II. OVERVIEW OF THE BUSINESS ORGANIZATION STRUCTURES

Before deciding on the type of organization you would like you choose for your business, you should know a little about your options. Business organizations are typically organized into three categories: sole proprietorships, corporations, and partnerships. Sole proprietorships and corporations are the most applicable to your current business needs, so this memorandum will focus on those two organization structures.

1. Sole Proprietorship

An unincorporated business owned by one individual is called a sole proprietorship. This is the simplest form of business organization.

There is no legislation dealing specifically with sole proprietorships, but there are many federal and provincial regulations affecting commerce, licensing, and registration. For example, in Ontario, where an owner carries on business under a name other than such individual’s own legal name, the name that is used to carry on business must be registered under the Business Names Act (Ontario) (the “BNA”). Most businesses need to register with the provinces and territories where they plan to do business. In your case, since you have yet to register your name, you would need to register the business in Ontario under the name you have selected, [•].

As a sole proprietorship, you would retain all profits directly. This also means that there is no separate taxable entity and the tax is at personal rates; however, it is important for you to speak with a tax professional about tax considerations, including offsetting the business income against your personal income and avoiding double taxation.

Sole proprietorships retain all control over the business. There is no legal separation between the individual and the business. This means that you, as the owner of the business, would be liable for all of the business’s obligations and your personal assets (including those not connected to your business) may be seized to meet these obligations.

The financial costs associated with registering your business as a sole proprietor are few, and are less than the other options considered in this memorandum.

2. Corporation

A corporation has a legal personality distinct from its owner and the owner becomes a shareholder of the coproration. As a separate legal entity, a corporation has the rights, powers and privileges (and potentially the obligations) of a natural person. It can hold property and carry on a business, and it is subject to legal and contractual obligations. As a shareholder of the corporation, owners do not personally own the assets of the corporation, nor are they personally liable (subject to some limited circumstance) for the liabilities of the corporation.

Incorporation must be completed either at the federal level under the Canada Business Corporation Act or at the provincial level under the Business Corporations Act (Ontario). The differences between incorporating federally and incorporating provincially are minimal, and you can functionally accomplish the same things under both. The primary consideration is that if you were to incorporate federally, you would not need to register for separate provinces and territories if you would like to carry on business beyond Ontario. And although it is easier to register the business name in Ontario, this would only protect the corporation’s name within the province. There is an option to electronically incorporate the Business the Ministry of Government and Consumer Services.

III. ADVANTAGES AND DISADVANTAGES OF SOLE PROPRIETORSHIP

As a sole proprietor, you will be the sole owner of the Business, fully responsible for all debts and obligations related to it. However, sole proprietorships are simpler to set up and require very little extra costs to continue operating as this form of business.

Advantages

(1)  Directly Retain Benefits

Under this business structure, you as the sole proprietor will retain all the benefits, including profits (after tax), of the Business directly. On this note, you will be taxed on the profits at your personal tax rate, as they have been earned through you directly.

(2)  Compliance & Reporting Obligations

There are no compliance or reporting obligations that are specific to sole proprietors beyond applicable business name registration, licensing requirements, and personal tax returns.

(3)  Potential Tax Advantages

Sole proprietorship offers some tax advantages. You should contact a tax professional for more information on this aspect if it is of interest to you.

Disadvantages

(1)  Unlimited Personal Liability

The main disadvantage of operating as a sole proprietor is unlimited personal liability for all debts and obligations related to your business. This means your personal assets could be seized by potential creditors to cover business liabilities, even if the assets are not connected to the Business. If a client or third party were to suffer a loss for which your business is responsible, you could be held personally liable for any potential damages awarded following a legal proceeding against the Business. However, you could limit your liability by contract or through insurance. You may want to reach out to an insurance advisor to learn more about your options.

 (2)  Potential Tax Disadvantages

Income is taxable at the sole proprietor’s personal rate. As a result, if your business is very profitable, it could result in you paying a higher rate of income tax than if you were to claim the profits via an incorporated business. You may need to contact a tax professional for more information on tax implications.

IV. ADVANTAGES AND DISADVANTAGES OF INCORPORATION

As a corporation, you will be able to limit your personal liability, create a separate legal entity away from yourself, and have better access to capital. However, this can be significantly more costly and require continuous administrative work. 

Advantages

(1) Limited Personal Liability

First, as the shareholder of the corporation, you will not be personally liable for the debts and obligations of the corporation. This means that your personal assets are separated and protected from any claims on the Business (except in certain limited cases of fraud or criminal activities). In contrast, a sole proprietorship has unlimited personal liability, which means that your personal assets could be seized to cover business liabilities.

However, please keep in mind that a shareholder’s exposure to liability for debt obligations will not be limited if that shareholder were to provide a personal guarantee for any such obligations.

(2) Separate Legal Entity

Second, because a corporation is a separate legal entity from the shareholders (you), this also means that you can transfer your ownership of the corporation by selling your shares. This means you can bring in new investors into your business and it can potentially exist perpetually without you. There are a number of restrictions and rules on these processes governed by laws which are beyond the scope of this memorandum. However, it is important to note that in a sole proprietorship, the only way to sell your business is through selling your assets.

There are also some potential tax advantages, such as a small business tax deduction. Corporations are taxed separately from their owners and corporate tax rates are generally lower than individual tax rates. Corporate taxes are on every dollar of profit the corporation earns, which means your company must generate a certain amount of profit before incorporation offers tax advantages. Additionally, small business corporations have several tax incentives, such as the small business deduction. Nevertheless, taxes are largely outside o the scope of the OBC, so we recommend seeking the advice of a tax professional on specific matters on taxation.

(3) Access to Capital

Third, you can access more capital by either selling shares or seeking financial lending from institutions. On the latter point, corporations often receive more favorable terms for loans than sole proprietorships. On the former point, incorporating allows you sell shares and issue other types of securities; although, as a private corporation, you would not be allowed to sell shares to the general public. This can be a complicated process and you should consult experts in corporate and securities law if you wish to sell shares of your business after incorporation.

Disadvantages

(1) Costs of Incorporation

First, the cost of incorporation and possible maintenance costs are higher than a sole proprietorship. The expenses related to incorporations include filing of incorporation documents (approximately $360 in Ontario), corporate name searches (approximately $60 in Ontario), and the maintenance of a minute book (approximately $50 in Ontario). Please note that these approximate costs could change next year—in any case, should you proceed with incorporation, we would provide you with the exact cost breakdown at that time.

(2) Extensive Record-Keeping and Filing Requirements

Second, the complexity of continuing a corporation can be extensive, especially with respect to record-keeping, filing, and other laws and regulations.

Incorporating [•] would require the maintenance of clear records and documentation as set out by the CBCA or the OBCA, as applicable:

(a) Corporate Minute Book: The minute book contains the entirety of the corporation’s incorporation documents, including articles of incorporation, by-laws, directors’ registers, financial statements, registration documents, and share registers. In addition, a record of director and shareholder meetings and other documents related to the corporation must be filed in the minute book, which must be stored in the registered office of the corporation. Note that the “registered office” can be any address provided in the articles of incorporation as the “registered address”, including your home address as long as it is in Canada, if incorporated under the CBCA, or in Ontario, if incorporated under the OBCA.

(b) Annual Corporate Tax Returns: The corporation must file an annual corporate tax return, which is separate from your personal tax return. This tax return is calculated based on the annual revenue and expenses of your business. Because the tax rates and rules differ from those of personal taxes, the preparation and filing of this tax return may increase your annual tax filing costs.

(c) Annual Returns: The corporation must file annual returns with up-to-date information about the corporation, including information pertaining to directors and officers. Associated annual fees if incorporated under the CBCA are approximately $40 if filed by email or phone and $12 if filed online. If incorporated under the OBCA, there are no associated annual fees for these filings.

(3) Process

Third, the process of incorporating is more onerous than operating as a sole proprietorship. Should you choose to incorporate we would largely guide you through the process. The specific steps involve choosing a jurisdiction, completing a name search for “[•],” preparing the required documents (mainly, the Articles of Incorporation), and covering some procedural steps (e.g., filing, banking arrangements, or pre-incorporation contracts).

Key Takeaways

You may wish to consider how much risk your business faces in terms of incurring potential liabilities and how much you value the protection provided by incorporation. You mentioned the risks associated with contracts, working with minors, and in-person tutoring. As a sole proprietor, you may wish to consult insurance professionals to address such risk.

Additionally, you should think about the nature of your business and what the growth of your business would look like in terms of your financial planning. You mentioned the possibility of expanding across and beyond Canada. This can carry additional risks and costs. We would recommend considering other businesses in your sector and the feasibility of scaling your business with financial planning experts if that is something you wish to pursue.

The next section of this memorandum will now cover what the processes look like for you to get a better idea of what it will entail to register as a sole proprietor or incorporate your business.

V. BUSINESS REGISTRATION PROCESS

Should you choose to operate as a sole proprietorship, you may operate under your legal name without the need to register a business name. If you would like to use another name for your business and operate under [•], you are required to register your business name under the BNA. Registration under the BNA serves as a public record for creditors to prevent sole proprietors from evading liability. This means that any potential creditors may find your legal name and information by searching for the name of your business. The process of registering your business name can be found at: https://www.ontario.ca/page/register-business- name-limited-partnership.

The cost is $60 if you register online or $80 if you register by mail or in person. There are additional fees associated with a business name search, which you can undertake to check available business names. Registering a business name does not protect it as a trademark and other companies may use that same name unless you register it as such. The OBC does not provide legal advice regarding intellectual property; however, you may choose to retain independent legal advice if you would like to learn more about trademarking your company.

Registering a business name in Ontario automatically provides you with a Federal Business Number and a Master Business License (“MBL”). You can use your MBL as proof of business name registration at financial institutions and in business transactions with the Ontario government.

VI. INCORPORATION PROCESS

1. Choosing a Jurisdiction

If you choose to incorporate your business in Ontario, you will have the right to carry on business only in Ontario. If you subsequently seek to carry on business in another province or territory, separate registration for each province or territory will be required. If you choose to incorporate your business federally under the CBCA, the corporation will have the legal right to carry on business across Canada, subject to additional provincial registration requirements (continuance extra-provincial registration fees are free for Ontario, but range from approximately $200-$350 in other provinces and territories). Your decision will be based on some of the concerns we discussed regarding your plans to potentially grow your business outside of Ontario. 

While there is no added fee to register in Ontario, there may be applicable registration fees in other provinces. If you are planning to expand your business operations outside of Ontario, you may wish to consider incorporating federally under the CBCA.

It must be noted that provincial incorporation will protect the corporation’s name only within the province in which it has been formally incorporated. Should this be a concern, federal incorporation may be better suited for your business. The following considerations should be considered when deciding whether to incorporate federally or provincially:

• Is federal name protection a primary concern for [•]? Is the corporate name unique enough to justify protection across a federal jurisdiction?
• In which geographic regions will [•] operate? Will it remain in one province or expand across Canada?

2. Name Search

Before incorporating, a name search must be conducted to ensure that the corporate name is not overly similar to any other registered business name, trademark, or corporate name in the jurisdiction in which you have incorporated. If it is found that another corporation has a similar name, it is generally recommended to not proceed with that name. If the name you intended to use for your corporation has already been registered, you must choose a new name. This name search must be conducted within 90 days prior to the filing date.

Prior to incorporating on the federal level, approval of your business’s name must be obtained from Corporations Canada. Corporations Canada is Canada’s federal corporate regulator and is responsible for compliance activities under the CBCA.

Under both the OBCA and the CBCA, the incorporated name must include a suffix such as “Corporation”, “Corp.”, “Incorporated”, “Inc.”, “Limited”, or “Ltd.”. The suffix indicates to persons dealing with the corporation that the business is operating as a corporation and its liability is limited. It is important to note that the incorporated name and its suffix must be included in all business documents and interactions with others.

This name search can be conducted through Canada’s Newly Upgraded Automated Name Search (NUANS). Each report conducted in NUANS costs $13.80. It can also be conducted using Ontario’s electronic name search system, which ranges from $8 to $26 per search depending on the type of report generated.

3. Preparing Required Documents

Articles of Incorporation must be completed and filed in order to incorporate a business. This can be done electronically, in person or by mail. The following should be included in the Articles of Incorporation:

• The name of the corporation;
• The address of the registered office of the corporation;
• The number of directors (can be a fixed number of directors or a minimum and maximum number of directors);
• The full names and addresses for service for each of the first directors;
• Restrictions, if any, on the business the corporation may carry on or on the powers that the corporation may exercise;
• The classes and any maximum number of shares the corporation is authorized to issue;
• The rights, privileges, restrictions and conditions (if any) attached to each class of shares and directors’ authority with respect to any class of shares;
• Restrictions on issue, transfer or ownership of shares (if any); and any additional provisions.

4. Filing Documents and Paying Applicable Fees

In order to incorporate your business in Ontario under the OBCA, the following information must be provided to the Ministry:

1. Completed articles of incorporation;
2. A covering letter identifying the name, return address, and telephone number of a contact for the corporation;
3. A business name search not older than 90 days prior to the filing date (however, this is not required if you were to incorporate a numbered company); and
4. Filing fee of $300 must be paid if filed electronically, or $360 if filed in person or by mail.

This can be completed either online at http://www.oncorp.com, by fax, by mail, or in person.
If you incorporate your business federally under the CBCA, you must provide Corporations Canada with the following:

1. Articles of Incorporation;
2. Initial Registered Office Address;
3. First Board of Directors (subject to residency requirements of directors under the CBCA, this can include yourself);
4. A business name search not older than 90 days prior to the filing date; and
5. Filing fee of $200 must be paid if filed online, or $250 if filed by paper.

This can be completed either online (at http://strategis.gc.ca/corporations), by fax, by mail, or in person.

The preparation of these documents will likely require the help of a legal professional to ensure compliance with relevant corporate statutes and that all relevant information is included. This process can significantly increase the cost of incorporation. The incorporation process is completed when a certificate of incorporation is issued. At this point, the corporation comes into existence.

5. Banking Arrangements

The corporation will be required to set up a bank account that is separate from the personal bank account(s) of the incorporator(s).

6. Pre-Incorporation Contracts

Please note that pre-incorporation contracts are not automatically binding on a company immediately upon incorporation. The corporation will only become entitled to the contract’s benefits and subsequently be held liable for its performance once the corporation signifies its intention to adopt the contract, which can be approved and ratified by the board of the directors following incorporation.

VII. RESOURCES

There are various government sources online providing further information about the incorporation process, such as the ones below:

Federal Incorporation: https://www.ic.gc.ca/eic/site/cd-dgc.nsf/eng/cs06642.html

Provincial (ON) Incorporation: https://www.ontario.ca/page/incorporating-business-corporation

VIII. CONCLUSION

Choosing to operate the Business as a sole proprietorship would allow you to avoid potentially burdensome record-keeping, filing requirements and compliance with corporate statutes. Whereas, if you incorporate, you may be required to make certain onerous filings, but avail yourself of a number of advantages, such as potentially claiming tax benefits. But whether or not this is useful in your situation depends on the exact amount of income you and the Business each generate and may be something you wish to speak to a tax advisor about. Importantly, incorporation would shield you from personal liability and separate your personal assets from the business. Incorporation would also allow you to access capital, which could assist you in growing and scaling your business.

Should you choose to incorporate the Business, provincial incorporation in Ontario would suffice since you currently operate out of your home in Ontario. However, since you plan to expand your operations federal incorporation in Canada may be preferable. There is not much substantive difference between incorporating in Ontario or Canada, though we would recommend you seek further legal advice if you’re concerned with the specifics of the OBCA, CBCA, or extra-provincial registration requirements.