Starting a business is an exciting time, but it can also be a confusing and overwhelming process. One of the key decisions that you will need to make is choosing the appropriate legal structure for your business. The two most common legal structures for businesses in Ontario are partnerships and corporations. In this blog, we will discuss the advantages and disadvantages of each and help you decide which is right for your business.
A partnership is a business structure where two or more people share ownership of a single business. Each partner contributes to the business financially, and in turn, shares in the profits and losses of the business. Partnerships are governed by the Ontario Partnerships Act.
Advantages of a partnership:
- Shared responsibility and decision-making: Partnerships allow for shared responsibility and decision-making, which can be beneficial for businesses that require diverse skill sets.
- Easier to set up: Partnerships are relatively easy to set up and require minimal legal documentation.
- Lower costs: Partnership businesses are generally less costly to set up and maintain than corporations.
Disadvantages of a partnership:
- Unlimited liability: Each partner is personally liable for the debts and obligations of the partnership. This means that if the business cannot pay its debts, the partners are responsible for paying them out of their personal assets.
- No separate legal entity: A partnership does not have a separate legal existence from its partners. This means that partners can be held personally responsible for the actions of other partners.
- Limited growth potential: Partnerships can be less attractive to investors and lenders because they do not offer the same level of liability protection as a corporation.
A corporation is a separate legal entity from its owners. Shareholders own the corporation and elect a board of directors who are responsible for managing the corporation. Corporations are governed by the Ontario Business Corporations Act.
Advantages of a corporation:
- Limited liability: Shareholders are not personally liable for the debts and obligations of the corporation. This means that their personal assets are protected in the event that the corporation is sued or cannot pay its debts.
- Perpetual existence: Corporations have perpetual existence, which means that the business can continue to operate even if one or more shareholders leave the business.
- Easier to raise capital: Corporations can issue shares of stock to raise capital. This makes it easier to attract investors and obtain financing.
Disadvantages of a corporation:
- More complex to set up: Corporations require more legal documentation and are generally more complex to set up than partnerships.
- Higher costs: Corporations are generally more costly to set up and maintain than partnerships.
- Greater government oversight: Corporations are subject to greater government oversight and regulation than partnerships.
Deciding whether to set up your business as a partnership or corporation is an important decision that will have a significant impact on your business. Each structure has its own advantages and disadvantages. While partnerships offer shared responsibility and decision-making, corporations provide limited liability protection and easier access to capital. It is important to consult with an experienced Ontario business lawyer who can help you navigate the legal complexities of each structure and guide you in making the right decision for your business.
At Falcon Law PC, we have years of experience in helping businesses of all sizes navigate the complexities of Ontario business law. If you are unsure about which legal structure is right for your business or have questions about partnership or corporation law, please don’t hesitate to contact us at 1-877-892-7778 or firstname.lastname@example.org. We are always happy to help.