Download introduction - Catalyst Law

STARTING YOUR BUSINESS
INTRODUCTION
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A variety of legal arrangements may be used to carry on a commercial activity.
The most popular ones are sole proprietorships, partnerships and corporations.
Today we will discuss the legal characteristics of these forms of business structures and
their advantages and disadvantages.
We will also discuss issues that arise after you’ve started your business, and how you can
protect yourself from creditors while operating your business.
SOLE PROPRIETORSHIP
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A sole proprietorship exists whenever an individual carries on business for the
individual's own account without using the medium of any other form of business
organization.
The individual is the sole owner of the business.
A sole proprietorship is the simplest arrangement for carrying on a business.
There are few legal formalities required to create or operate a sole proprietorship. The
only real requirement is to register the name under which you intend to carry on business
(if the name is not your own name).
All benefits flowing from the business accrue to the exclusive enjoyment of the sole
proprietor. All obligations associated with the business are also the sole proprietor's
responsibility.
Thus, the income or losses of the business belong to its owner, as do the assets used in the
business.
The sole proprietor is personally responsible for carrying out all the contractual
relationships relating to the business.
Any liabilities that arise from the acts of the sole proprietor or from the employees of the
sole proprietor are the sole proprietor's responsibility.
All liabilities of the business rest with the individual.
All business and personal assets of the sole proprietor may be seized in fulfilment of the
sole proprietor's business obligations and liabilities, including debts incurred by the sole
proprietor in connection with the business.
The income or loss of a sole proprietor from the business in any year must be included
with his or her income or losses from other sources during the year, and the aggregate
result is subject to tax under the Income Tax Act at the tax rate applicable to individuals.
-2NAME
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If a sole proprietor carries on business under a name or style other than his or her own
name, that name must be registered under the Business Names Act.
The registration must be filed with the Ministry of Government and Consumer Services
when the name or designation is first used. Registration is for a period of five years and
may be renewed.
In order to obtain a business name, you must first conduct a search of the government’s
records to determine if another entity is using a name that is similar to the name that you
want to use (a NUANS search).
Judgment call as to whether your proposed name is similar to, or confusing with, an
existing name.
If name is similar to existing name, the risk is that the owner of the existing name will
sue you for damages or will require you to change your name.
PARTNERSHIP
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When two or more persons, whether individuals or corporations, carry on business
together with a view to profit, the relationship is called a partnership.
A partnership is like a sole proprietorship in that the partners carry on the business
themselves directly.
A partnership is formed when two or more persons carry on business in common,
contribute property or services to the business, share in its net profits and its losses, and
are involved in the affairs of the business.
Each partner has a right to an equal share of the profits and losses of the partnership,
unless the partners have agreed otherwise.
The partnership is not a legal entity separate from its partners.
As such, in most instances, one partner's actions bind all the partners, which means that
one partner can be personally liable for the acts of another partner.
Each partner in a firm is liable with the other partners to the full extent of his or her
personal assets for all debts and obligations incurred by the firm while the person was a
partner.
In the case of tortious liability, the firm is liable, and each partner is jointly and severally
liable, to the same extent as the wrongdoing partner for any penalty, loss or injury caused
to a non-partner by the wrongful act or omission of a partner acting in the ordinary course
of the firm's business or with the authority of the partners.
A partner is under a duty of loyalty to the partnership and the other partners.
Partner must not act in his own interests to the detriment of the partnership.
A partner cannot carry on a business in competition with the business of the partnership
without the consent of the other partners.
Also, a partner must account to the firm for any benefit derived from a transaction
relating to the partnership or partnership property.
All property contributed by the partners to the partnership or purchased in the course of
the partnership business is called "partnership property".
Unless the partners have agreed otherwise, a partnership is deemed to dissolve on the
death of one of the partners.
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Income or loss of the business carried on by a partnership is determined at the partnership
level, but income or loss is taxed in the hands of the partners, not at the partnership level.
Registration of Partnership Name
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The Business Names Act provides that no persons associated in partnership may carry on
business or identify themselves to the public, unless the name of the partnership is
registered by all of the partners.
A partnership name must be registered with the government, unless the partnership
carries on business under the names of the partners.
In general, the partnership structure is not likely to be well-suited to your needs given the
line of work that you are in.
CORPORATIONS
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The corporation is the business entity used most frequently to carry on commercial
activities.
Unlike a sole proprietorship or partnership, a corporation is a legal entity separate in law
from its owners, the shareholders of the corporation.
A corporation is like a separate, living person.
A corporation may own property, carry on business, possess rights and incur liabilities.
The shareholders own the corporation through their ownership of shares.
The shareholders do not own the business or the property of the corporation, and the
rights and liabilities of the corporation are not the rights and liabilities of the
shareholders.
The shareholders do not own the assets of the corporation, and they do not bear the
burden of the liabilities of the corporation – those belong to the corporation alone (except
in certain circumstances discussed later).
This arrangement is unlike a sole proprietorship or partnership, where owners of a
business or property owned the business or property directly.
Where to Incorporate
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Having chosen the corporation as the appropriate form of business entity, one must
consider in which jurisdiction to incorporate. Generally, a company may be incorporated
provincially or federally.
The only real advantage to incorporating federally is that your name will be protected in
each province (a federal company may use its name in any province without having to
register the name in that province – Ontario corporation means the name is only
protected in Ontario).
More expensive to incorporate provincially - $360 v. $250 federally.
There is generally little reason to incorporate federally unless you intend to carry on
business in several provinces.
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INCORPORATION PROCEDURE
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Incorporation under both the OBCA and CBCA is available as a matter of right.
If you fill out the articles of incorporation properly, the government must accept the filing
and create the corporation.
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Must deliver articles of incorporation to the appropriate government department, together
with the required supporting material and the required fees.
The corporation comes into existence on the date shown in the Certificate of
Incorporation.
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NAME
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Before you can incorporate, must first determine if proposed name is not similar to, or
confusing with, an existing name.
Same issues with registration of business name – judgment call – must determine risks.
Can’t use certain names – names that sound like you’re part of the government – names
that don’t describe what your company does.
Can always change name if need be.
Determine where registered head office of corporation will be – can just use home
address.
How many and what classes of shares will the company be authorized to issue.
Can issue common shares (equity) or preference shares (fixed value shares) – equity
shareholders “own” company.
If any of the corporation's after-tax income is to be paid to its shareholders, this is
accomplished by the directors declaring a dividend to the holders of the corporation's
shares.
Dividends constitute income to shareholders who are individuals and this income is
generally taxed again.
In certain circumstances, dividends received by corporate shareholders can be received
tax free.