Oliver Xing
Chartered Accountant
203-255 Duncan Mill Rd.
Toronto, ON Canada M3B 3H9
Tel:416-510-2991  Fax:416-510-0851

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Sole Proprietorship







There are several ways to start a business, with each structure having its tax and legal advantages and disadvantages. Before you decide which form is best, you should consider such aspects as personal liability, business name protection, tax advantages and registration or filing costs. The way your business is taxed has a lot to do with the way your business is set up.

There are mainly three forms of business: Sole Proprietorship, Partnership and Corporation.

A sole proprietorship is an unincorporated business that is owned by one person.  It's the simplest kind of business structure.

The owner of a sole proprietorship has complete control over a business, and receives all of the profits from that business, but is personally liable for all of the debts and liabilities of that business, and this liability extends even to the proprietor's personal property and assets.  This is known as unlimited liability. 

A sole proprietorship is not required to be registered if the business is carried on under the owner's own name (e.g. Jane Doe).  However, if the business uses a name other than the owner's, or any other words are added to the owners name (e.g. Jane Doe Cosmetics), a declaration must be filed under the Business Names Act before you start using it. Registered names are valid for five years. 

A sole proprietor pays taxes by reporting income (or loss) generated by the business on a personal income tax return (T1).  The income (or loss) forms part of the sole proprietor's overall income for the year.  The income tax return must include financial statements or one or more applicable forms such as Form T2124, Statement of Business Activities; Form T2032, Statement of Professional Activities.

A partnership is an arrangement where two or more persons agree to combine their resources (money, labour, property, or skills) in the operation of a business. 
In return, each partner is entitled to a share of the profits or losses in the business. The business profits or losses are usually divided among the partners based on the partnership agreement.

It is strongly recommended to draw up a written partnership agreement to establish the terms of the business, profit sharing and to protect partners/ shareholders in the event of disagreement or dissolution of the business.

There are two types of partnerships, General Partnerships and Limited

In a General Partnership, each partner shares in the management of the business and has personal liability for all the debts and obligations of the business. 

In a Limited Partnership, some partners are "General Partners" who control and manage the business, while some partners are "Limited Partners" who contribute capital only, take no part in the management of the business, and can limit their liability to the value of their contribution to the partnership. There must be at least one managing partner in a limited partnership, and the managing partner has unlimited liability. A limited partner becomes a general partner if he or she takes part in the management of the partnership. A legal document, setting out specific requirements, must be drawn up for a limited partnership. 

A partnership by itself does not pay income tax on its income, and it does not file an annual income tax return. Instead, each partner reports his or her share of the partnership income or loss on a personal income tax return.  Each partner also has to file either financial statements or one or more applicable forms such as Form T2124, Statement of Business Activities; Form T2032, Statement of Professional Activities.  This requirement remains, whether the share of income was received in cash, or as a credit to a capital account in the partnership.

A partnership has to file a partnership information return if, throughout the fiscal period, it has six or more members or if one of its members is a member of another partnership.

A corporation is a separate legal entity, distinct from its shareholders. Incorporation offers your business a number of advantages including business name protection, transferability of business ownership, possible tax advantages and limited liability
in the sense that  you and the other shareholders are not responsible for the corporation's debts.

Canadian companies may be incorporated either federally or provincially.  If your business will operate primarily in Ontario, provincial incorporation may be desirable.  If your business will operate in a number of provinces, you may wish to consider federal incorporation. Under provincial incorporation your business name is protected only in the province. As a federally incorporated business, the name has national protection. 

The process of business incorporation has three main elements:

NUANS Name Search 
A name search (unless you are going to be operating a numbered company) must be conducted by a Searcher of Records, and confirms that no one else has a business or registered trade mark with a name the same as, or similar to, the one you have proposed. 

Articles of Incorporation 
Articles of Incorporation are legal documents that establish your business, and must be approved by the government before you do business under that business name. 

Fee to file your application for incorporation
Fees vary according to the level of government to which you are applying. 

Since a corporation has a separate legal existence, it has to pay tax on its income, and therefore must file its own income tax return (T2) within six months of the end of every taxation year, even if it doesn't owe taxes.  It also has to attach complete financial statements and the necessary schedules to the T2 return.  A corporation pays its taxes in monthly instalments. 

For more information on federal and provincial corporate tax, please refer to Taxation - Corporate Tax.

For information on incorporating a Federal or Ontario Corporation offered by Oliver Xing, Chartered Accountant, please refer to Federal Incorporation or Ontario Incorporation.

For information on NUANS Name Search, Minute Book or Corporate Seal offered by Oliver Xing, Chartered Accountant, please refer to NUANS Name Search, Minute Book or Corporate Seal.

To order online your Federal or Ontario Incorporation Package, NUANS Name Search, Minute Book or Corporate Seal of your choice, please fill in the online Incorporation Order Form or Contact Us for more information.

For step-to-step information on incorporating and starting a new business,
please refer to Business Startup.