Starting a business

Businesses can take several different forms. Each type of business has its own advantages and disadvantages so make sure you understand the options.

Corporation

A corporation is a separate legal entity from its owners that can own property, carry on business, and incur liabilities. While owners own and control the corporation through shares, they do not personally own the corporation’s assets. A shareholder’s liability is limited to the value of assets that have been transferred to the corporation, in exchange for shares.

There are many types of corporations. For example, federal corporations, provincial corporations, holding corporations, professional corporations and now personal real estate corporations.

The advantages of incorporating are significant. Corporations typically enjoy lower tax rates than individuals, can continue in perpetuity, and are responsible for their own liability without necessarily impacting the owners.

To incorporate, an owner (or owners) must file Articles of Incorporation with the federal or provincial government.

Sole Proprietorship

A sole proprietorship is the most basic form of business. This is carrying on a business for yourself. Ontario requires sole proprietors to register their business name if it differs from the operator’s name. A sole proprietor bears full liability for the business, which may be offset via contract or insurance.

A sole proprietorship could be a good option for start-‐ups that will likely not be profitable in the short term. Income from a sole proprietorship is considered an income source for the individual. Losses from such businesses can be used to offset income from other sources.

Partnership

A partnership is formed when two or more individuals carry on business together for profit. These individuals could be people or corporations. There are three types of partnerships—a general partnership, a limited liability partnership, and a limited partnership.

In General Partnerships, each partner has unlimited liability for the debts and obligations of the partnership. In a Limited Partnership, one or more general partners have fully liability for the partnership’s obligations while the liability of other partners is limited to the extent of their financial contributions. Limited Liability Partnerships (LLP) are open to certain professions. While assets of the LLP may be used to satisfy partnership obligations, the partners are only liable for their negligence or the negligence of those under their supervision.

From a tax perspective, a partnership itself is not taxable. However, income or loss is calculated at the partnership level then allocated to the partners. A partnership and its trade name must be registered. Partnership Agreements are useful in helping partners customize their working relationship. In the absence of this document, rules of Ontario’s Partnership Act will apply.

Co-Ownership

This form of business is distinct from a partnership. Here, two or more persons jointly own a property and each owner is free to deal with their interest in the property as desired. Furthermore, co-‐owners are not agents of each other so agreement usually needs to be reached when contemplating decisions that affect the property.

One potential tax advantage of co-‐ownership is that each party can handle taxes differently, for example, a capital cost allowance could be claimed at different times or rates.

Franchising & Licensing

With franchising, an established business gives a franchisee the right to use its branding and system in connection with the supply of goods and services. The franchisee typically pays an initial fee and ongoing remittances to the franchisor, in exchange for the franchisor’s goodwill, knowledge and assistance.

Franchising in Ontario is subject to the Arthur Wishart Act. Under this Act, potential franchisees are entitled to significant disclosure concerning the franchisor, its principals, the organization and its system. The Act imposes a duty of fair dealing on both parties to act in good faith and in accordance with reasonable commercial practices.

If you’re considering becoming a franchisee, you should consider working with a lawyer to make sure that your agreement does not unduly restrain your right to trade, along with other important considerations.

Licensing involves a contractual relationship where a licensor gives a licensee the right to its trademark, copyright, know-‐how or technical data grant, in exchange for a fee or royalties. While franchisees and licensees are independent contractors, they differ in an important way. Franchisors exert a significant level of control over franchisees whereas licensors do not do the same with licensees.

Succession Planning

Businesses can take several different forms. Each type of business has its own advantages and disadvantages so make sure you understand the options.

Rollovers

There are several ways to transition your business or reorganize its ownership. Some rely on section 85 of the Income Tax Act to rollover their assets to a new corporation, without triggering immediate tax liabilities. To achieve this, the transferor and transferee must file a joint election with the Canada Revenue Agency (CRA) and satisfy other conditions. For instance, while any Canadian entity, ie., person, trust, or corporation can be a transferor, only taxable Canadian corporations may be transferees. In addition, only certain assets are eligible for the section 85 rollover. They include:

any capital property (includes both depreciable and non-‐depreciable capital property, but notably excludes any real property owned by a non-‐resident person unless this real property is used in a business carried on by the non-‐ resident in Canada);
Canadian and foreign resource properties;
inventory (except real property that is inventory, an interest in real property, or an option in respect of real property);
eligible capital property (i.e., goodwill and other intangible property); and
real property, an interest in real property, or an option in respect of real property owned by a non-‐resident that is used in a business carried on by the non-‐resident in Canada.

Rollovers are not a gift. A transferor has to receive at least one share of capital stock in the transferee’s company. The transferor can also receive “boot,” which refers to non-share consideration. This boot could be the assumption of a loan or mortgage, or cash in hand.

Share Purchases

A share purchase could be a good option where one shareholder of a corporation wishes to retire and the other does not. Section 85 of the ITA can also be relied on to sell or transfer shares to the same corporation or another corporation. When selling or transferring shares to another corporation, you need to know that section 84.1 of the ITA will deem the transferor to be receiving a taxable dividend if the transferor and transferee are non-‐arms length. This application of the ITA can be avoided by ensuring that any non-‐share consideration and the stated capital of the class of shares issued for the transferred shares do not exceed the Paid Up Capital (PUC) of the transferred shares.

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