There are a variety of structures available to businesses seeking to operate in Ontario, including sole proprietorships, partnerships, cooperatives, and corporations. The appropriate structure for a business will depend on a variety of considerations, including liability protection, tax, organization and continuing costs, and desired governance model. Most businesses in Ontario are operated either as a sole proprietorship or through a corporation.
A corporation is considered a separate legal entity from its shareholders and provides limited liability protection. Except for certain limited exceptions, the shareholders of a corporation will not be liable for any act, default, obligation, or liability of the corporation in their capacity as shareholders. If a corporation becomes bankrupt or insolvent, the creditors of the corporation will typically not have recourse against the shareholders or their personal assets.
Corporations offer several additional benefits, including:
- Separate taxation from its shareholders, at typically lower tax rates.
- Tax planning options not otherwise available to individuals or other business structures.
- Shareholders may be able to take advantage of the lifetime capital gains exemption upon the sale of the corporation.
- Ability to raise capital from investors or obtain financing from lenders more easily than other business structures.
- Investment in a corporation can be structured to limit an investors’ role in the management and operation of the business.
- Better access to government grants and programmes.
- Corporations may choose a financial year other than the calendar year.
Federal incorporation versus provincial incorporation
Federal business corporations are governed by the Canada Business Corporations Act. Ontario business corporations are governed by the Ontario Business Corporations Act. A corporation may be incorporated under the federal statute or any of the Canadian provincial corporate statutes.
The principal benefit of federal incorporation is that further name approval by provincial regulators of the corporation’s legal name is not required to carry on business in such province – though additional registration may still be required. In contrast, a provincially incorporated corporation will typically need to obtain approval to use its legal name in other provinces in which it intends to carry on business.
A corporation is not restricted to carrying on business in its jurisdiction of incorporation. If it wishes to carry on business in another province, the corporation will normally need to register or obtain an extra-provincial licence.
Incorporation under the federal or provincial corporate statutes can typically be effected rapidly and inexpensively. Once the name of a corporation is approved by the applicable registrar, incorporation can generally be completed with 48 hours.
Except where the proposed business or entity is governed by sector-specific legislation applicable to industries such as insurance, banks, credit unions and trust or loan companies, both federal corporations and Ontario corporations are formed by filing articles of incorporation under the Canada Business Corporations Act or the Ontario Business Corporations Act, respectively. A similar process exists for corporations formed in other Canadian jurisdictions.
The articles of incorporation of a corporation will set out, among other things, restrictions, if any, on the business the corporation may carry out, the classes and any maximum number of shares that the corporation is authorized to issue, and the rights, privileges and restrictions attaching to each class of shares. There is no minimum or maximum amount of share capital that a corporation can issue.
The business and affairs of a corporation are governed by its board of directors and officers unless the powers are restricted by the shareholders through a unanimous shareholders agreement. Private corporations governed by the Canada Business Corporations Act require 25% of the members of the board of directors to be a resident Canadian or, if the board of directors is made up of fewer than four members, at least one of the directors must be a resident Canadian. There are no director residency requirements for private corporations governed by the Ontario Business Corporations Act.
Further requirements and qualifications of directors as well as rules governing the calling of and holding meetings of shareholders and directors are set out in the applicable corporate statute and in the corporation’s constating documents.
A branch office is a way for foreign organizations to conduct business directly in Ontario. In order to exist it must apply for a license designating an agent and comply with all provincial registration requirements.
A branch office is an appealing option for foreign companies for its tax advantages; however, it is not a legal entity separate from the parent company and the parent company will still incur the debts, liabilities and obligations of the branch office.
A summary of differences between the corporations and branch offices are as follows:
|Entity Name||To obtain an EPL, a non-resident corporation’s corporate name cannot be identical or confusingly similar to the name of an existing Canadian business or trademark.|
If a non-resident corporation wishes to conduct business under the name that is different from its corporate name, it is required to register a “business” name. Similar to the corporate name, a “business name” cannot be identical or confusingly similar to existing names in the applicable jurisdiction.
|Subsidiary’s corporate and business names cannot be confusingly similar to the names of an existing Canadian business or trademark.|
Subsidiaries can be incorporated with: (1) a numbered corporate name (e.g., 123456 Ontario Inc.) or (2) a word corporate name (e.g., ABC Ontario Inc.). A numbered name is automatically assigned and is not subject to any name clearance process. However, government approval for the word name is required.
|Jurisdiction||A branch can only be registered provincially/territorially. There is no federal registration for the branch offices. A branch should register in each jurisdiction where it carries on business and can be registered in multiple jurisdictions at once.||A subsidiary can be incorporated federally or provincially/territorially. The subsidiary’s business is not restricted to the jurisdiction of incorporation. However, to carry on business in another jurisdiction, a corporation (including federal) is required to register in that jurisdiction.|
|Structure||No structuring is required for the branch office as the branch is not a separate legal entity from the non-resident corporation.|
A non-resident corporation may appoint certain individuals for Canadian operations; however, executive and supervisory roles would remain with the non-resident corporation.
|There are many ways a corporate subsidiary can be structured. With some limitations, it is permissible to have different classes of shares with different rights. Share attributes would be outlined in the constituting documents of the subsidiary and may be amended from time to time.|
Subscription price for the shares can be nominal (e.g., $0.01/share).
A subsidiary will be required to have directors to operate and most elect to appoint officers (e.g., President, Secretary, Treasurer). Election of directors and, if desired, appointment of officers, are completed after incorporation. Shares are issued to the shareholders by the directors of the subsidiary after incorporation is completed.
|Residency Requirement||A branch is required to have an agent for service in each jurisdiction of registration. Most accounting and law firms offer this service.||There are no residency requirements for the shareholders of the corporation, regardless of the jurisdiction of registration. There are also no residency requirements for the directors of the corporations incorporated in Ontario, British Columbia, Nova Scotia, New Brunswick, and Quebec. The rest of the jurisdictions continue to have residency requirements.|
A federal corporation that has four (4) or fewer directors must have at least one (1) director who is a resident Canadian and if more than four (4) directors, at least 25% of the directors must be resident Canadian.
|Income Tax Implications||A non-resident corporation operating through the branch in Canada would be liable for at least the following: (1) tax on its Canadian-source business income, (2) a “branch” tax on its after-tax profits which are not reinvested in Canada. The “branch” tax essentially takes the place of the tax withholding that would have been payable on dividends by a Canadian subsidiary. The “branch” tax rate may be reduced under Canadian tax treaties.|
A branch is not subject to “thin capitalization rules” because it is not a separate entity and, as such, there can be no loans between the non-resident corporation and its branch.
|A corporate subsidiary is deemed to be a Canadian “resident” by virtue of its registration in Canada and, as such, taxed on its worldwide income.|
A subsidiary must withhold taxes on certain payments to non-residents (e.g., dividends and interest paid to non-arm’s length parties).
Subsidiaries are subject to “thin capitalization rules” which in some instances deny a Canadian subsidiary the ability to deduct interest expense on debt owing to certain related non-residents,
|Goods and Services Tax (GST) and the Harmonized Sales Tax (HST)||To determine whether registration for GST/HST is required for a branch, the entire revenue from a non-resident corporation should be reviewed (not just the branch). If the revenue exceeds the “small supplier” threshold, a non-resident corporation will have to register. A non-resident corporation would then be required to charge GST/HST on all taxable supplies it makes in Canada and remit same to the government. A non-resident corporation may potentially also be subject to the audit by Canada Revenue Agency.||Only revenue of the subsidiary corporation would be considered in determining whether a “small supplier” threshold is met. If registration for GST/HST is required, a subsidiary corporation will be solely responsible for collection and remittance of this tax. A parent non-resident corporation will not be subject to the Canada Revenue Agency audit nor be required to comply with the GST/HST legislation.|
|Disclosure Obligations||Upon the branch office registration, a non-resident corporation would be required to provide information respecting its operations to the Ontario Ministry. If carrying on business as a branch, a non-resident corporation may also be required to disclose income and other financial details from its worldwide operations to Canada Revenue Agency and other regulatory agencies, as may be applicable.||Most of the time, a subsidiary is only required to disclose its own income and other financial details, and not those of a non-resident parent corporation.|
Some jurisdictions, including Ontario and federally incorporated companies, require that corporations maintain a register of individuals with “significant control” over the corporation. What is considered “significant control” will depend on the laws of each jurisdiction that has such requirements. The level of control often depends on the specific voting rights attached to the shares or value held in the corporation.
A sole proprietorship is owned by one individual who carries on business without incorporating. It is the simplest form of operating a business in Ontario. Its advantage is that there are little to no setup or operating costs, and minimal ongoing regulatory requirements.
In Ontario, a sole proprietor who uses a name, business style or designation other than that individual’s full name is required to register with the Ministry of Government and Consumer Services. Sole proprietorships are subject to federal, provincial, and municipal laws and regulations concerning licensing, registration and trade and commerce, such as consumer protection legislation.
Unlike other business entities, Ontario law does not recognize a distinction between the sole proprietorship and the individual owner. All liability of the sole proprietorship is the personal liability of the individual owner. There is no limitation on liability like that which shareholders of a corporation or partners of a limited partnership enjoy. The practical consequence is that a successful claim against a sole proprietorship can be enforced against the personal assets of the individual owner. Additionally, the individual owner and the sole proprietorship are not treated separately for tax purposes. This allows individuals to set off losses and other expenses related to the sole proprietorship against their other income.
Sole proprietorships are not a popular type of business organization for most foreign businesses wishing to carry on business in Ontario. They are also not an option for foreign corporations.
A partnership is the relationship that exists between two or more individuals or entities carrying on business together with a common view to profit. In Ontario, general partnerships are governed by the Partnership Act and the common law. Persons who have entered into partnership with each other are collectively called a firm.
In addition to a general partnership, provincial legislation also permits businesses to operate through limited partnership and limited liability partnership structures. The basic distinctions between these various types of partnerships are as follows:
|General Partnerships||Limited Partnerships||Limited Liability Partnerships (LLP)|
|Not a separate legal entity. All partners are jointly and severally liable for debts and obligations. Their personal assets are at risk and available to the creditors of the partnership.|
Each partner is an agent of the partnership; actions of one partner bind all others unless a partner acts outside the firm’s normal scope of business.
Created by an agreement between the partners to carry on business with a common view to profit.
Registration of the firm name, listing each partner, is required under the Business Names Act.
|Consists of one or more general partners, and one or more limited partners.|
General partners are responsible for management and control and are personally liable for all debts and obligations.
Provided there is no participation in management, limited partners are not liable for debts and obligations.
Governed by the Limited Partnership Act.
|Two or more persons enter into an agreement designating the partnership as LLP.|
Limited to partnerships practicing a profession, such as law.
A minimum amount of liability insurance is required.
Partners are generally liable for all debts and obligations but are not responsible for these if they arise out of negligent or wrongful acts of other partners/employees.
Must carry on business under its registered firm name ending with LLP.
A joint venture is not a legal entity and cannot sue or be sued. It can be described as a relationship of two or more persons associated for a common purpose, who combine resources to conduct a joint commercial venture. All rights and liabilities will be borne by the parties involved in the agreement.
There are no provincial statutes that govern joint ventures in Ontario. The joint venture is instead governed by the terms of the contract entered into by the parties. It is therefore prudent that the agreement is clear that no partnership is being created. The contract must also set out the nature of the collaboration, as well as all arrangements, contributions and expectations of the parties involved.
Members of joint ventures generally retain their ownership interest in property used in the joint venture.
A franchising arrangement is established by contract where the franchisor grants a license to a franchisee that allows the franchisee to use the franchisor’s already established trademark and system of carrying on business for some type of fee that the parties agree upon.
The benefits for the franchisee are that it is entering into an established system with brand equity, an established customer base, access to the franchisor’s proprietary methods, ongoing advice and guidance, and sometimes financial assistance from the franchisor.
Drawbacks for a franchisee are that franchise agreements are very one-sided, favouring the franchisor with little room to negotiate. It usually locks the franchisee into a long-term commitment and often includes payment of ongoing royalties to the franchisor. The franchisee is also bound to the standards and procedures mandated by the franchise contract, thus potentially stifling creativity and flexibility.
Despite the drawbacks, a franchisee in Ontario has certain protections under the Arthur Wishart Act, which aims to balance the relationship between the franchisor and franchisee by imposing various obligations on the franchisor.
The franchise contract will detail the parties’ rights and obligations, mechanisms of dispute resolution, and fees. Ontario has specific legislation that governs the sale of a franchise by a franchisor.