You’ve got the idea, the hustle, and maybe even a logo. But before you dive into business cards and branding, there’s one not-so-fun (but very important) question to answer: How should you legally set up your business?
In Ontario, you have a few main options — each with its perks, pitfalls, and paperwork.
- Sole Proprietorship: The One-Person Show
What it is: You are the business. Under this structure, income and expenses go directly on your personal tax return.
Pros: A sole proprietorship is simple and inexpensive to set up. You retain all the profits, and there is minimal ongoing paperwork (hello, no annual filings – but we will get to that later).
Cons: You’re personally liable for everything. If the business owes money, so do you. Raising capital can be tough, and its not ideal for scaling or bringing in partners.
Best for: The approach is best suited for early-stage freelancers, consultants, or anyone testing the entrepreneurial waters.
- Partnership: The Dynamic Duo (or Trio, or More)
What it is: Two or more people join forces to make money together — and share the results (for better or worse).
Pros: This structure is easy to start (a handshake works, though we strongly recommend a written agreement if you don’t want a legal headache down the road). The investment, ideas, and workload is shared. Under a partnership, you pass-through taxation — profits and losses flow to each partner personally.
Cons: A partnership is still not considered a separate legal entity. Under this business structure, the liability is shared as well — this means your partner’s mistakes can cost you. Remember those headaches we warned abut above? Well, disagreements can get messy without a clear partnership agreement.
Best for: This business structure is best suited for small teams who trust each other — and have a solid partnership agreement drafted by, say, a lawyer you know.
- Corporation: The Grown-Up Structure
What it is: A separate legal entity — meaning the business is its own “person” (with fewer emotions and more tax filings).
Pros: Under this business structure, your personal liability is limited and your personal assets are better protected. There are also potential tax advantages, like income splitting and deferral. It’s also easier to raise capital or sell the business down the road. A corporation can also add credibility — “Inc.” has a nice ring to it.
Cons: Losses can’t be deducted from personal income. This involves a more complex setup – complete with the requirement for annual filings (don’t worry though – we handle this). Corporations also cost more to maintain (lawyers and accountants will become your new best friends when you decide to incorporate).
Best for: Businesses planning to grow, take on investors, or protect personal assets.
- Bonus Round: Incorporate Federally or Provincially?
In Ontario, you can incorporate under the Ontario Business Corporations Act (OBCA) or federally under the Canada Business Corporations Act (CBCA).
Federal gives you broader name protection across Canada; provincial is often simpler and cheaper if you’re staying local.
The Bottom Line
There’s no one-size-fits-all answer — your structure depends on your goals, risk tolerance, and growth plans.
If you’re not sure which path to take, talk to a lawyer (that’s us). We’ll help you set up your business depending on your needs — and keep you out of trouble later.
Robin K. Mann, Associate Lawyer