Types of Business Organizations
Sole proprietorships are the most common and simplest form of business structure in Ontario. Under this type of structure, an individual owns the assets of the business and is also personally responsible for all its liabilities. In such a structure, the owner usually manages and operates the business themselves. An Ontario sole proprietorship must have its registered business address located within the Province of Ontario.
Partnerships are similar to sole proprietorships in that the owners of the business personally own all of the assets of the partnership and they are personally responsible for all of the liabilities of the partnership. The basic difference between a partnership and a sole proprietorship is that a partnership has more than one owner (i.e. a “partner”). Similar to sole proprietorships, one or more partners actively manage and operate the business.
A corporation (also called a “company”) is a separate legal entity that exists independently from its owners. A corporation is created and comes into existence when the articles of incorporation (also called Charter or Certificate of Incorporation) are filed with the relevant government authority or department.
What is the Structure of a Corporation?
A corporation is owned by its shareholders. While shareholders do not directly manage the corporation, they influence corporate decisions through indirect actions such as electing and removing directors, approving or disapproving amendments to the articles of incorporation and voting on important corporate decisions.
One of the responsibilities of the shareholders, usually on an annual basis, is to elect the Board of Directors. The members of the Board of Directors are responsible for managing the affairs of the corporation. Usually, directors make only major business decisions, however they supervise and appoint Officers who make the day-to-day business decisions of the corporation.
Officers are responsible for the everyday management of the corporation. Typically, officers are appointed directly by the Board of Directors. A shareholder may serve on the Board of Directors and also be an Officer of the corporation. In fact, in most jurisdictions one person is enough to form a corporation, and that person can also be the sole Officer, Director and shareholder.
What are the Advantages of Incorporation?
The most important advantage of incorporation is that it gives its shareholders limited liability. Since the corporation is a separate legal entity, its shareholders are personally protected from the debts and liabilities of the corporation.
• A corporation has unlimited life. If an owner dies or sells his interest, the corporation will continue to exist and conduct business.
• Ability to easily establish insurance and retirement plans.
• Ownership of corporation is easily sold or transferred through sale or transfer of stock.
• Capital can be raised through sale of stock.
• A corporation has centralized management which may remain in place after the sale of business.
What are the Disadvantages of Incorporation?
The primary disadvantage to incorporation is the possibility of double taxation. The profits of a corporation are taxed first as income to the corporation, then second as income to the shareholder. However, all reasonable business expenses such as salaries and other operating expenses are deductions against corporate income which can minimize double taxation.
What is a Numbered vs. Named Corporation?
Anyone who forms a corporation must decide whether to have a named or a numbered corporation.
A numbered corporation will be issued a numbered name (e.g. 12345 Canada Ltd.). This option is usually chosen when a corporate name is not important or the business has to be incorporated quickly.
A named corporation is identified by its name as opposed to a number. A business's name often tells its customers about the type of business it conducts and sets it apart from its competitors. A corporate name should include some or all of the following:
• A DISTINCTIVE element. This is a unique name that distinguishes your business from all others engaged in the same business. Your unique name can be a made-up name, initials or characters, or a name of a person or thing.
• A DESCRIPTIVE element. This is a word that describes the type of business your company does. For example, Services, Enterprises, Communications, Industries, etc.
• A LEGAL element. This is mandatory for all corporations. It indicates that the business is legally incorporated. You may choose from Inc., Incorporated, Corp., Corporation, Ltd., or Limited.
There is no difference between the legal designations Inc., Corp., Ltd., and their long-form names. All of these legal elements designate your company as a legally incorporated business. Sole proprietorships and partnerships cannot use these legal designations in their names.
The corporation can only use the legal element that was registered as the company name. If you named your company ABC Inc., you could legally use the designation of either Inc. or Incorporated with your name. You could not use the legal designations Corp./Corporation or Ltd./Limited.
For further details on name restrictions in Ontario & regulations, please refer to the Corporations Act: