Types of Businesses in Ontario: Which Legal Structure is Best for Your Business?
Welcome to Ontario’s diverse business landscape! Here you’ll find everything from the simplicity of sole proprietorships and partnerships to the structure of corporations and the community-driven essence of cooperatives.
In this article we cover the types of business ownership in Ontario, and give you a plain English explanation of each (including the pros & cons). We cover these six business structures:
- Sole Proprietorships
- General Partnerships
- Limited Partnerships
- Limited Liability Partnerships
- Corporations
- Cooperatives
By the end of this guide you’ll have a clear idea of which of the six types of Ontario businesses is the right fit for your entrepreneurial journey!
Types of Business Ownership in Ontario
When starting a business in Ontario, one of the most important decisions you will make is choosing the right business structure. There are six types of business ownership structures in Ontario, and each has its own advantages and disadvantages. Here are the types of businesses in Ontario:
Sole Proprietorship
A sole proprietorship is a business owned by one person. It is the easiest and most common way to start a business in Ontario. As a sole proprietor, you have full control of your company. You are also responsible for all debts and obligations of the business. This means that your personal assets are at risk if your business runs into financial trouble.
General Partnership
A general partnership is a business owned by two or more people. Each partner contributes to the business and shares in the profits and losses. General partnerships are not required to be registered with the government, but it is recommended that you have a partnership agreement in place to outline the terms of the partnership.
Limited Partnership
A limited partnership is a business owned by two or more people, but with different levels of liability. Limited partners are only liable for the debts and obligations of the business up to the amount of their investment. General partners, on the other hand, are fully liable for the debts and obligations of the business. Limited partnerships are required to be registered with the government.
Limited Liability Partnership
A limited liability partnership (LLP) is a business owned by two or more people, with limited liability protection for each partner. LLPs are required to be registered with the government. LLPs are similar to general partnerships, but each partner is protected from the debts and obligations of the other partners.
Corporation
A corporation is a separate legal entity from its owners. This means that the corporation can enter into contracts, own property, and sue or be sued. The owners of a corporation are called shareholders, and they are not personally liable for the debts and obligations of the corporation. Corporations are required to be registered with the government.
Cooperative
A cooperative is a business owned by its members, who share in the profits and decision-making. Cooperatives are often used by groups of people who want to work together to achieve a common goal, such as providing a service or selling a product. Cooperatives are required to be registered with the government.
Comparison of Ontario Business Structures
| Business Structure | Liability | Complexity of Setup | Ownership | Tax Implications | Cost to Set Up |
|---|---|---|---|---|---|
| Sole Proprietorship | Unlimited (Owner personally liable) | Simplest | Single owner | Income taxed at personal rate | Low |
| General Partnership | Unlimited (All partners personally liable) | Moderate | Two or more individuals | Each partner taxed individually | Low to Medium |
| Limited Partnership | Limited for limited partners, Unlimited for general partners | Moderate | General and limited partners | Depends on general or limited partner status | Medium |
| Limited Liability Partnership | Limited for all partners | Moderate to High | Professionals, often in services like law or accounting | Each partner taxed individually with added liability protection | Medium to High |
| Corporation | Limited (Owners are not personally liable) | Complex | Shareholders | Corporate tax rate, potential for double taxation on dividends | High |
| Cooperative | Typically Limited, varies by structure | Moderate | Members, based on democratic principles | Depends on setup, profits returned to members or reinvested | Medium to High |
Sole Proprietorships in Ontario
One of the most common types of business structures in Ontario is a sole proprietorship.
What is a Sole Proprietorship?
A sole proprietorship is a type of business structure where one person owns and operates the business. This means that you, as the sole proprietor, have complete control over the business and are responsible for all its debts and obligations.
One of the biggest advantages of a sole proprietorship is that it’s easy and inexpensive to set up. You don’t need to file any paperwork or pay any fees to register your business. All you need to do is start operating your business and keep track of your income and expenses for tax purposes.
Pros & Cons of the Sole Proprietorship Legal Structure
Here are some of the pros and cons of choosing a sole proprietorship as your business structure:
Pros:
- Easy and inexpensive to set up
- Complete control over the business
- All profits go to the owner
- Simple tax reporting requirements
Cons:
- Unlimited personal liability for business debts and obligations
- Limited ability to raise capital
- Difficult to sell the business
- Limited ability to hire employees
Overall, a sole proprietorship can be a good choice if you’re starting a small business and want to keep things simple. However, if you’re planning on growing your business or need more protection from liability, you may want to consider other business structures, such as a corporation or a partnership.
General Partnerships in Ontario
If you are considering starting a business in Ontario with at least one other person or corporation, you may want to consider forming a General Partnership. A General Partnership is an unincorporated business structure where two or more individuals or corporations agree to operate a business together. Each partner shares the profits, losses, and management responsibilities of the business.
What is a General Partnership?
A General Partnership is a type of business structure where two or more individuals or corporations agree to operate a business together. In Ontario, General Partnerships are governed by the Ontario Partnerships Act, which outlines the rights and responsibilities of each partner. Partnerships are not required to register with the government, but it is recommended that they register with the Ontario Ministry of Public and Business Service Delivery to obtain a Master Business License.
Pros & Cons of the General Partnership Legal Structure
General Partnerships have some advantages and disadvantages you should consider before deciding if it is the right business structure for you:
Pros
- Easy and Inexpensive to Set Up: General Partnerships are relatively easy and inexpensive to set up compared to other business structures. Partnerships do not require a formal agreement, but it is recommended that partners have a written agreement outlining the terms of the partnership.
- Shared Management Responsibilities: Each partner has an equal say in the management of the business, which can be beneficial if partners have different areas of expertise.
- Shared Profits and Losses: Partnerships allow for the sharing of profits and losses between partners, which can be beneficial if one partner has more financial resources than the other.
Cons
- Unlimited Liability: Partners in a General Partnership have unlimited liability, which means that each partner is personally responsible for the debts and obligations of the business. This can put partners’ personal assets at risk.
- Shared Liability: Each partner is also responsible for the actions of the other partners, which can lead to legal and financial problems if one partner makes a mistake or engages in illegal activities.
- Limited Growth Potential: General Partnerships can be limited in their growth potential since they cannot issue shares to raise capital and may find it difficult to obtain financing.
Limited Partnerships in Ontario
A limited partnership is a type of business entity that is made up of at least one general partner and one limited partner. The general partner is responsible for managing the business and is personally liable for its debts and obligations. The limited partner, on the other hand, is not involved in the day-to-day management of the business and is only liable for the amount of money they have invested in the partnership.
What is a Limited Partnership?
A limited partnership is a type of partnership that is made up of at least one general partner and one limited partner. The general partner is responsible for managing the business and is personally liable for its debts and obligations. The limited partner, on the other hand, is not involved in the day-to-day management of the business and is only liable for the amount of money they have invested in the partnership. Limited partnerships are often used in real estate and other investment ventures.
Pros & Cons of the Limited Partnership Legal Structure
There are several advantages to forming a limited partnership in Ontario. Some of the benefits include:
- Limited liability for limited partners: Limited partners are only liable for the amount of money they have invested in the partnership. They are not personally liable for the debts and obligations of the partnership.
- Tax benefits: Limited partnerships are not subject to corporate income tax. Instead, the income and losses of the partnership are passed through to the partners and are taxed on their personal income tax returns.
- Flexibility: Limited partnerships allow for flexibility in the management structure of the business. The general partner is responsible for managing the business, while the limited partner can be a passive investor.
However, there are also some disadvantages to forming a limited partnership. Some of the drawbacks include:
- Personal liability for general partners: General partners are personally liable for the debts and obligations of the partnership. This means that if the partnership is sued or goes bankrupt, the general partner’s personal assets may be at risk.
- Limited control for limited partners: Limited partners do not have a say in the day-to-day management of the business. They are only able to make decisions on major issues, such as the sale of the business or the addition of new partners.
Overall, forming a limited partnership can be a good option for businesses in Ontario that are looking for flexibility in their management structure and want to take advantage of tax benefits. However, it’s important to weigh the pros and cons before deciding if a limited partnership is the right legal structure for your business.
Limited Liability Partnerships in Ontario
An LLP is a type of partnership that provides its partners with limited liability protection. This means that the partners are not personally liable for the debts and obligations of the partnership.
What is a Limited Liability Partnership?
An LLP is a type of partnership that combines the flexibility of a general partnership with the limited liability protection of a corporation. In an LLP, each partner is only liable for their own actions, and not for the actions of the other partners. This means that if the partnership is sued or incurs debts, the partners’ personal assets are protected.
Pros & Cons of the Limited Liability Partnership Legal Structure
There are several advantages and disadvantages to forming an LLP in Ontario. Some of the advantages include:
- Limited liability protection: As mentioned above, an LLP provides its partners with limited liability protection, which can help protect their personal assets in the event of a lawsuit or other legal action.
- Flexibility: LLPs are relatively flexible in terms of management and ownership structure, which can make them an attractive option for small businesses and startups.
- Tax benefits: LLPs are taxed as partnerships, which means that the partnership itself does not pay taxes. Instead, the partners report their share of the partnership’s income or losses on their personal tax returns.
Some of the disadvantages of forming an LLP include:
- Complexity: LLPs can be more complex to set up and maintain than other types of business structures, such as sole proprietorships or partnerships.
- Limited liability protection may not be absolute: While an LLP does provide its partners with limited liability protection, this protection may not be absolute. For example, partners may still be held liable for their own negligence or misconduct.
- Limited investment opportunities: LLPs may have limited investment opportunities, as they cannot issue stock or other securities.
Overall, forming an LLP can be a good option for businesses that want to combine the flexibility of a partnership with the limited liability protection of a corporation. However, it’s important to carefully consider the pros and cons of this legal structure before deciding whether it’s the right choice for your business.
Corporations in Ontario
A corporation is a separate legal entity from its owners, meaning that the corporation can enter into contracts, sue and be sued, and own property in its own name. Here are some things to keep in mind if you’re considering setting up a corporation in Ontario.
What is a Corporation?
A corporation is a type of business entity that is owned by shareholders. The shareholders elect a board of directors, who are responsible for making major decisions about the corporation. The board of directors then appoints officers, who are responsible for the day-to-day management of the corporation. One of the key advantages of setting up a corporation is that it provides limited liability protection to the shareholders. This means that the shareholders are generally not personally liable for the debts and obligations of the corporation.
Pros & Cons of the Corporation Legal Structure
As with any type of business entity, there are both pros and cons to setting up a corporation. Here are a few things to keep in mind:
Pros
- Limited liability protection: As mentioned above, setting up a corporation can provide limited liability protection to the shareholders. This means that if the corporation is sued or goes bankrupt, the shareholders’ personal assets are generally protected.
- Ability to raise capital: Because corporations can issue stock, they have the ability to raise capital by selling shares to investors.
- Perpetual existence: Unlike sole proprietorships and partnerships, corporations have perpetual existence, meaning that they can continue to exist even if the owners change.
Cons
- Increased complexity: Setting up and maintaining a corporation can be more complex and expensive than setting up a sole proprietorship or partnership.
- Double taxation: Corporations are subject to double taxation, meaning that the corporation itself is taxed on its profits, and then the shareholders are taxed again on any dividends they receive.
- Increased regulation: Corporations are subject to more regulation than other types of business entities, which can be both time-consuming and expensive.
Overall, setting up a corporation can be a good choice for entrepreneurs who are looking for limited liability protection and the ability to raise capital by selling shares. However, it’s important to weigh the pros and cons carefully before making a decision.
Cooperatives in Ontario
A cooperative is a type of business that is owned and operated by its members. Members pool their resources together to achieve a common goal, such as providing goods or services to the community.
What is a Cooperative?
A cooperative is a business that is owned and controlled by the people who use its services or products. In a cooperative, members work together to achieve a common goal, such as providing affordable housing, groceries, or financial services. Members pool their resources together to achieve this goal, and they share in the profits and benefits of the business.
One of the key benefits of a cooperative is that it is democratically controlled by its members. Each member has an equal say in how the business is run, regardless of how much money they have invested in the business. This means that decisions are made based on what is best for the members, rather than what is best for a small group of investors.
Pros & Cons of the Cooperative Legal Structure
Like any business structure, there are pros and cons to forming a cooperative. Here are a few to consider:
Pros:
- Democratic control: Each member has an equal say in how the business is run.
- Shared benefits: Members share in the profits and benefits of the business.
- Limited liability: Members are not personally liable for the debts of the business.
- Tax benefits: Cooperatives may be eligible for tax breaks and exemptions.
Cons:
- Limited access to capital: Cooperatives may have a harder time raising capital than traditional businesses.
- Limited growth potential: Because cooperatives are owned and controlled by their members, they may be limited in their ability to expand.
- Limited exit options: It may be difficult for members to sell their ownership stake in the business.
In Ontario, there are many different types of cooperatives, including financial co-operatives (credit unions, caisse populaires and insurance companies) which make up 7% of the provinces co-op sector, and non-financial co-operatives, which make up 92% of the sector, and operate in about 20 key sectors of the Ontario economy.
If you are interested in forming a cooperative in Ontario, the Ontario Co-operative Association is a great resource. They provide information and resources to help grow and develop your co-operative.
How to Choose the Best Legal Structure for Your Ontario Business
When starting a business in Ontario, one of the most important decisions you will make is choosing the legal structure of your business. The legal structure you choose will have a significant impact on how your business operates, how it is taxed, and your personal liability for the business’s debts and obligations. Here are some factors to consider when choosing the best legal structure for your Ontario business.
Liability
One of the most important factors to consider when choosing a legal structure for your business is liability. As a business owner, you want to protect your personal assets from any liabilities that may arise from your business. Some legal structures, such as sole proprietorships and general partnerships, do not provide any protection for your personal assets. On the other hand, corporations and limited liability partnerships (LLPs) offer limited liability protection for their owners.
Taxation
Another factor to consider when choosing a legal structure for your business is taxation. Different legal structures are taxed differently, and the tax implications can be significant. For example, a sole proprietorship’s income is taxed as personal income, while a corporation’s income is subject to corporate tax rates. It’s important to consider the tax implications of each legal structure before making a decision.
Ownership and Management
The legal structure you choose will also impact how your business is owned and managed. For example, a sole proprietorship is owned and managed by one person, while a corporation is owned by shareholders and managed by a board of directors. Consider how you want your business to be owned and managed when choosing a legal structure.
Cost and Complexity
Finally, consider the cost and complexity of each legal structure. Some legal structures, such as sole proprietorships and general partnerships, are relatively simple and inexpensive to set up. Others, such as corporations and LLPs, can be more complex and expensive to establish and maintain.
Frequently Asked Questions
What are the different business structures available in Ontario?
In Ontario, there are four broad types of business structures: sole proprietorship, partnership (including general, limited, and limited liability), corporation, and cooperative. Each structure has its own advantages and disadvantages, and it’s important to choose the one that best suits your business needs.
What is the process for registering a business in Ontario?
To register your business in Ontario, you need to follow a few simple steps. First, you need to choose a business name and check if it’s available. Then, you need to decide on the structure of your business and register it with the government. You may also need to obtain licenses and permits, depending on the nature of your business.
What are the key differences between a sole proprietorship and a partnership in Ontario?
The main difference between a sole proprietorship and a partnership is the number of owners. A sole proprietorship is owned by one person, while a partnership is owned by two or more people. In a sole proprietorship, the owner is personally liable for all debts and obligations of the business, while in a partnership, the partners share the liability.
What are the advantages and disadvantages of incorporating a business in Ontario?
Incorporating a business in Ontario has several advantages, such as limited liability, access to more funding sources, and potential tax benefits. However, it also has some disadvantages, such as higher costs, more paperwork, and more regulations to follow.
What are the requirements for operating a business in Ontario?
To operate a business in Ontario, you need to comply with various regulations and requirements. These may include obtaining Ontario licenses and permits, registering for taxes, following health and safety regulations, and complying with employment standards.
Resources for Choosing a Business Type in Ontario
- Business structure: Which one is right for you? (Government of Canada)
- Tips from a Business Lawyer – Ontario Business Structures: Selecting … (Unified Lawyers LLP)
- The 3 Most Common Types of Business Entities in Ontario – Invest Ottawa (Invest Ottawa)
- Decide on the ownership structure for your business – Ontario.ca (Government of Ontario)
- How to choose your business structure | BDC.ca (Business Development Bank of Canada)
- Doing Business in Canada: Business structures | Gowling WLG (Gowling WLG)
