Determining the Legal Structure of your Business
When starting your business endeavour, the appropriate legal structure will depend on the nature of the business itself. For instance, a business venture creating art or small trinkets will invariably incur less risk than a business that underpins housing foundations. As such, a contextual and circumstantial approach is necessary to evaluate the appropriate course of action by considering issues such as liability, revenue, and tax, among others. Of course, planning is not static. These considerations are often in flux and require revisiting as the business or venture evolves or changes.
A viable option is to operate as a sole proprietorship
One important drawback is liability. Sole proprietors are personally responsible to the extent of their personal assets. This is often a major impetus to incorporation. However, should the business incur minimal inherent risk (i.e., the art example above), sole proprietorship may be a viable option. Particularly, in the early stages of a business where revenue and disposable income are limited, a sole proprietorship allows the operator to keep professional fees and costs down by avoiding the regulatory compliance required of a corporation. However, where the business increases the exposure or liability on the sole proprietor it may be time to consider incorporation.
Incorporation may be favourable
A corporation has the drawback of costs associated with maintaining regulatory compliance. However, this nominal amount must be weighed against the advantages of incorporation. One reason to incorporate may be to limit liability. The corporation is a separate legal entity. Unlike a sole proprietor, the risk and exposure for the owner of a corporation is typically limited to what is invested or conveyed to the corporation (i.e., money, services, property etc.). It may also be important to take advantage of the preferential tax rates afforded to corporations. Additionally, a corporation may be able to secure financing unavailable to a sole proprietor, providing for further expansion or reinvestment in the business. Finally, a corporation can host multiple owners and the corporation does not cease to exist on the owner’s death. These are just some of the factors that weigh in on the decision to incorporate.
Operating as a partnership may present an optimal structure
Partnerships may be express or implied. As such, it will be important to consider the consequences or implications of being in a partnership or being seen to be in a partnership. The rights and obligations of parties in an implied partnership are not as clear and will be guided by the Partnerships Act and common law. A written partnership agreement, in contrast, provides clarity, formality, flexibility, and will help limit the risk for the parties involved. Partnerships may work optimally when carrying on a single venture between two parties and can involve individuals or corporations.
Employment Law Implications
Regardless of the vessel you use to start a business in Ontario, there will almost certainly be important employment law implications once your business starts to expand. Most companies in Ontario are subject to the Employment Standards Act (“ESA”). The ESA outlines Ontario employee entitlements to minimum wage, vacation time, benefits, and termination/severance pay, amongst many others. Additionally, all employers are subject to a myriad of employee rights created by the common law.
With the rights found in the ESA and common law combined, Ontario employees have some of the strongest employment protections in the country and even the world. As such, if your Ontario business has expended to the point where you require employees to assist in day-to-day operations, you need to be well-versed in your responsibilities pursuant to Ontario employment law to avoid potential unwanted liabilities in the future. These liabilities often stem from the initial contract of employment. However, they can also show up throughout the life of the employment agreement, especially upon its conclusion through termination and/or the sale of the business. Companies who hire competent employment counsel proactively often save significant costs through guided drafting of contracts and policies, and from strategic decision making. This is compared to those companies who hire lawyers after a surprise employment law problem appears.
To help understand the above myriad of employment law implications, our employment law team has put together a helpful checklist for employers to review when assessing if they are compliant with provincial employment legislation. This can be found here.
Conclusion
Choosing the appropriate structure for starting a business in Ontario is crucially important to meeting the marketable needs of your product and/or service. However, as discussed above, the long-term success of an Ontario business can be affected by the exact medium you choose. Furthermore, upon expansion, your business will inevitably be affected by employment law implications. Therefore, it is incredibly important to contact counsel who have knowledge of both business and employment law when planning the long-term success of any business in Ontario.
This blog post was written by Zachary Murray, a member of the Business Law team and Filip Szadurski, a lawyer in the Employment team . Zachary can be reached at 613-369-5497 or at Zachary.murray@mannlawyers.com. Filip can be reached at 613-566-2060 or at filip.szadurski@mannlawyers.com.
