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BUSINESS: Sole Proprietorships, Partnerships, Limited Partnerships, Limited Liability Partnerships, Corporations & Joint Ventures

The most basic form of business organization, used in a wide variety of circumstances, is called a sole proprietorship. Such organizations are relatively inexpensive to set up and require few legal formalities. In fact, a sole proprietorship comes into effect when an individual carries on business for his or her own account without the involvement of other individuals, excepting employees. Quite a number of small businesses are organized as sole proprietorships, with benefits like income and assets going exclusively to the sole proprietor, and, in turn, all obligations including losses, contractual and tortious liability associated with the business are also placed on the door of the sole proprietor. There is no limited liability for the sole proprietor, a major disadvantage of sole proprietorships. To compensate for their business obligations and liabilities, all their business and personal assets could be seized. It is possible for the sole proprietor to limit his or her personal liability exposure by contract, or through insurance. A requirement of the federal Income Tax Act(ITA) is that individuals with business income report that income on a calendar year (as their fiscal period) basis, a rule applicable to sole proprietorships as well. Such income or losses from a sole proprietorship has to be included with the sole proprietor’s income or losses from other sources during the year. This totalized income is to be taxed under the ITA at the marginal tax rates applicable to individuals. Thus, a sole proprietor’s business losses, meaning non-capital losses, can be deducted from the sole proprietor’s other income. In order to start a business, sole proprietors have to review municipal, provincial and federal licensing requirements; as licenses are required for a number of activities.

In addition, sole proprietors have to comply with the Ontario Business Names Act (BNA) which states that no individual shall carry on business or identify his or her business to the public under a name other than his or her own legal name, unless the name is registered by that individual. However, if an individual, corporation, or partnership commences or defends an action under a name other than the registered name of the business, then leave of the court is required under the BNA. The definition of “Business” here includes every trade, occupation, profession, service or venture carried on with a view to profit. For this purpose, a name or designation is to be first registered with the Ministry of Consumer and Business Services. There are additional requirements of the BNA for renewals and amendments to the registration. Furthermore, there is a penalty on summary conviction for non-compliance with these requirements. According to the Rules of Civil Procedure, a sole proprietor carrying on business under a name other than his or her own can sue or be sued in the name of the sole proprietorship.

Partnership

If two or more persons, whether individuals or corporations, carry on business together with a view to profit, the relationship is called a partnership and the members of the partnership are called partners. Like a sole proprietorship, a partnership is also relatively inexpensive to set up. The legal formalities required to establish a partnership are few, and the partners carry on the business themselves directly, because the partnership is not a legal entity separate from its partners. According to the laws of Ontario, there are three types of partnerships: general partnerships, normally known as partnerships; limited liability partnerships (LLPs); and limited partnerships (LPs). The general partnerships and LLPs in Ontario, are governed by the Partnerships Act whereas limited partnerships follow the requirements of the Limited Partnerships Act. The liability of each partner for the debts and other obligations of the partnership is unlimited in a general partnership. As opposed to this, in a limited partnership, there is one or more “general partners” whose liability is unlimited, and one or more “limited partners” whose liability is limited to the amount they have contributed to the partnership business, as mentioned in the record of limited partners. Essentially a mix of general partnerships and limited partnerships, the LLPs are generally used by groups of professionals who are not permitted to incorporate and obtain full limited liability. Although the assets of the LLP are available to pay for debts and claims, its partners are liable only for their own negligence, or the negligence of employees under their direct supervision and control.

Co-ownership

If two or more persons jointly own property they are called co-owners. It is clear from section 3 of the Partnerships Act that such a relationship alone does not result in a partnership, even if the co-owners share in the profits generated by the property. The most significant characteristic of a co-ownership is that in a co-ownership each co-owner owns and is free to deal separately with his or her interest in the property, unless he or she has limited his or her freedom to do so by contract with the other owners. As opposed to this, in a partnership, the partners have no separate interest in the property. The partners, each of them, have a right to a division of the profits of the partnership. When a partner wishes to sell his or her interest, it has to be sold as a partnership interest, not an interest in the assets of the partnership.

Corporations

The most common form of business organization is a corporation, which is a legal entity separate in law from its owners, and can own property, carry on business, possesses rights and incur liabilities. Through their ownership of shares the shareholders own the corporation, but they do not own the property belonging to the corporation, and the rights and liabilities of the corporation are not the rights and liabilities of the shareholders.

In exchange for shares, the shareholders have transferred to the corporation (in the form of money, property or past services) their assets, and hence, their liability is limited to the value of the assets they invested in the corporation. So, if a corporation incurs liabilities in excess of the value of its assets, its creditors can demand to be repaid from the assets of the corporation, but have no further recourse for the unpaid liabilities. It is possible that shareholders in their personal capacity have guaranteed the obligations of the corporation. In that event, they would effectively lose their limited liability. However, not all debts of a corporation would be guaranteed by the shareholders. It is so, because corporations are distinct legal entities. A corporation can sue in its own name and enjoy perpetual existence (“A Going Concern”). It continues notwithstanding the death or withdrawal of a shareholder by the sale of his or her shares.

Joint ventures

As joint ventures have not been precisely defined in legal terms, a number of meanings have been attributed to the term, including:

  • A partnership;
  • An association of two or more persons for a limited purpose (when the participants are not partners); or
  • Any combination of two or more persons to conduct a business jointly under previously agreed rules.
  • Whatever be the relationship between the venturers, in most instances, the co-venturers have a written agreement spelling the rules by which the venture will be governed.

Generally, such agreements include matters like the nature of the business in which the joint venture will engage; the contribution of each co-venturer;  each co-venturer’s share in the profits and losses; and so on.

When deciding on how to setup, startup and finance your business, or on which form of legal enterprise to use contact the expert lawyers at Levy Zavet PC.

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