Small Business Law

The main structures are sole proprietorship, partnership, and corporation. A sole proprietorship is the simplest: you and the business are the same legal entity, you report business income on your personal tax return, and you are personally liable for all business debts. A partnership is similar but involves two or more owners sharing profits, losses, and liability. A corporation is a separate legal entity from its owners, providing limited liability, potential tax advantages, and the ability to raise capital through shares. Each structure has different implications for liability, taxation, administration, and growth potential.

It depends on your circumstances. Incorporation makes sense when your business income is high enough that corporate tax rates provide savings, you want to protect personal assets from business liabilities, you plan to bring on investors or partners, you want to build equity in the business for eventual sale, or your clients or industry expect you to operate as a corporation. Incorporation involves more administration and cost than operating as a sole proprietorship. For businesses just starting out, with low income, or with minimal liability exposure, a sole proprietorship may be appropriate initially, with incorporation later as the business grows.

The fundamental difference is legal separation. A sole proprietorship is not a separate legal entity. You and your business are the same. Business income is your personal income, taxed at personal rates. Business debts are your personal debts. If the business is sued, your personal assets (home, savings) are at risk. A corporation is a separate legal entity. It earns income, pays taxes, owns assets, and can be sued. As a shareholder, your liability is generally limited to your investment in the corporation. You can pay yourself through salary, dividends, or a combination. The corporation files its own tax return. This separation protects you personally but requires more administration and cost.

A partnership is an arrangement where two or more people carry on business together with a view to profit. Like a sole proprietorship, a partnership is not a separate legal entity. Each partner is personally liable for all partnership debts and obligations, including those incurred by other partners. A corporation is a separate entity, and shareholders are generally not personally liable for corporate debts. Partnerships are simpler to set up and have fewer ongoing requirements, but expose partners to significant risk. Corporations require more formality but provide liability protection. Many businesses that would operate as partnerships instead incorporate and operate with a shareholder agreement governing the relationship between owners.

Common triggers include: your business income exceeds what you need to live on (allowing you to retain earnings in the corporation at lower tax rates), you are entering contracts that expose you to liability, you want to bring on a business partner or investor, you are hiring employees, your industry or clients expect you to be incorporated, or you want to build equity for an eventual sale. There is no magic income number, but many accountants suggest incorporation becomes tax-advantageous when business income exceeds $60,000 to $80,000 annually. Consult an accountant to analyze your specific situation.

Certain regulated professionals in Ontario, including lawyers, doctors, dentists, accountants, and others, can incorporate professional corporations to carry on their practices. Professional corporations must be incorporated under the Ontario Business Corporations Act (not federally) and are subject to additional rules set by the relevant regulatory body. The professional remains personally liable for professional negligence, but the corporation provides some liability protection for other business obligations and offers tax planning opportunities. If you are a regulated professional considering incorporation, confirm the requirements with your governing body.

Both options create a valid corporation with limited liability. Federal incorporation under the Canada Business Corporations Act (CBCA) gives you the right to carry on business across Canada under your corporate name and provides nationwide name protection. Provincial incorporation under the Ontario Business Corporations Act (OBCA) is appropriate if you operate primarily in Ontario and want simpler administration. Key differences: federal incorporation costs $200 (online) but requires extra-provincial registration in Ontario and annual filings with both Corporations Canada and Ontario; Ontario incorporation costs $300 but involves only provincial filings. Federal corporations require at least 25% Canadian resident directors; Ontario has no residency requirement. For most small businesses operating in Ontario, provincial incorporation is simpler and sufficient.

NUANS (Newly Upgraded Automated Name Search) is a computerized search of corporate and business names across Canada. Before incorporating, you must obtain a NUANS report showing that your proposed corporate name does not conflict with existing registered names. The report searches federal and provincial corporate registries and trademark databases. For federal incorporation, you submit the NUANS report to Corporations Canada for approval. For Ontario incorporation, the NUANS report is not required if you use a numbered company name, but is required if you want a specific named company. NUANS reports are valid for 90 days and cost approximately $30 to $40.

A numbered company uses its assigned corporation number as its name rather than a word name. For example, "1234567 Ontario Inc." or "1234567 Canada Inc." Numbered companies are faster and cheaper to incorporate because no NUANS name search is required. You can still operate under a different business name by registering a "doing business as" (DBA) name. Many businesses incorporate as numbered companies for simplicity, especially when the business will operate under a trade name anyway. The corporate name (the numbered name) appears on legal documents, while the registered business name appears in marketing and customer-facing materials.

Upon incorporation, you receive articles of incorporation (the corporation's charter document) and a certificate of incorporation confirming the corporation's existence. You should also prepare organizational resolutions (appointing directors, officers, establishing a fiscal year, banking arrangements), by-laws (rules governing corporate procedures), share certificates (evidencing share ownership), and registers and ledgers (tracking directors, officers, and shareholders). These documents are kept in the corporate minute book. Many incorporations include a minute book with all these documents prepared. Aleksandre Law incorporations include a complete minute book.

Corporations have ongoing legal obligations. Annual filings: Ontario corporations must file an annual return with the provincial government; federal corporations file with Corporations Canada and must also file in any province where they carry on business. Corporate tax returns: the corporation must file a T2 corporate income tax return annually. Minute book maintenance: significant corporate decisions, including director elections, share issuances, and major transactions, should be documented in resolutions kept in the minute book. Records: corporations must maintain registers of directors, officers, shareholders, and other records at their registered office. Failure to maintain proper corporate records can jeopardize limited liability protection and create problems if the business is sold or audited.

A minute book is the official record book of a corporation containing all its constitutional and organizational documents. It typically includes: articles of incorporation and any amendments, by-laws, organizational resolutions, annual resolutions, shareholder and director meeting minutes, share certificates and transfer documents, registers of directors and officers, registers of shareholders, and registers of share transfers. The minute book is evidence that the corporation has been properly maintained and that corporate formalities have been followed. A well-maintained minute book is essential for bank financing, due diligence on a sale, and demonstrating the validity of corporate actions.

This is common, especially for small businesses that incorporated years ago and never updated their records. The minute book should be brought current by preparing resolutions documenting director and officer appointments, share issuances, and other corporate actions that have occurred. This process is sometimes called a "minute book update" or "corporate cleanup." It is particularly important to update the minute book before selling the business, seeking financing, or bringing on new shareholders, as buyers, lenders, and investors will conduct due diligence and expect proper records. Aleksandre Law can review your existing minute book and prepare the necessary documentation to bring it current.

A shareholder agreement is a contract between the shareholders of a corporation governing their relationship with each other and with the corporation. It addresses matters such as: how decisions are made, restrictions on transferring shares, what happens if a shareholder wants to leave, what happens if a shareholder dies or becomes disabled, how disputes are resolved, non-competition and confidentiality obligations, and dividend policies. Shareholder agreements are particularly important for closely-held corporations with a small number of shareholders who are actively involved in the business. The agreement provides certainty and helps prevent disputes.

Without a shareholder agreement, shareholder relationships are governed by the corporation's articles, by-laws, and the applicable corporate statute (OBCA or CBCA). These default rules may not suit your situation. For example, without an agreement, a shareholder may be able to sell their shares to anyone, there may be no mechanism to force out a shareholder who is not contributing, and there may be no agreed process for valuing shares. When shareholders disagree, the lack of an agreement often leads to expensive litigation. A shareholder agreement addresses these issues in advance, when relationships are good and parties can negotiate reasonable terms. It is much easier to agree on buyout terms before there is a dispute than after.

Key provisions typically include: governance (board composition, voting requirements, reserved matters requiring unanimous consent), share transfer restrictions (right of first refusal, right of first offer, restrictions on transfers to competitors), buy-sell provisions (what triggers a buyout, how shares are valued, how payment is structured), shotgun clause (allowing one shareholder to offer to buy or sell at a stated price), tag-along and drag-along rights (protecting minority shareholders on a sale, allowing majority to compel minority to sell), non-competition and confidentiality (preventing shareholders from competing or disclosing confidential information), dispute resolution (mediation, arbitration), and deadlock provisions (how to resolve if shareholders cannot agree). The appropriate provisions depend on the number of shareholders, their roles, and the nature of the business.

A shotgun clause (also called a buy-sell clause) is a mechanism for resolving shareholder disputes by allowing one shareholder to force a buyout. When triggered, the initiating shareholder offers to buy the other shareholder's shares at a stated price per share. The receiving shareholder then has a choice: accept the offer and sell their shares, or "turn the gun around" and buy the initiating shareholder's shares at the same price. This mechanism forces the initiating shareholder to name a fair price, because if they offer too low, the other shareholder will buy them out instead. Shotgun clauses are effective at resolving deadlocks but can be risky: a shareholder with less access to cash may be forced to sell even if they do not want to.

Tag-along rights protect minority shareholders. If a majority shareholder receives an offer to sell their shares, tag-along rights allow minority shareholders to participate in the sale on the same terms. This prevents the majority from selling to a new owner and leaving minorities behind. Drag-along rights benefit majority shareholders. If a majority shareholder wants to sell to a third party and the buyer wants 100% of the shares, drag-along rights allow the majority to compel minorities to sell their shares on the same terms. This prevents a minority from blocking a beneficial sale. Both provisions are standard in shareholder agreements and protect different interests.

A right of first refusal requires a shareholder who receives an offer from a third party to first offer their shares to the existing shareholders on the same terms. If the existing shareholders decline, the selling shareholder can proceed with the third-party sale. This protects existing shareholders from having unwanted third parties join the corporation. A right of first offer is similar but works differently: the selling shareholder must first offer shares to existing shareholders before seeking outside buyers.

A unanimous shareholder agreement (USA) is a specific type of shareholder agreement signed by all shareholders that can restrict the powers of the directors. Under the OBCA and CBCA, a USA can transfer some or all of the directors' powers to the shareholders themselves. This is useful in closely-held corporations where the shareholders want direct control over management rather than delegating to a board. A USA can also protect minority shareholders by requiring unanimous consent for certain decisions. Because it restricts director powers, a USA shifts some potential director liability to the shareholders.

You should have a contract reviewed before signing whenever significant money or risk is involved, you do not fully understand the terms, the contract is lengthy or complex, the other party has more bargaining power, or the relationship will be ongoing. Specific situations include commercial leases, franchise agreements, supplier or vendor agreements, significant purchase contracts, loan and financing agreements, employment contracts (whether you are the employer or employee), partnership or joint venture agreements, and any contract with penalty clauses, indemnities, or personal guarantees. The cost of legal review is typically far less than the cost of problems arising from a poorly understood or unfavorable contract.

An employment agreement should clearly set out the terms of employment. Key provisions include: job title and description, start date, compensation (salary, bonus, commission structure), benefits, working hours and location, vacation entitlement, probationary period, termination provisions (notice periods, severance), restrictive covenants (non-competition, non-solicitation, confidentiality), intellectual property ownership, and dispute resolution. Ontario's Employment Standards Act sets minimum standards that apply regardless of what the contract says, but contracts can provide greater protections for either party. Well-drafted employment agreements provide clarity and reduce disputes.

The distinction matters significantly for taxes, liability, and employment standards. Employees work under the employer's direction and control, use the employer's tools and equipment, work set hours, are integrated into the business, and cannot profit from efficient performance. Employers must withhold taxes, pay CPP and EI premiums, and comply with employment standards. Independent contractors operate their own businesses, control how they complete work, provide their own tools, can profit or lose money, and typically work for multiple clients. Contractors invoice for their services and handle their own taxes. Misclassifying an employee as a contractor can result in liability for unpaid taxes, CPP/EI premiums, and employment standards entitlements. The label in the contract is not determinative; courts look at the actual relationship.

An independent contractor agreement should clearly establish the contractor relationship and cover: scope of services, deliverables and timelines, compensation and invoicing, expenses, term and termination, confidentiality, intellectual property ownership, warranties and representations, indemnification, insurance requirements, and confirmation of independent contractor status (including that the contractor is responsible for their own taxes). The agreement should avoid provisions that make the relationship look like employment, such as requiring set hours, providing benefits, or exercising significant control over how work is performed.

A non-disclosure agreement is a contract that protects confidential information. When you share proprietary information with another party, whether a potential investor, business partner, employee, or contractor, an NDA prevents them from disclosing or using that information without permission. Key provisions include: definition of confidential information, permitted uses, exceptions (publicly available information, independently developed information, legally required disclosure), duration of obligations, and remedies for breach. NDAs are also called confidentiality agreements. They are commonly used before business discussions, during due diligence on a sale, and whenever sensitive information must be shared.

Non-competition clauses restrict someone from competing with a business for a period of time after leaving. In employment contexts, courts view these skeptically because they restrict a person's ability to earn a living. To be enforceable, a non-competition clause must be reasonable in scope (what activities are prohibited), geography (what area does it cover), and duration (how long does it last). It must also protect a legitimate business interest. Courts will not enforce clauses that are broader than necessary to protect the employer's interests. Non-solicitation clauses (preventing soliciting customers or employees) are generally more enforceable than non-competition clauses. In commercial contexts (such as the sale of a business), courts are more willing to enforce non-competition clauses because the parties have more equal bargaining power.

An annual return is a filing that updates the government on basic information about your corporation, including its registered office address, directors, and officers. Ontario corporations file annual returns with the Ontario government. Federal corporations file with Corporations Canada and must also register in each province where they carry on business. The annual return is not a tax filing; it is a corporate registry filing. Failure to file can result in the corporation being dissolved for non-compliance. Filing deadlines and fees vary: Ontario corporations must file within six months of their fiscal year-end (no fee); federal corporations must file within 60 days of their anniversary date ($12 fee).

Under the OBCA and CBCA, corporations must maintain: articles of incorporation and amendments, by-laws, unanimous shareholder agreements (if any), minutes of shareholder and director meetings, resolutions signed by shareholders and directors, registers of directors and officers, registers of shareholders (securities register), and registers of ownership interests and transfers. These records must be kept at the corporation's registered office and be available for inspection by directors and shareholders. For private corporations, certain records can be kept elsewhere with shareholder consent.

Poor corporate record-keeping can have serious consequences. Courts may "pierce the corporate veil" and hold shareholders personally liable if the corporation has not been operated as a separate entity. Banks and lenders may refuse financing without evidence of proper corporate governance. Buyers conducting due diligence on a sale will identify deficiencies, potentially reducing the purchase price or killing the deal. The corporation may be unable to prove it authorized contracts, share issuances, or other transactions. Directors and officers may face personal liability for failing to maintain proper records. Taking the time to keep proper records protects the investment you have made in your business.

Under the OBCA, corporations must hold an annual meeting of shareholders within 18 months of incorporation and subsequently within 15 months of the previous annual meeting. At this meeting, shareholders typically elect directors, appoint auditors (unless an exemption applies), and receive financial statements. Directors must meet as necessary to conduct the business of the corporation. However, for small corporations with few shareholders, both statutes allow shareholders and directors to pass resolutions in writing in lieu of meetings. Most small, closely-held corporations use written resolutions rather than formal meetings. The resolutions must be properly drafted and kept in the minute book.

When buying an existing business, you can buy the shares of the corporation that owns the business or buy the assets (equipment, inventory, customer lists, goodwill) while leaving the corporation with the seller. Each approach has advantages. Buying shares is simpler and includes everything the corporation owns, including contracts and licenses that may not be easily transferable. However, you acquire all the corporation's liabilities, known and unknown, including potential tax issues or lawsuits. Buying assets lets you choose what to acquire and generally limits your exposure to the seller's liabilities. However, it may require consent to assign contracts, may trigger bulk sales obligations, and has different tax consequences. The right structure depends on the specific business, and both parties should obtain legal and accounting advice.

Due diligence is the process of investigating and verifying information about a business before completing a purchase. Buyers conduct due diligence to confirm that what they think they are buying is what they are actually getting. The process typically includes reviewing: financial statements and tax returns, corporate records (minute book, articles, resolutions), contracts (leases, customer agreements, supplier agreements, employment contracts), intellectual property (trademarks, patents, trade secrets), real property (title, environmental issues), litigation and claims, regulatory compliance, and employee matters. Due diligence identifies risks and allows buyers to negotiate price adjustments, require specific representations and warranties, or walk away if problems are too significant.

A letter of intent (LOI) is a preliminary document outlining the basic terms of a proposed transaction before a definitive agreement is negotiated. It typically covers: the proposed purchase price and structure (asset or share purchase), key conditions (financing, due diligence), exclusivity period (preventing the seller from negotiating with others), timeline, and confidentiality. Letters of intent are typically non-binding on the substantive terms (either party can still walk away) but binding on exclusivity and confidentiality. They allow parties to confirm they have a deal in principle before incurring the expense of drafting and negotiating a full purchase agreement.

A non-binding offer (or letter of intent) expresses interest in a transaction and outlines proposed terms but does not commit either party to proceed. It allows parties to negotiate key terms before incurring costs. A binding offer (or binding agreement) is a contract that obligates the parties to complete the transaction on the stated terms. Breaking a binding agreement has legal consequences. In business sales, parties typically start with a non-binding letter of intent, conduct due diligence, then negotiate and sign a binding purchase agreement.

Fees vary based on the service. Incorporations (including complete minute book) typically range from $1,000 to $1,500 plus government filing fees. Shareholder agreements depend on complexity but generally range from $2,000 to $5,000. Contract drafting and review is quoted based on the document. Hourly rates apply to matters that cannot be quoted in advance. Contact the office to discuss your needs and receive a fee estimate. Many services are offered at flat fees quoted upfront.

Incorporating an Ontario numbered company can be completed within one to two business days once you provide the required information. Named companies require a NUANS search (which takes about 30 minutes to order) and government processing time for name approval. Federal incorporations have similar timelines. Preparing a complete minute book with all organizational documents takes additional time. From start to finish, expect the process to take one to two weeks including minute book preparation.

You will need to provide: proposed corporate name (or confirm a numbered company is acceptable), registered office address (must be in Ontario for OBCA corporations, or anywhere in Canada for CBCA), director names, addresses, and consent (at least one director for OBCA corporations, or at least 25% Canadian residents for CBCA), shareholder names and addresses, share structure (what types of shares, how many authorized, how many issued to each shareholder), and fiscal year-end date. The incorporating lawyer will guide you through these decisions.

You are not legally required to have a lawyer draft your shareholder agreement, but it is strongly advisable. Shareholder agreements deal with complex issues including corporate governance, share valuation, buyout triggers, and dispute resolution. Poorly drafted agreements create ambiguity that leads to disputes. Worse, a missing agreement means no agreed framework when problems arise. Given that shareholder disputes can threaten the existence of the business and involve significant money, the cost of proper legal advice is a worthwhile investment. Each shareholder should ideally have separate legal advice to ensure their interests are protected.

Your options depend on what agreements are in place. If you have a shareholder agreement, review it for dispute resolution provisions: it may require mediation or arbitration before litigation, or provide buyout mechanisms like a shotgun clause. If there is no agreement, your options include negotiation (try to reach a resolution directly), mediation (use a neutral third party to facilitate settlement), or litigation (apply to court). Under the OBCA and CBCA, shareholders can seek relief for oppression if the corporation or directors have acted in a manner that is oppressive or unfairly prejudicial to their interests. Oppression remedies are broad and include orders to buy out shares, require certain corporate actions, or award damages. These disputes are expensive and disruptive. If possible, try to resolve matters through negotiation or mediation before resorting to litigation.

Yes. Many businesses start as sole proprietorships and incorporate later as they grow. The process involves incorporating a new corporation and transferring the business assets (equipment, inventory, customer relationships, contracts) from yourself to the corporation. This transfer has tax implications (particularly capital gains and GST) and should be done with proper planning. Section 85 of the Income Tax Act allows for tax-deferred rollovers of assets to a corporation in certain circumstances. Consult a lawyer and accountant to structure the conversion properly.