Sole Proprietor, Partnership, or Corporation? A Guide to Choosing the Right Business Structure in Ontario

Many entrepreneurs in Ontario rush this step, often defaulting to the simplest option without fully understanding the risks. At Cabinet Sauvé Law, we believe in building businesses on a solid legal footing to provide you with genuine Peace of Mind for the years to come. This guide will walk you through the three most common business structures in Ontario—the Sole Proprietorship, the Partnership, and the Corporation—so you can make an informed decision that aligns with your vision.

• Taxation: Simplicity is a key feature here. You don't file a separate tax return for the business. Instead, you report all business income and expenses on a T2125 Form (Statement of Business or Professional Activities), which is filed with your personal T1 income tax return. The net profit of your business is added to your other personal income (if any), and you are taxed at your marginal personal tax rate.
• Setup and Costs: Setting up is incredibly easy and inexpensive. If you operate the business under your own legal name (e.g., "Jane Doe Consulting"), you don't have to do anything. If you want to operate under a trade name (e.g., "Apex Consulting"), you must register that name with the Ontario government. This is a simple online process.
  

Pros and Cons of a Sole Proprietorship

Pros:

• ✅ Simple and Inexpensive: Very easy and relatively inexpensive to set up and maintain.
• ✅ Full Control: You are the sole decision-maker.
• ✅ Simplified Taxes: All profits and losses are reported on your personal tax return.

• ❌ Unlimited Personal Liability: Your personal assets are at risk.
• ❌ Limited Credibility: Can be perceived as less professional by some clients, lenders, or investors.
• ❌ Raising Capital is Difficult: You can't sell shares, and banks may be more hesitant to lend to a non-incorporated business.
• ❌ Limited Longevity: The business legally ceases to exist when the owner retires or passes away.

The Partnership: Teaming Up for Business

Deep Dive: The Danger of Joint and Several Liability

In a standard General Partnership, the liability risk is magnified. Like a sole proprietorship, partners have unlimited personal liability. However, it is also "joint and several." This means that each partner is individually responsible for 100% of the partnership's debts, regardless of who incurred them.

Consider this scenario: You and a partner start a small construction business. Your partner, without your full knowledge, signs a contract for a project that goes badly, resulting in a $100,000 lawsuit against the partnership for damages. The plaintiff can sue the partnership and both partners individually. If your partner has no personal assets, the plaintiff can come after you for the full $100,000, putting your personal home and savings at risk, even if you had nothing to do with the problematic contract. This is a staggering level of risk that must be fully understood.

The Partnership Agreement: Your Most Important Document

Because of the immense shared risk, no one should ever enter a partnership without a comprehensive, professionally drafted Partnership Agreement. This legal document is the rulebook for your partnership and is essential for providing clarity and Peace of Mind. It should clearly outline:

• Capital contributions of each partner.
• Roles, responsibilities, and decision-making authority.
• How profits and losses will be distributed.
• A process for resolving disputes.
• Exit clauses detailing what happens if a partner wants to leave, retires, or passes away (a buy-sell agreement).

Taxation, Setup, and Costs

• Taxation: Similar to a sole proprietorship, the partnership itself does not pay taxes. The net income "flows through" to the partners based on the profit-sharing ratio in the Partnership Agreement, and each partner reports their share on their personal T1 tax return.
• Setup and Costs: A partnership must be registered with the Ontario government. The primary cost should be the legal fees for drafting a robust Partnership Agreement, which is an absolutely non-negotiable investment.

Pros and Cons of a Partnership

Pros:

• ✅ Relatively Easy to Set Up: Simpler and less expensive than incorporation.
• ✅ Combined Resources: Allows partners to pool their money, skills, and experience.
• ✅ Simplified Taxes: No separate corporate tax return is required.

• ❌ Unlimited, Joint and Several Liability: The highest level of personal risk.
• ❌ Potential for Conflict: Disagreements between partners can destroy the business.
• ❌ Instability: The partnership can dissolve if one partner decides to leave.

The Corporation: A Separate Legal Entity

Deep Dive: The Protection of the "Corporate Veil"

The single greatest advantage of a corporation is limited liability. Because the corporation is a separate entity, its debts and legal obligations belong to the corporation itself, not to its shareholders. This creates a protective barrier, often called the "corporate veil," between the business's liabilities and your personal assets. If the corporation fails or is sued, your personal risk is generally limited only to the amount you have invested in the company. The bank can't seize your house to pay a corporate loan (unless you have provided a personal guarantee, which is a common requirement for new corporations). This protection is the ultimate source of financial Peace of Mind for a serious entrepreneur.

Taxation: Flexibility and Complexity

Corporate taxation is more complex but offers significant advantages.

• Corporate Tax Return: The corporation files its own T2 tax return and pays corporate income tax.
• Lower Tax Rates: In Canada, active business income earned by a Canadian-controlled private corporation is taxed at a much lower rate (the "Small Business Deduction") than personal income tax rates, up to a certain threshold.
• Tax Deferral: This lower rate allows you to leave more after-tax money in the corporation to reinvest in growth. You only pay personal income tax on the money you draw out of the corporation as a salary or dividends. This flexibility is a powerful financial planning tool.

Setup and Ongoing Obligations

• Setup and Costs: Incorporation is the most expensive and complex option. It involves filing Articles of Incorporation with the government, creating corporate by-laws, and setting up a minute book to hold all corporate records (share certificates, director resolutions, etc.).
• Ongoing Compliance: Corporations have mandatory annual obligations, including holding shareholder and director meetings, filing an annual corporate return, and maintaining the minute book.

Pros and Cons of a Corporation

• ✅ Limited Personal Liability: The best protection for your personal assets.
• ✅ Enhanced Credibility and Professionalism: Appears more established to clients, suppliers, and lenders.
• ✅ Tax Advantages: Potential for lower tax rates and tax deferral.
• ✅ Perpetual Existence: The business continues to exist even if ownership changes.
• ✅ Easier to Raise Capital: You can bring in investors by selling shares.

A Simple Comparison Table

Conclusion: Making the Right Choice for Your Vision