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Business Types One of Three – Corporation

October 15, 2014 - 0

There are three ways you can organize a business – a proprietorship, a partnership or a corporation. In this blog we review the setup of a corporation.

A corporation is a separate legal entity from its owner(s). A corporation is sort of like a separate person in the eyes of the law. It can enter into contracts and it can be sued. It can and must set up its own bank account and it can take advantage of monetary vehicles like loans, credit cards and lines of credit, all in its own name. Lastly, it is subject to taxation by various levels of government.

A corporation has to be created or incorporated before it can begin business. Incorporation in Ontario is done by submitting the required paperwork and fee to the province through a registry office. The province in turn creates or incorporates the corporation with the words Limited (Ltd) or Incorporated (Inc) at the end of its name. So when you see Ltd or Inc at the end of a business name you know it is a corporation rather than a proprietorship or a partnership. It is also possible to incorporate federally for companies wishing to regularly do business on a national scale.

The owner(s) of a corporation are called shareholder(s). Although the owner or owners operate the business they do so in the name of the corporation. The internal rules that govern how they operate and do business are laid out in a Shareholder Agreement.

The corporation:

  • Would buy the equipment and supplies it needs to operate (even if it used the owner’s money to do so)
  • Would hire and pay employees
  • Would earn any profits or incur any losses
  • Would have to file its own corporate tax return and pay its own taxes

To sum up, a corporation is a separate legal entity, created by the province or federal government. It enjoys the fruits of its own labor (or the labor of its owners and/or employees). The owner benefits by the increase in the value of the company and thus the value of his or her shares. The corporation may also pay him or her a salary and/or dividends.

We will be doing a blog on the advantages and disadvantages of proprietorships, corporations and partnerships but if you would like to find out which way of doing business is best for you please give us a call. We would be glad to sit down with you to discuss your plans and determine which method of organizing your business would be best for you.

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