If you have decided to start a business, or if you have already started one, it is important to decide what legal form of business will work best for you. There are three main forms of business to choose from.
- These are sole proprietorship’s,
If you are going to start a business alone, you can choose between a sole proprietorship or a corporation. If you are going to start a business with at least one other person, you can choose between a partnership or a corporation.
There are important legal differences between the three forms of business. For example, both sole proprietors and the partners of a partnership are not considered legally separate from the business. The owners are personally responsible for every aspect of the business, and any profit or loss must be included on the personal income tax return of each business owner. All their personal assets remain exposed to potential loss and creditors of the business.
In comparison, a corporation is considered legally separate from its owners. In fact, the law considers a corporation to be a legal entity, much like a person. The owners of a corporation do not usually have personal liability for the debts of the business or for any lawsuits that arise and the corporation is taxed separately from its owners. The owners of corporation are called shareholders. The directors and owners of corporation are generally remain personally liable for payment of taxes on behalf of corporation. They can also be liable for corporation’s debts if they sign personal guarantee.
There are many factors to consider when choosing the legal form that is best for your business. As a business grows, the advantages of the corporate business form usually outweigh the disadvantages. We can help you determine which form of business is best for your situation. You can obtain more information about the advantages and disadvantages of the different legal forms of business by consulting one of our lawyers at Joshi Law Office. We cal also help ou in incorporating.
Advantages & disadvantages of Sole Proprietorship’s:
A sole proprietorship is a business that is owned by one person. It is the simplest type of business to start. There are several important features of a sole proprietorship. First, the business and the owner are considered to be one entity under the law. Second, all of the assets of the business are personally owned by the sole proprietor. Third, the sole proprietor is not considered an employee of the business. The sole proprietor is not paid a salary, but instead can take money from the business through personal drawings.
Having a sole proprietorship has several advantages and disadvantages, including important tax implications.
One of the advantages of being a sole proprietor is that its operation is simple, there is less paperwork. You also get to keep the profits from the business and you have the freedom to end your business whenever you want. A sole proprietorship is the easiest form of business to start. And, although you need to keep separate accounting records for the business, you only need to file one tax return. There is no difference between you and your business.
Having a sole proprietorship also has disadvantages. The owner is personally responsible for all aspects of the business. If the business is being sued, so is the business owner. If the business owes money, the business owner is responsible for the debt, and the owner may have to use personal assets to pay. All the personal assets of the sole proprietor remain exposed to potential debts and claims arising from business. . If the owner cannot pay the debts of the business, he or she may have to claim personal bankruptcy. The only way to transfer ownership of a sole proprietorship is to sell the entire business to someone else. Otherwise, the life of the business ends when the sole proprietor dies.
There are also important tax implications of operating a sole proprietorship. Net business income from a sole proprietorship must be included as part of the sole proprietor’s personal income. However, if the business suffered a loss, the owner can deduct the loss from other income he or she has received for that year. This will lower the overall taxable income of the owner and reduce the amount of personal income tax that must be paid. If the business made a profit, the profits are taxed at the owner’s personal income tax rate which is generally higher than corporate tax rate. In general, it is better from a tax standpoint to be a sole proprietor if you expect the business to lose money in its early years and you have income from another source, such as employment income.
Business taxation can be very complicated, and it is usually a good idea to contact a tax lawyer or a chartered accountant to determine the tax implications of your particular situation.
Normally, sole proprietorship’s are best for businesses earning a small profit which do not have significant liability concerns, Corporations are better where the tax rate of individual is in higher bracket
Advantages & disadvantages of Partnerships:
A partnership is an unincorporated business that is carried on by two or more people who intend to share the business profits. Partnerships have at least five important features. First, a partnership can be created by an express agreement or it can be created if the people are simply acting in a way that seems like a partnership. Second, the partners can be held responsible for the actions and business debts of the other partners. Third, all the assets of the business are personally owned by the partners. Fourth, there are two main types of partnerships: general partnerships, where all the partners share the profits and losses of the business; and limited partnerships, where the limited partners are not involved in the daily operations and are only responsible for losses up to the amount they contributed to the business. Fifth, partners are not considered employees of the business. Because of this, partners are not eligible for employment insurance if the business fails. Partners are not paid a salary, but they can take money from the business through personal drawings.
It is a good idea to put a partnership agreement in place because it will outline issues such as how the profits or losses will be divided among the partners, and it will describe any limits to the legal responsibility of the partners.
Being a partner in a partnership has several advantages and disadvantages, including important tax implications.
There are 3 main advantages to forming a partnership. First, a partnership allows two or more people to work together and bring different skills and resources to the business. Second, a partnership is fairly easy to establish. The actual registration of a partnership is not expensive or complicated. However, it is a good idea to decide how the partnership will be run and put it into a partnership agreement. Third, if the partnership suffers a loss but the partners have other employment income, the loss can be used to reduce their taxable income, thereby lowering the income tax payable by the partner.
There are 5 main disadvantages to forming a partnership. First, because the partnership is not considered to be separate from its owners, the partners are personally responsible for liabilities of the partnership. If the business fails, the partners will be personally responsible to pay all of the debts and obligations of the partnership. Second, because each partner is an agent for the business and for the other partners, each partner is personally responsible for the actions of the other partners. If one of the partners makes a bad business decision, or acts negligently which results in the partnership owing a debt, all of the other partners are personally responsible to pay it back.
Third, because a partnership is based on the individual partners, and it is not a separate legal entity, if one of the partners dies, the partnership ends. This means that the remaining partners have to re-establish the partnership.
Fourth, because a partnership is not a separate legal entity, it is difficult to buy or sell a partnership interest. Buying or selling a partnership interest will involve rewriting the partnership agreement and determining exactly how the partnership will change.
Fifth, although the resolution of disagreements amongst partners is generally covered under a partnership agreement or case law, it usually is very difficult. There is no Act that exists which sets out rules for settling partnership disputes. If the disagreements are not resolved by the partners themselves, they will usually have to turn to outside help which can be time consuming and costly.
There are tax implications to owning a partnership interest. First, the business income of a partnership is divided between the partners and included on each partners’ personal income tax form; the partnership does not file a separate tax form. Second, if the business has suffered a loss, the partners can deduct the loss from any other employment income they receive. This will lower the overall income of an individual partner and reduce the amount of income tax he or she must pay. Third, if the business has made a profit, the profits are taxed at each partners’ personal income tax rate. Fourth, because the partnership is not a separate legal entity, the partners cannot take advantage of income splitting or tax deferral opportunities available with corporations
Advantages & disadvantages of Corporations:
Corporations is the third most important form of carrying a business. The main feature that makes corporations different from sole proprietorships and partnerships is that corporations are legal entities separate from their owners. As a result, the corporation is responsible for its own debts, assets, and lawsuits. The legal responsibility of the shareholders, directors, officers and employees of the corporation is limited, which means that, with few exceptions, these people cannot be held personally responsible for the debts and obligations of the corporation. This is the reason that one of the words Limited, Incorporated, Corporation, or one of their abbreviations must be included in the full legal name of the corporation. These words give notice to the public that the business is a corporation and therefore its owners, directors, officers and employees have limited liability.
Corporations are owned by shareholders, who own a percentage of the entire corporation through their shares. Shares can generally be bought and sold fairly easily, unless restrictions have been placed on the transfer of shares.
There are many advantages to incorporating a business. First, there is the advantage of limited personal liability for the people who own and run the corporation. This means that the shareholders of the corporation cannot be held responsible for the debts and obligations of the corporation unless they provided a personal guarantee. By comparison, in a sole proprietorship or a partnership, the owner or partner is personally liable for all of the obligations of the business. This means that the owner’s personal assets, including their home, car, and personal savings can be taken to pay for the debts of the business.
Second, a corporation has an unlimited life. Because the corporation is a separate legal entity, the corporation will continue to exist even if the shareholders die or leave the business, or if the ownership of the business changes.
Third, the corporate form of business makes it easier for a business to grow and expand. Through the issuance of shares, corporations may be able to access the money they will need for expansion. This makes the corporate form of business more suitable for large business ventures than sole proprietorship’s or partnerships.
Fourth, there may be tax advantages to running your business as a corporation. Examples of corporate tax advantages are tax deferral strategies and income splitting. Corporate taxation is a complicated matter and it is important that you talk to an accountant or a tax lawyer to determine which tax advantages apply to your situation and how best to structure your business.
Finally, a corporation may appear more stable and sophisticated to the public. This may help you acquire new business.
There are also disadvantages to incorporating a business. First, you will have to file two tax returns, one for the business and one for your personal income. Unlike sole proprietorship’s and partnerships, any losses from the corporation cannot be deducted from the personal income of the owner.
Second, the registration and set up fees for a corporation are higher than the set up fees for a sole proprietorship or a partnership. Incorporating a business is also a more complicated process than starting a sole proprietorship or partnership. You should contact a lawyer to help you incorporate your business.
Third, the Government requires corporations to maintain proper corporate records, called a minute book. A minute book contains the corporate bylaws and minutes from annual meetings.
To determine whether you should incorporate your business, you should consult a lawyer who can help you evaluate your specific situation.
SHAREHOLDERS, DIRECTORS & OFFICERS
Corporations are managed and directed by officers and directors, and they are owned by shareholders. Each of these groups has a different role and responsibility in the corporation.
Shareholders are the owners of the corporation. Shareholders of shares which carry voting rights, exercise their control through their votes. They elect the directors who guide and control the business operations of the corporation. Shareholders are also asked to vote on important issues, such as the sale or dissolution of the business. They generally do not participate in the day to day operation of the business unless they are also directors or officers. Shareholders also influence the control of the corporation through the purchase and sale of corporate shares.
Directors are elected by the shareholders to guide the business operations of the corporation. Directors select the officers who manage the daily business activities. Directors approve budgets and important contracts. They also decide when to issue shares, and when to declare a dividend.
Officers are the day to day managers of the corporation. Officers include the President and Vice-President of the corporation. The duties of the various officers are established by the directors and by the by-laws of the corporation.
The maximum and minimum number of directors is stated in the Articles of Incorporation. Each privately held corporation must have at least one shareholder, and at least one director. Typically, corporations have one or more officers who are approved by the directors. In a small corporation, it is possible for one person to hold all of these positions and to perform all of the duties. Often, however, when a corporation begins to grow, more people will be needed to manage and direct the corporation.
For more information about the role and duties of shareholders, officers and directors, speak with one of our lawyers.
Directors’ and shareholders’ liability
One of the main benefits of the corporate form of business is that the shareholders, directors and officers of a corporation are not usually held personally responsible for the debts and obligations of the corporation. However, if a shareholder or director has personally guaranteed a loan or debt, he or she will be held personally responsible for it. In addition, there are some situations in which the directors of a corporation can be held personally responsible.
For example, if the corporation has not paid its corporate income tax or the HST on its sales, the directors may and probably will be held personally responsible for paying. Often, directors and officers buy ‘directors and officers liability insurance’ (D&O) to protect themselves in case this type of situation arises. In comparison, shareholders are not responsible for these debts unless they have personally signed a guarantee.
You should be careful if you have been asked to be a director for a corporation or if you are not involved in the day to day business of the corporation in which you are already a director. It is important to be aware of your legal responsibilities as a director of a corporation. We can advise you on what your responsibilities are.
Franchises are a popular way for people to buy and run businesses.
What is a franchise?
A franchise is a contract or agreement where a franchisor gives a franchisee the right to start a business under a business system that already exists. Under the franchise agreement, the franchise business usually uses the name or trademark of an existing company and conducts the same type of business as the existing company. The franchisee has a right to use the name or trademark of the existing company, and the franchisor gets to have some control over the franchisee’s business. The franchisor also has a continuing right to receive payments from the franchisee.
Advantages of owning a franchise
There are 4 main advantages to owning a franchise. First, you are able to operate your own business while still having the security of working with a large company. Second, you may not have to be an expert at running your own business because you will usually receive support from the franchisor. For example, the franchisor may provide such things as ongoing training and business advice. Third, you enjoy the benefit of using the franchisor’s reputation. As a result, there is less business risk for you if the franchise has developed a successful product. Fourth, it may be easier to borrow money to buy a franchise than to start an independent business.
Disadvantages of owning a franchise
There are also several disadvantages to owning a franchise. Depending on the franchisor and the franchise agreement, the franchisor may maintain a substantial amount of control over new franchises. In typical franchise situations, the franchisor will set the opening and closing times of the franchise, determine what is to be sold and how it is to be sold, and will put restrictions on the ability of the franchisee to sell his or her franchise. You should discuss these issues before you enter into a franchise agreement.
Another disadvantage of franchises is that franchisees usually have to pay an up-front fee simply to begin using the business name. To continue using the name, the franchisee will usually have to pay a set fee either every month or every year. These fees can be substantial. In exchange, the franchisee gets to use the franchise name and sell the franchise product. People will know your business name and you will not have to spend time developing a marketing plan or customer recognition of your business.
The Franchise Disclosure Act
The Franchise Disclosure Act is the law in Ontario that governs all types of franchise relationships. The Act focuses on pre-sale disclosure, and impacts the way in which franchisors carry out the sales of their franchises. Detailed regulations governing the franchisor’s behaviour are also a part of the Act, and franchisors must provide prospective franchisees with a ‘disclosure document’ prior to accepting any payments from prospective franchisees and prior to having prospective franchisees sign any agreement related to the franchise.
Franchisors are now required to disclose many important facts, such as the business background of the franchisor and its directors, partners and officers, and the litigation history of the franchisor. The disclosure document must contain copies of all franchise documentation to be signed by a prospective franchisee, including any restriction in the sourcing of supplies. While the Act is largely about pre-sale disclosure and applies only to franchises sold after January 31, 2001, everyone should be aware of two very important provisions that affect existing franchise relationships. First, the Act prohibits a franchisor from interfering with its franchisees’ right to associate. Second, it provides that “Every franchise agreement imposes on each party a duty of fair dealing in its performance and enforcement.” The obligation to deal fairly and conduct oneself in a commercially reasonable manner is an obligation imposed on both the franchisor and the franchisee and applies to all franchise agreements including those made prior to the Regulations.
There are many complicated legal issues involved with buying and operating franchises. You should consult us prior to entering into a franchise agreement.
An employment contract is an agreement between an employer and employee that outlines the terms of their relationship, such as the employee’s salary and standard of service. It should be noted that the relationship between an employer and employee is contractual even if no written document has been signed. In Ontario, the relationship is governed by several statutes, including the Employment Standards Act, the Labour Relations Act and the Occupational Health and Safety Act. These statutes establish some basic conditions of the employer-employee relationship, such as an employee’s minimum wage, maximum hours of work and minimum notice for dismissal. Furthermore, the relationship is affected by common law rules, including rules dealing with unfair bargaining power and an employee’s duties of loyalty, confidentiality and good faith. Nonetheless, many employers require prospective employees to enter into formal written employment contracts. Such contracts add a degree of certainty about the terms of the employer-employee relationship and are useful if any disputes about the employment arise.
Creating a Valid Employment Contract
An employment contract, like all contracts, requires that each party provide consideration in order to be binding. Consideration is something of value, such as money, or, in the context of an employment agreement, the employer’s promise of a job and the employee’s promise to provide a service. Furthermore, such consideration must be provided at the time the agreement is made. An employment contract that is made with an existing employee will not be binding unless the employer provides additional consideration. A promise to continue to employ an employee is not valid consideration. However, a promotion or bonus that would not have otherwise occurred in the normal course of the relationship would be sufficient.
Another requirement is that an employment contract must be entered into voluntarily by the parties. The employer has the onus to show that the employee was able to negotiate without coercion or undue influence, particularly if some terms in the contract are harsh or restrictive. An employer might require a prospective employee to obtain independent advice in order to establish that the agreement was freely made. At the very least, the prospective employee should have sufficient time to read and understand the contract before being required to sign it.
Essential Features of an Employment Contract
An employment contract must state the names of the parties, the date when the contract begins, the contract’s duration, and a description of the employee’s duties. In addition, the contract should set out the employee’s rate of pay and how and when such payment will occur. An employment contract cannot violate the minimum statutory standards for minimum wage, timing of payment, maximum hours of work and payment for overtime. (Employers and employees should be aware that the Government of Ontario is in the process of amending these standards.)
In addition, there are minimum statutory standards for notice of dismissal or payment in lieu of such notice. An employment contract should provide for at least as much notice as that required by legislation. If a clause breaches the statutory minimum standard for notice of dismissal, a court may replace the clause with the common law notice period, which is a much longer period than that provided by the current legislation.
Finally, an employment contract should outline a standard of performance which the employee is expected to meet and provide an employer with some flexibility to change an employee’s job description.
Many employment contracts use restrictive covenants in order to protect the legitimate proprietary interests of an employer. Such clauses restrict the rights of a former employee to compete with their former employer and to disclose confidential information learned while on the job. The contract must outline the scope of information which is deemed to be confidential, the duration of the restrictions, and the geographic area which the restrictions cover. Furthermore, the restrictions must be reasonable, particularly in regards to geographic area and duration. An employer cannot restrict the right of a former employee to compete indefinitely.
When an employee’s position involves research or development, many employers use a clause in the employment contract which states that discoveries, improvements and other creative achievements by the employee during the course of the employment are the property of the employer.
In addition to these basic features, many employment contracts have more technical provisions that address the legal parameters of the contract. For instance, a clause might state that the contract represents the entire agreement between the employer and employee (which might prevent an employee from attempting to bind an employer to an oral promise that was not included in a subsequent contract). Some other technical provisions sever an invalid clause from an otherwise valid contract and establish the jurisdiction for legal disputes about the contract.
There are many other aspects of the employer-employee relationship which can be addressed in an employment contract.