Some of the key issues to consider in answering this question, include:

1. Liability;
2. Ownership and Control;
3. Financing; and
4. Tax and Estate Planning.

Liability

One of the main advantages of incorporating your business is the limited liability of the corporate structure. A corporation is a distinct legal entity that is separate and apart from its owners (i.e. the shareholders). As a general rule, no shareholder of a corporation is personally liable for the debts, obligations or acts of the corporation. However, directors and officers of the corporation can have some liability for the decisions they make and the things they do (or fail to do) on behalf of the corporation.

A sole proprietorship, on the other hand, is not a legal entity separate from its owner (i.e. the sole proprietor), and thus the sole proprietor is personally liable for all of the debts, obligations and acts of the business (including any wrongs committed by employees in the ordinary course of their employment). All personal assets of the sole proprietor may be seized to satisfy the debts and obligations of the business.

Like a sole proprietorship, a partnership is not a legal entity separate from its partners. The assets and liabilities of the partnership business are considered the assets and liabilities of the partners themselves. Each partner is jointly liable with the other partners for all debts and obligations of the partnership business (incurred while the person is a partner). Partners are also jointly liable for any wrongful acts or omissions of a partner acting in the normal course of the business (thus you should choose your partners wisely).

A limited partnership involves a partnership between at least one limited partner and at least one general partner. Liability of the limited partners is limited solely to what they have invested in the partnership (so long as they do not take part in the control or management of the business), while the general partner (who is responsible for managing the business) faces unlimited liability for all debts and obligations of the business (although personal liability can be minimized by using a corporation as the general partner).

Ownership and Control

As the sole owner of the business, the sole proprietor has absolute control over all decision-making and management of the business.

General partnerships are flexible in matters of ownership and control of the business, as such matters can be determined by the partners themselves in the form of a partnership agreement entered into between the partners. However, in the absence of such a partnership agreement, the ownership and control of a general partnership is governed by default rules under the Ontario Partnerships Act (e.g. each partner has an equal right to take part in the management of the partnership business, and a right to share equally in the capital and profits of the business).

In a limited partnership, the general partner has all of the rights and obligations of a partner in a general partnership (including the right to manage the business). This is subject, however, to the provisions of Ontario’s Limited Partnerships Act requiring the consent of the limited partners for certain actions to be taken by the general partner. A limited partner may not take part in the control or management of the business (as doing so will cause the limited partner to lose his or her limited liability status and be subject to the unlimited liability of a general partner).

In a corporation, the directors have responsibility for managing the business (or at least supervising the management of the business). Officers are appointed by the directors and can only exercise the specific management powers delegated to them by the directors. Ultimately, the shareholders have the power to elect the directors, and the shareholders retain the power to vote on and approve certain fundamental changes to the corporation or its business that are proposed by the directors.

Financing

In a sole proprietorship, available capital is generally limited to the sole proprietor’s assets. Obtaining debt financing from third parties may be difficult for sole proprietors who do not have sufficient personal or business assets to secure a loan.

With a greater number of owners, a partnership structure provides greater opportunity to access funds from the individual partners. Debt financing can also be easier to obtain as lenders can look to the collective assets of all of the partners to secure a loan.

A limited partnership can raise equity capital by attracting passive investors (i.e. limited partners) that are looking for a financial return from the business without the unlimited liability or management responsibility associated with being a partner in a general partnership. The ability to obtain debt financing from third parties will likely depend on the sufficiency of the business assets that such lenders will have recourse to.

Similar to a limited partnership, an incorporated business can attract larger numbers of equity investors (i.e. shareholders) by offering such shareholders limited liability together with an equity interest in the business. By creating different classes of shares (each class having different rights and privileges) opportunities for equity financing can be broadened to appeal to specific investor preferences and demands. Since a corporation owns its own property, lenders can look to the assets of the business as security for the loan (although in practice loans to small businesses often require a personal guarantee from one or more shareholders).

Tax and Estate Planning

Since there is no legal distinction between a sole proprietorship and the owner (i.e. the sole proprietor), the sole proprietor is taxed directly on the income or losses of the sole proprietorship. This allows losses from the business (e.g. incurred during the start-up of the business) to be offset against other sources of personal income, reducing the net income tax otherwise payable. On the other hand, once the business becomes profitable, the business income will be added to any other sources of personal income and taxed at rates that may be higher than the special rates applicable to business corporations. The ability to offset losses against other income often justifies starting and keeping a business as a sole proprietorship until it becomes profitable, at which time it can be converted to a corporation.

Opportunities for estate planning are quite limited for sole proprietorships, since the business will effectively dissolve upon the death of the sole proprietor (unless the business is sold or the business assets are transferred as a going concern by the estate of the deceased).

For general partnerships, business income and losses are calculated at the partnership level, but the partnership itself is not subject to tax. Instead, the income or loss of the business is allocated to, and taxed in the hands of, each individual partner. Because new businesses frequently experience initial losses, the flow-through tax treatment of a general partnership can often benefit the partners by allowing them to immediately apply any losses from the business to offset personal income from other sources. The ability to offset losses against other income often justifies starting and keeping a business as a partnership until it becomes profitable, at which time it can be converted to a corporation.

Since a partnership is not a legal entity separate and apart from its partners, its continued existence is somewhat fragile. Unless the partners have agreed otherwise, the partnership will terminate upon the death or insolvency of any partner.

Limited partnerships generally enjoy the same flow-through tax treatment as a general partnership, however there are additional technical tax rules that may limit the application of business losses under certain circumstances.

The death or bankruptcy of a limited partner will not terminate the limited partnership (provided that there is always at least one limited partner).

However, the retirement, death or incapacity of a general partner, or the dissolution of a corporate general partner, automatically dissolves a limited partnership (unless there is a remaining general partner, in which case the business may continue with the consent of all of the remaining partners if the right to do so is set out in a limited partnership agreement).

Since a corporation is a separate legal entity from its shareholders, it is the only form of business that is taxed directly. This precludes the often beneficial flow-through tax treatment available to partnerships and sole proprietorships, and leads to a second level of taxation when profits are ultimately distributed to the shareholders by way of dividends. On the other hand, if the business is profitable and the profits are retained in the corporation (rather than distributed to the shareholders), corporate tax rates are generally lower than the personal tax rates applicable to individual partners or sole proprietors. Also, shareholders may take advantage of their lifetime capital gains exemption when the business is sold (provided that the sale is structured as a sale of the shares of the corporation and such shares qualify for tax purposes as “qualified small business corporation shares”)

Since a corporation is a separate legal entity, it continues to exist notwithstanding the death or withdrawal of a shareholder or director. Corporate structures offer a great deal of flexibility when it comes to estate planning. For example, by tailoring the rights and privileges of different classes of shares, a principal shareholder may be able to maintain control over the business while allowing the growth in value of the business to accrue to successive generations.

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Probate is the legal process by which a court confirms the authority of an executor (estate trustee) to deal with the assets of a deceased person. While probate is generally not required as a matter of law, it is required as a practical matter by most financial institutions, land registry offices and other authorities whose cooperation is needed to transfer title to certain estate assets.

In Ontario, the estate administration tax is levied at a rate of $5 per $1,000 for the first $50,000 of estate value, and $15 for every $1,000 of estate value in excess of $50,000. The estate value generally includes the value of all property that belonged to the deceased person at the time or his or her death (less the value of any mortgages on real property, real property outside of Ontario, jointly owned property that passes by right of survivorship to another person, and life insurance, RRSPs and RRIFs payable to a named beneficiary).

The problem, however, is that if probate is required for any of the deceased’s assets, all of the estate assets governed by the will must be included in the total estate value for the purposes of calculating the tax payable (including those assets with respect to which it would not have otherwise been necessary to obtain probate).

A solution to this problem is to have two wills: (i) a “public” will concerning those assets of the estate for which probate will likely be required; and (ii) a “private” will for those assets of the estate for which probate will most likely not be required, such as private company shares held by the deceased (since the transfer of title to such shares typically only requires the consent of the directors of the company, who are generally prepared to give their consent to such a transfer based on whatever evidence they deem sufficient in the circumstances). While this makes the drafting of wills a little more complicated, the potential tax savings for a reasonable-sized estate can be significant.

While the use of multiple wills as a legitimate estate planning strategy has generally been accepted by the Ontario courts, one cannot guarantee that probate will not be required for the so-called “private” will in all circumstances (e.g. where such will is contested by some of the estate beneficiaries or others, etc.).

The proper implementation of this strategy requires very careful drafting of the two separate wills (e.g. to ensure that the “private” will does not revoke or override the “public” will, or vice versa). It is also important that the assets dealt with under each will are carefully defined so that there is no overlap between the two wills, nor any assets that are not dealt with under either will (i.e. that fall between the cracks). As with any estate planning, the retention of a properly qualified legal professional is highly recommended.

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Federal not-for-profit corporations incorporated under Part II of the CCA were given three years to transition to the CNCA to avoid dissolution. However, even if you missed the October 17, 2014 transition deadline, it may not be too late to complete the transition (as dissolution is not automatic, and there is a 120 day grace period in which to comply even after you receive a formal notification that Corporations Canada plans to dissolve your not-for-profit corporation).

As a reminder, there are generally 5 steps in the federal not-for-profit transition process:

1. Review the current Letters Patent and Bylaws, and decide whether to retain or remove any provisions that are no longer required.
2. Prepare Articles of Continuance (if the corporation is also a registered charity, the draft Articles of Continuance should be sent to the Canada Revenue Agency for pre-approval before filing them with Corporations Canada).
3. Amend the Bylaws in accordance with the new requirements, default provisions, and choices available under the CNCA.
4. Obtain member approval at a members’ meeting duly called under the corporation’s existing corporate governance rules (with approval by at least two-thirds of the members).
5. File the Articles of Continuance with Corporations Canada, along with the initial registered office address and first board of directors form, and the amended Bylaws (note that the Bylaws can be filed within 12 months of their confirmation by the members).

Although the Ontario Not-for-Profit Corporations Act (ONCA) passed third reading in the provincial legislature in 2010, it has not yet been proclaimed in force. In order to be proclaimed, additional legislation must be introduced to deal with technical amendments required to implement the ONCA. This bill (titled “Bill 85” in its most recent form) was in the midst of second reading in May of 2014 when the last provincial election was called, and thus “died on the order paper”. As a result, a new bill will have to be re‑introduced and the legislative process started all over again (beginning with first reading, followed by second reading, committee review and third reading, and finally Royal Assent).

The ONCA is thus unlikely to take effect before 2016, and existing Ontario not-for-profit corporations will still have a period of three years from the date it is proclaimed in force to implement the required changes.

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