A sole proprietorship is a business that is owned by one person. It is the simplest type of business to start. There are several important features of a sole proprietorship. First, the business and the owner are considered to be one entity under the law. Second, all of the assets of the business are personally owned by the sole proprietor. Third, the sole proprietor is not considered an employee of the business. The sole proprietor is not paid a salary, but instead can take money from the business through personal drawings.
Having a sole proprietorship has several advantages and disadvantages, including important tax implications.
One of the advantages of being a sole proprietor is that its operation is simple, there is less paperwork. You also get to keep the profits from the business and you have the freedom to end your business whenever you want. A sole proprietorship is the easiest form of business to start. And, although you need to keep separate accounting records for the business, you only need to file one tax return. There is no difference between you and your business.
Having a sole proprietorship also has disadvantages. The owner is personally responsible for all aspects of the business. If the business is being sued, so is the business owner. If the business owes money, the business owner is responsible for the debt, and the owner may have to use personal assets to pay. All the personal assets of the sole proprietor remain exposed to potential debts and claims arising from business. . If the owner cannot pay the debts of the business, he or she may have to claim personal bankruptcy. The only way to transfer ownership of a sole proprietorship is to sell the entire business to someone else. Otherwise, the life of the business ends when the sole proprietor dies.
There are also important tax implications of operating a sole proprietorship. Net business income from a sole proprietorship must be included as part of the sole proprietor's personal income. However, if the business suffered a loss, the owner can deduct the loss from other income he or she has received for that year. This will lower the overall taxable income of the owner and reduce the amount of personal income tax that must be paid. If the business made a profit, the profits are taxed at the owner's personal income tax rate which is generally higher than corporate tax rate. In general, it is better from a tax standpoint to be a sole proprietor if you expect the business to lose money in its early years and you have income from another source, such as employment income.
Business taxation can be very complicated, and it is usually a good idea to contact a tax lawyer or a chartered accountant to determine the tax implications of your particular situation.
Normally, sole proprietorship's are best for businesses earning a small profit which do not have significant liability concerns, Corporations are better where the tax rate of individual is in higher bracket.
There are 3 main advantages to forming a partnership. First, a partnership allows two or more people to work together and bring different skills and resources to the business. Second, a partnership is fairly easy to establish. The actual registration of a partnership is not expensive or complicated. However, it is a good idea to decide how the partnership will be run and put it into a partnership agreement. Third, if the partnership suffers a loss but the partners have other employment income, the loss can be used to reduce their taxable income, thereby lowering the income tax payable by the partner.
There are 5 main disadvantages to forming a partnership. First, because the partnership is not considered to be separate from its owners, the partners are personally responsible for liabilities of the partnership. If the business fails, the partners will be personally responsible to pay all of the debts and obligations of the partnership. Second, because each partner is an agent for the business and for the other partners, each partner is personally responsible for the actions of the other partners. If one of the partners makes a bad business decision, or acts negligently which results in the partnership owing a debt, all of the other partners are personally responsible to pay it back.
Shareholders are the owners of the corporation. Shareholders of shares which carry voting rights, exercise their control through their votes. They elect the directors who guide and control the business operations of the corporation. Shareholders are also asked to vote on important issues, such as the sale or dissolution of the business. They generally do not participate in the day to day operation of the business unless they are also directors or officers. Shareholders also influence the control of the corporation through the purchase and sale of corporate shares.
Directors are elected by the shareholders to guide the business operations of the corporation. Directors select the officers who manage the daily business activities. Directors approve budgets and important contracts. They also decide when to issue shares, and when to declare a dividend.
Officers are the day to day managers of the corporation. Officers include the President and Vice-President of the corporation. The duties of the various officers are established by the directors and by the by-laws of the corporation.
The maximum and minimum number of directors is stated in the Articles of Incorporation. Each privately held corporation must have at least one shareholder, and at least one director. Typically, corporations have one or more officers who are approved by the directors. In a small corporation, it is possible for one person to hold all of these positions and to perform all of the duties. Often, however, when a corporation begins to grow, more people will be needed to manage and direct the corporation.
For more information about the role and duties of shareholders, officers and directors, speak with one of our lawyers.
A franchise is a contract or agreement where a franchisor gives a franchisee the right to start a business under a business system that already exists. Under the franchise agreement, the franchise business usually uses the name or trademark of an existing company and conducts the same type of business as the existing company. The franchisee has a right to use the name or trademark of the existing company, and the franchisor gets to have some control over the franchisee's business. The franchisor also has a continuing right to receive payments from the franchisee.
There are 4 main advantages to owning a franchise. First, you are able to operate your own business while still having the security of working with a large company. Second, you may not have to be an expert at running your own business because you will usually receive support from the franchisor. For example, the franchisor may provide such things as ongoing training and business advice. Third, you enjoy the benefit of using the franchisor's reputation. As a result, there is less business risk for you if the franchise has developed a successful product. Fourth, it may be easier to borrow money to buy a franchise than to start an independent business.
There are also several disadvantages to owning a franchise. Depending on the franchisor and the franchise agreement, the franchisor may maintain a substantial amount of control over new franchises. In typical franchise situations, the franchisor will set the opening and closing times of the franchise, determine what is to be sold and how it is to be sold, and will put restrictions on the ability of the franchisee to sell his or her franchise. You should discuss these issues before you enter into a franchise agreement.
Another disadvantage of franchises is that franchisees usually have to pay an up-front fee simply to begin using the business name. To continue using the name, the franchisee will usually have to pay a set fee either every month or every year. These fees can be substantial. In exchange, the franchisee gets to use the franchise name and sell the franchise product. People will know your business name and you will not have to spend time developing a marketing plan or customer recognition of your business.
An employment contract, like all contracts, requires that each party provide consideration in order to be binding. Consideration is something of value, such as money, or, in the context of an employment agreement, the employer's promise of a job and the employee's promise to provide a service. Furthermore, such consideration must be provided at the time the agreement is made. An employment contract that is made with an existing employee will not be binding unless the employer provides additional consideration. A promise to continue to employ an employee is not valid consideration. However, a promotion or bonus that would not have otherwise occurred in the normal course of the relationship would be sufficient.
Another requirement is that an employment contract must be entered into voluntarily by the parties. The employer has the onus to show that the employee was able to negotiate without coercion or undue influence, particularly if some terms in the contract are harsh or restrictive. An employer might require a prospective employee to obtain independent advice in order to establish that the agreement was freely made. At the very least, the prospective employee should have sufficient time to read and understand the contract before being required to sign it.
An employment contract must state the names of the parties, the date when the contract begins, the contract's duration, and a description of the employee's duties. In addition, the contract should set out the employee's rate of pay and how and when such payment will occur. An employment contract cannot violate the minimum statutory standards for minimum wage, timing of payment, maximum hours of work and payment for overtime. (Employers and employees should be aware that the Government of Ontario is in the process of amending these standards.)
In addition, there are minimum statutory standards for notice of dismissal or payment in lieu of such notice. An employment contract should provide for at least as much notice as that required by legislation. If a clause breaches the statutory minimum standard for notice of dismissal, a court may replace the clause with the common law notice period, which is a much longer period than that provided by the current legislation.
Finally, an employment contract should outline a standard of performance which the employee is expected to meet and provide an employer with some flexibility to change an employee's job description.
Many employment contracts use restrictive covenants in order to protect the legitimate proprietary interests of an employer. Such clauses restrict the rights of a former employee to compete with their former employer and to disclose confidential information learned while on the job. The contract must outline the scope of information which is deemed to be confidential, the duration of the restrictions, and the geographic area which the restrictions cover. Furthermore, the restrictions must be reasonable, particularly in regards to geographic area and duration. An employer cannot restrict the right of a former employee to compete indefinitely.
When an employee's position involves research or development, many employers use a clause in the employment contract which states that discoveries, improvements and other creative achievements by the employee during the course of the employment are the property of the employer.
In addition to these basic features, many employment contracts have more technical provisions that address the legal parameters of the contract. For instance, a clause might state that the contract represents the entire agreement between the employer and employee (which might prevent an employee from attempting to bind an employer to an oral promise that was not included in a subsequent contract). Some other technical provisions sever an invalid clause from an otherwise valid contract and establish the jurisdiction for legal disputes about the contract.
There are many other aspects of the employer-employee relationship which can be addressed in an employment contract.
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