
What are Copyrights, Trademarks and Patents?
Patents, trademarks and copyright are different forms of intellectual property and are expressly protected by law. Copyright protection covers dramatic, musical, artistic and literary works. The latter also includes computer programs. Trademarks are created and used to distinguish goods or services between different sources. Trademarks can be words, designs or slogans, or any such combination. Patents are for inventions, and protect new discoveries such as innovative technologies, methods and devices. The duration of each of these intellectual property rights vary. While trademarks can be kept indefinitely, copyrights and patents have only a limited period of protection.
