Starting a Business
Sole proprietorship – What’s the easiest way to start a business?
If you intend to use your own name then as soon as you start carrying on any business you are in business. If you are going to gross (money received for either goods or services) over $30,000 you must reg- ister with H.S.T. (though recommended regardless of volume) but no other steps are required. If you are going to use a trade name then that name must be registered. This method is often used for small home based businesses. As an individual, all of your assets are available to satisfy any debts of your business.
Partnership – What’s involved in forming a partnership?
A partnership is basically two or more persons (persons included companies) carrying on business with a view to profit. (not a not for profit venture). It is not much more complicated than starting a sole proprietorship , the partners must register the partnership. Similarly, the trade name must be registered. The Partnership Act of Ontario governs the partnership but it s recommended that a Partnership Agreement be drawn up, which would be customized for the particular partnership rather than relying on generic legislation which might not be suitable for your particular partnership. Each Partner is personally liable for all of the debts of the Partnership.
Limited partnership – Is there any way to limit my liability as a partner?
A Limited Partnership operates like a Partnership as far as sharing the profits but only the General Partners are liable for the debts of the Partnership. The Limited Partners, as long as they don’t participate in the running of the business incur no liability.
Incorporation – What’s involved in setting up a corporation?
A corporation comes into existence by filing Articles of Incorporation with either the Federal or Provincial Governments. A fee is due depending upon the jurisdiction chosen, which is presently $360 for an Ontario Provincial Corporation and $200 for a Federal Corporation. See here. Once incorporated, the Corporation is a person at law and carries on the business. As any other person, it must register any trade name it uses and must register with HST if gross income is going to exceed $30,000.00. As a person, the Corporation must file its own tax return. A Corporation must keep certain records which is done in a Minute Book.
How do I decide which model is best for me?
Very often a person who wants to incorporate does not need to incur those costs and those funds allocated towards incorporation could be better used launching his or her new business. On the other hand, several people working together might be much more suited to incorporate rather than operate as a partnership notwithstanding the additional set up costs.
Starting a business can be an exciting yet intimidating experience. A clear strategy put in place at the commence of business, i.e. starting out as a sole proprietor and when certain targets are reached converting to a limited company, allows the owner/operator to spend his or her time on business issues and not on legal issues. It is imperative, if you are thinking of starting your own business, either on your own or with others, that you consult with a professional advisor to ensure that your business is structured to your advantage taking into account your operating budget, expectation, liability and tax consequences amongst other considerations.
Convertibility – How easy is it to change from one type of business model to another?
Most models can be converted into another model with some exceptions such as a Partnership can not be a Proprietorship unless all the Partners save one leaves the business. The Income Tax Act of Canada provides various methods of converting either a Proprietorship or Partnership into a Corporation without any immediate tax consequences.
Tax – Are there different taxes associated with the different business models?
A sole Proprietorship is yourself and therefore any other income earned by you during the year i.e. investment income is added to the net income of your business to determine the amount of taxes you will have to pay. A Partnership is, in itself, not a legal entity and therefore the profits of the Partnership are attributed to each Partner’s interest (it does not have to be equal) and, as with a Proprietorship, is added to all other income earned by the Partner for the year. A Corporation, is a separate person at law and therefore pays its own tax. Presently, a Canadian Controlled Private Corporation in Ontario enjoys a reduced tax rate of 15.5% on the first $500,000. However, if the money is paid out to the owner then the owner will have either income (T4) or dividend income. The idea of the Income Tax Act is to be fully integrated in that the Corporation and the individual combined pay the same amount of tax as if there was never a corporation.
Costs – What costs are involved in setting up the different business models?
A Proprietorship involves no cost except for a name registration($70). A Partnership involves a) a name registration ($70) and the Partnership registration ($ ). A Partnership Agreement, which is highly recommended could run between $1,000 and $5,000. A Corporation costs $200 for a Federal and $360 for a Provincial Corporation. There are other incidentals such as a minute book which total approximately $300. As with a Partnership, where there are more than one Shareholder a Shareholders’ Agreement is highly recommended with about the same costs as a Partnership Agreement.