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 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:
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.
Alternative Methods to Carrying on Business in Ontario
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 it as 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 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.