— Sole Proprietorship
The majority of small businesses operate as sole proprietorships. The business is carried on by an individual who owns all assets, receives all profits and is responsible for all obligations of the business.
Sole proprietorships are economical and simple, but disadvantages include:
unlimited personal liability.
a high marginal tax rate for proprietorship income.
termination of the business on the death or bankruptcy of the proprietor.
The proprietor may claim business losses against other income, but once the business becomes profitable, then incorporation offers many advantages.
If two or more people operate a business and share profits, they are deemed to be in partnership by The Partnership Act of each province. Partnerships, like proprietorships, are only required to register their business name provincially. A partnership agreement is not mandatory but advisable. Management and profits are shared equally unless varied by a partnership agreement, which also deals with the continuation of the partnership in the event of death or the sale of the partnership. Partnership income and expenses are taxable in the hands of the individual partners. Because each partner is liable for all obligations of the partnership, a high degree of trust and co-operation are necessary.
The risk of personal liability in proprietorships and partnerships makes them unpopular for substantial or risky business. Most profitable businesses incorporate.
— BENEFITS OF INCORPORATION
Limited liability of shareholders
Lower tax on Dividends to shareholders
More flexibility for tax and estate planning
The ability to raise more capital from investors
A shareholder may claim up to $500,000 as a capital gains exemption on the disposition of his or her shares
— Limited Liability
Although the company’s shareholders only risk the loss of the price of their shares, directors and officers of companies are exposed to certain creditors such as Revenue Canada, the provincial government and employees. Limited liability could also be eroded when lenders, landlords and suppliers insist on obtaining personal guarantees from the principals of a company.
— How to Incorporate
A business is incorporated by filing with the provincial or federal corporate registry. This calls for: a name reservation approval; a memorandum (or articles) that lists the number and class of shares and the company name; the rules for the operation of the company (called articles or bylaws); and notice of the company’s registered address.
Because the company is a separate legal entity, additional administrative, accounting and legal costs arise. Nevertheless, these costs are usually justified by the benefits of incorporation.
If you have any other questions or concerns, please contact one of our knowledgeable and experienced solicitors. We would be pleased to assist you.