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One of the first considerations for an entrepreneur before commencing a business is selecting the appropriate type of business vehicle for the endeavour. This article outlines some of the advantages and disadvantages of the main business structures in Ontario: sole proprietorships, general partnerships, limited partnerships, limited liability partnerships and corporations. The most appropriate business vehicle for the individual will, however, always depend on the particular circumstances of the contemplated business.

Sole Proprietorship

The main advantage of a sole proprietorship is the ease with which the business can be commenced and dissolved. The business is simply formed when one individual starts to carry on business, and it ceases to exist when such individual no longer engages in such business. Nothing more formal is required, except that, depending on the business, you may still need to apply for any required governmental permits or licences. A business name need not be registered if the owner is using his or her own name to conduct the business.

Furthermore, by virtue of being a sole proprietor, he or she has complete control over business decisions and is generally not accountable to others, other than by contract and tort exposure. The ease of operating the business as a sole proprietorship also means that there are usually only modest expenses to starting it up.

The key disadvantage of sole proprietorships is that there is no legal separation between the individual owner and the business. Therefore, the owner is fully liable for all the debts and obligations of his or her business, regardless of how carefully he or she segregates it from all other activities. Creditors of the business become creditors of the owner personally, leaving the owner’s personal assets exposed to claims by creditors. Securing proper insurance may help to mitigate some of the risks.

The owner will also need to declare all revenues and expenses of the business when filing his or her own personal tax returns, which can be disadvantageous from a tax perspective if the business is very profitable (on the other hand, business losses could offset the owner’s other income from employment or other investments, which can be tax-efficient).

There is also no continuity of the business if the sole proprietor passes away. The business dies with him or her and cannot be passed on.

General Partnership

Like the sole proprietorship, a partnership is also simple and relatively inexpensive to form and operate. When two or more individuals or corporations conduct business together with a view to profit, they are typically considered to be operating as a partnership.  There are few formalities required, and the partners can have great flexibility in designing the internal managerial structure of the partnership. The capital and resources required to start up the business can be divided among the partners involved. A well-drafted partnership agreement can also provide a useful blueprint for the partners of how to operate the partnership, how business decisions can be made, the respective rights and responsibilities of each partner, how to deal with profit and loss sharing, how to handle the departure of a partner from the business, and can help to limit disputes among the partners.

Similar to sole proprietorships, the partners in a partnership also have the ability to deduct losses from the partnership business against their income from other sources for tax purposes, which can be beneficial from a tax perspective.

Disadvantages of partnerships as compared to sole proprietorships include the compliance with registration requirements under the Business Names Act for partnerships and the obligation to give notice to creditors under the Partnerships Act if a partner retires. A disadvantage that a partnership shares with a sole proprietorship is the unlimited liability, given that there is no separate legal personality of the partnership. In the case of a partnership, this unlimited liability arises jointly, or jointly and severally for all debts of the partnership, even for those debts incurred by the other partner, since each partner can bind the partnership. Liability can, however, be limited by forming a partnership of two or more corporations, or by forming a limited partnership or limited liability partnership as described in the sections that follow.

It should also be noted that a partner may be a creditor or debtor or employee of his or her co-partners, but not of the partnership. In other words, a partner cannot be employed by his or her own firm. Furthermore, any fundamental change to the partnership (e.g., change in nature of the business, expulsion of a partner, variation of default rules) would require unanimous consent of the partners. This disadvantage can be overcome by careful drafting of a partnership agreement.

Limited Partnership

The limited partnership allows for some partners (limited partners) to have limited liability with respect to the limited partnership. The limited partner’s liability is limited to his or her investment in the limited partnership. The disadvantage from the perspective of the limited partner is that this limited liability status comes at a cost – the limited partner cannot have any managerial control of the partnership or in the direction of the business.

There must also be at least one general partner, who has the control and management of the limited partnership but is also liable for all the debts and obligations of the limited partnership. Such liability can be somewhat limited if the partners use a corporation to act as the general partner, but doing so may complicate the business structure and increase the overall costs.

Limited partnerships can also provide certain tax advantages and are relatively simple to form. Other than complying with the Business Names Act, the only additional legal requirement is registering the limited partnership under the Limited Partnerships Act.

Limited Liability Partnership

The limited liability partnership shields a partner from liability for negligent or other wrongful acts of another partner, and it does not curtail the right to be an active partner in the business. It, too, provides certain tax advantages.

Nonetheless, the limited liability partnership is only available to certain regulated professions (e.g., doctors, lawyers), and it requires some effort and compliance with registration formalities.

Corporation

The main advantage of the corporation is that it is a distinct legal entity, separate from its shareholders (i.e., owners), directors, and officers. It can sue and be sued in its own name, it can enter into contracts (even with its own shareholders), it can own property, and it provides for perpetual succession, which means that it can continue to exist notwithstanding any changes to its shareholders or directors. Perhaps most importantly, shareholders are not generally liable for debts or other obligations of the corporation. The corporation alone is liable for its debts and obligations and this liability is limited to the corporation’s own assets (except for a few caveats, such as if the shareholder agreed to pledge its personal assets as collateral to a creditor of the corporation, personally guaranteed a loan given to the corporation, or if the corporation was formed for an improper or illicit purpose). In most cases, the shareholders only stand to lose the investments they made in the corporation.

Another significant advantage of operating your business through a corporation is the potential tax benefits. Not only is the business income that is kept in the corporation subject to the lower corporate tax rate (as compared to the individual tax rate), if the corporation’s share structure is organized properly, there could also be income-splitting opportunities with lower-income spouses and adult children. The shareholders may also be able to take advantage of the lifetime capital gains exemption (around $800,000) when they dispose of their qualifying small business shares of the corporation. Consulting with a corporate accountant is always highly recommended to determine if and how one could benefit from these tax advantages provided by a corporation.

There are, however, also some key disadvantages that should be considered before choosing to run your business by way of a corporation. For example, the incorporation process can be time-consuming, complex and costly. It involves making certain required government filings,  conducting name searches to ensure the proposed corporate or trade name can be used and preparing many corporate documents to comply with corporate laws.

In addition to the work involved with incorporating, the maintenance of the corporation, too, is more demanding than in the case of the other business vehicles. The corporation’s directors are required to hold meetings, elect officers, and provide shareholders with information. The shareholders must also hold at least an annual meeting to elect the directors, and deal with other formal corporate matters. These requirements, in the case of one-person and closely held corporations, have been greatly simplified by legislation,  but still require the preparation of corporate documentation that must be maintained and recorded in the corporation’s minute book, at least annually. An annual return and corporate tax return must also be filed by the corporation each year.

The creation, maintenance and dissolution/winding up of a corporation are all typically more costly than with other business vehicles, especially when you account for professional fees (e.g., legal and accounting).

Given all the above considerations when contemplating the right business structure, it is prudent that entrepreneurs involve an experienced business lawyer and accountant in the process.

If you require assistance in corporate law, please feel free to contact Stephen Sforza at 905-668-4486 or Stephen@durhamlawyer.ca.

“This article is intended to inform. Its content does not constitute legal advice and should not be relied upon by readers as such. If you require legal assistance, please see a lawyer. Each case is unique and a lawyer with good training and sound judgment can provide you with advice tailored to your specific situation and needs.”

This past year brought many changes as Canadians learned to navigate the expected and unexpected effects of a global pandemic. We look back at 2020’s GTA real estate market and share some insight into a year that was anything but predictable.

Following the lockdowns in early spring and despite a nearly 70% plunge in the Toronto real estate market in April of 2020, numbers managed to climb to a record high in the course of the second half of the year. By June, the market began to make up for the slow spring market, with the end of 2020 boasting sales that exceeded 2019 numbers by 8.4%, and the average selling price for all home types combined was up by 13.3% to $955.615.

Reasons

Most predictions concerning the Toronto real estate market of 2020 were mistaken. In April, the vast majority of real estate and investment experts anticipated a decline in both property sales and prices. It seemed likely that a drop in pricing and sales would stem from the stagnant demand for housing caused by historic job losses, collapsing equity markets, and stalled immigration.

However, low-interest rates and higher savings enabled many first-home buyers to seize the opportunity to enter the market when they had previously not been able to. According to Statistics Canada, while Canadians saved 2-3 percent of their disposable income before the pandemic, that percentage increased to 28.2 percent in the second quarter of 2020. Furthermore, Canadians that generally fall into the home-buying category were least likely to suffer from job losses.

Additionally, the market’s rapid recovery and success is partially due to the shared longing for more living space, which led to immense competition for certain property types. Staying at home, working from home, working out at home, and home-schooling put significant strain on those in small living spaces, driving many occupants to look for larger alternatives, often outside of the downtown area. At the same time, condominium units declined in popularity, with this sector of the Toronto real estate market falling by 6.7%.

What 2021 May Bring

With the COVID-19 vaccine becoming widely distributed and with historically low-interest rates that are likely here to stay, 2021 looks as though it will be a strong year for the Toronto real estate market. Potential home-buyers will again be comfortable to attend viewings and sellers will allow people into their homes for open houses that have often been conducted virtually in the second half of 2020.

Moreover, the government is targeting high immigration numbers for 2021 and expects the return of both international students and non-permanent residents, which will bolster the housing demand in the post-pandemic GTA.

If you require assistance with your real estate purchase or sale or refinance, please feel free to contact Paria Rad at 905-668-4486 or paria@durhamlawyer.ca.

“This article is intended to inform. Its content does not constitute legal advice and should not be relied upon by readers as such. If you require legal assistance, please see a lawyer. Each case is unique and a lawyer with good training and sound judgment can provide you with advice tailored to your specific situation and needs.”

If you have entered into a new-build home agreement, it is strongly advisable that you have your agreement reviewed by a legal professional for the following reasons.

TARION Registration

Legal counsel will verify that the new home builder is registered with TARION, the corporation that administers the Ontario New Home Warranties Plan Act (the Act), and that the home itself is enrolled under the Act. If they are not so registered or enrolled and there is no applicable exception under the Act disqualifying the home from enrolment, this will deprive the purchaser of the benefits provided under the Act. Accordingly, the purchase agreement would need to be adjusted for homes that do not qualify for enrollment under the Act, because in that case, the purchaser cannot rely on statutory warranties under the Act, but on contractual warranties only.

TARION Warranty Coverage

A review of the new-build agreement with counsel will ensure that the purchaser is knowledgeable about the filing requirements of and the deadlines up to which a warranty service request or claim can be made.

TARION assists with the enforcement of vendor warranties. For example, in the new-build agreement, the vendor will warrant that the home is constructed in accordance with Ontario’s Building Code, is fit for habitation, and is free from defects in workmanship and materials and major structural defects. If a dispute arises concerning such warranties, TARION conducts an assessment of the warranty claim by inspecting the building or by other investigation. Furthermore, if the vendor refuses compensation for violating a warranty, TARION itself will compensate the purchaser out of a guarantee fund it maintains. For these protections to take effect, the purchaser must adhere to strict deadlines that vary with the nature of the discovered deficiency.

Deposit

TARION insures the purchaser’s deposit up to a limit depending on the purchase price in the event of default of the vendor. Hence, counsel will advise that there should not be a deposit paid by the purchaser in excess of the TARION insurance. Furthermore, if the deposit exceeds 30% of the purchase price, the purchaser will be regarded as a homeowner upon making the payment, and no longer a home purchaser. Consequently, the purchaser may be responsible for any construction lien claims registered after closing against the new home and may be subject to statutory holdback liabilities concerning such claims.

HST Rebate

Counsel will also advise the purchaser on the requirements to obtain the first-time purchaser HST rebate. New-build home buyers are eligible for this rebate, which can amount to up to $24,000.00, if the home will be utilized as their primary residence, or the primary residence of certain blood-relatives.

Modifications Post-Closing

Counsel will also draw the purchaser’s attention to the fact that vendors and builders are permitted to substitute certain materials from the plans and specifications for materials of equal quality. It may also be the case that the purchaser is permitted to select certain colors or materials from the vendor’s samples. Upon the purchaser’s failure to make such a selection within a specified timeframe, the vendor may make the selection on the purchaser’s behalf.

Substantial Completion

Another surprise that may await a purchaser who does not have legal counsel reviewing the purchase agreement can be the obligation to begin occupation of the dwelling upon its “substantial completion”. Substantial completion is reached when the dwelling complies with legislative standards. This can require significantly lower degrees of completion than the purchaser may expect. The building must merely be fit for habitation, have completed structural, mechanical, plumbing, and electrical systems, and comply with safety and health standards. This does not necessarily require that certain luxurious items are installed, or that the exterior of the building is finished.

The purchaser may not hold back any part of the purchase price notwithstanding that there may be exterior work to be completed such as painting, driveway, grading, seeding, etc. The vendor shall complete any outstanding details within a reasonable time thereafter. Failure to fully complete these items will not allow the purchaser to refuse to close, nor does it entitle him or her to a reduction of the purchase price.

If you are seeking legal advice in relation to your new-build home or other real estate matter contact Jonathan Dippolito at 905-668-4486 ext 229 or jdippolito@durhamlawyer.ca.

“This article is intended to inform. Its content does not constitute legal advice and should not be relied upon by readers as such. If you require legal assistance, please see a lawyer. Each case is unique and a lawyer with good training and sound judgment can provide you with advice tailored to your specific situation and needs.”

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