If you are in business for yourself and are unincorporated or involved in a partnership, you are a "Sole Proprietor". This means that you are carrying on business in your personal capacity; if you wish to carry on business as a "Sole Proprietor" using a name other than your own, you must register this business name with the Ministry of Corporate and Consumer Affairs, pursuant to the Business Names Act.
Incorporation is done for a variety of reasons; your business does not have to be large in order to take advantage of the benefits of Incorporating.
You can incorporate as an Ontario Corporation or a Federal Corporation, although the vast majority of incorporations are incorporated as Ontario Corporations, as it is more cost effective and has the ability to carry on business anywhere, subject to local registration requirements.
Why Incorporate in the first place? - The Corporation is viewed in law as a totally separate and distinct legal entity, having the ability to do anything that a "person" can do - i.e. enter into contracts, sue or be sued, etc. This is totally distinct from the Shareholders who own the Corporation, the Directors who oversee the dealings of the Corporation, and the Officers who generally carry on the day to day operations and are the signing authorities for the Corporation. In a "closely held" Corporation, these designations are more often than not the same people, simply wearing different hats for different required roles as and when needed.
When starting a business and incorporating, the Shareholders (if more than one) are usually very cost conscious, and quite often they will defer from entering into a Shareholders' agreement, advising that they will do it eventually as they do not wish to spend the money at this time. This is a huge mistake as the next time the issue arises is usually when problems occur between the parties, at which time no one is willing to sign such an agreement.. A Shareholders' agreement should be entered into while the parties are on good terms, as it provides for many things, but the most essential provisions deal with death of a shareholder, disability of a Shareholder and "divorce". Reasons for one party wanting out, or one party wanting the other out are varied; the business is not generating enough money to support the Shareholders; the business is generating substantial monies, and one party believes that the other party is being overpaid for the actual services being rendered; life changes i.e. matrimonial issues, health, change in life outlook,; or the parties simply cannot get along. Without having a pre-agreed mechanism for resolving this issue, no agreement can be reached as to who is leaving and who is remaining, or the value of the shares of the departing Shareholder. It can quickly turn into an ugly grudge match, with parties refusing to sign cheques, or even to come to work--the business suffers, and it may well be the end of it.
The Corporation provides limited liability protection to the Shareholders, Directors and Officers; the acts of the Corporation are the acts of the Corporation and not of those who authorized or directed these actions. There are of course exceptions to every rule; if you are obligated to provide a "Personal Guarantee" of the Corporation's liabilities to a Landlord, or the Bank, or even Trade Creditors, then you have given up the limited liability vehicle that the Corporation otherwise provides. There are also statutory liabilities attaching to the Directors in certain circumstances- i.e. unpaid wages to employees (up to 6 mos. in arrears) or when the Director(s) have caused the Corporation to commit an unlawful act- in these limited circumstances the "corporate veil" can be pierced in order to attach personal liability to the Directors primarily.
Income Tax Treatment- Canadian Controlled Private Corporations are entitled, under the Income Tax Act of Canada, to have lower tax rates than if all profits simply accrued to the individual. There are numerous tax advantages available to these Corporations, affording your Accountant/Financial Advisors greater latitude for minimizing taxes otherwise payable.
The usual Corporation, being in business, is a Corporation with share capital; whoever owns the shares, owns the Corporation. There are also Corporations without share capital - i.e. non-profit businesses, or Associations, in addition to Charitable Corporations, which are afforded special tax treatment, once being a duly registered Charity.
The above are an example of the why's and what's of incorporations; all of those Corporations mentioned above are "Private" Corporations. However there are also "Public "Corporations which are those who are situate on a stock index and allow their shares to be actively traded by the members of the public who purchase same.
When two or more legal entities, being either persons or Corporations wish to carry on business in a Partnership, they may do so, by registering the name of the Partnership, disclosing the Partners, and contact information with respect thereto.
It is imperative, similarly to Shareholders, that the Partners enter into a Partnership Agreement to cover the essential working terms of the Partnership - once again specific Income Tax treatment will apply to the Partnership Profits. it should be noted however that one incident of Partnership that differs greatly from that of Shareholders to each other, is that each Partner is legally liable for the acts of the other Partner(s), unless it is a Limited Partnership, in which case one or more Partners may limit their liability within the Partnership and to the outside world, provided that there is at all times a General Partner, without limited liability.
This is simply another vehicle for allowing two or more parties, whether individuals or Corporations, to enter into a business adventure together, as two very distinct parties, as opposed to the vicarious liability that one Partner may suffer due to the actions of the other(s). In this scenario, the two Joint Venturers carry on business , usually being a specific project, with the Joint Venture ending when the project has been completed.
As with Corporate Shareholders and Partnerships, the participants in a Joint Venture should have a "Joint Venture Agreement" in order to govern not only the roles and obligations of the parties, but also provisions to allow for solutions to the contingencies of life - death, disability and the sale by one party of its interest in the Joint Venture.