The main difference between a Incorporated Business and an Unincorporated Business lies in their legal structures and how they are treated under the law
Legal Structure for Business corporations
Corporated Business
A corporate business or business corporations that is separate and distinct from its stockholders. It is formed by submitting articles of incorporation to the state, and a board of directors is in charge of running it. Due to limited liability, shareholders’ private assets are normally protected from the obligations and liabilities of the company. A corporation’s name must end with one of the 6 legal suffixes which are Inc. or Incorporated, Ltd. or Limited and Corp. or Corporation.
Incorporator
The person or people who have the authority to create a corporation are known as Incorporators; they are usually the main owners of the company. It could be a corporation (Legal person) or an individual (Natural person).
Director
A Director is the corporation’s overall head and is usually the owner. A single corporation may have a minimum of 1 natural person serving as a director and a maximum of ten natural persons serving as directors. Every director has the same authority and access within the company.
Director Residency Requirements
In the Federal jurisdiction, all corporations are required to fulfill the requirement for Director Residency. The requirement is as such: At least 25% of all directors must have a Canadian PR or Citizenship status. Other jurisdictions do not have director residency requirements.
Shareholder
A shareholder is any person or a company who owns the corporation and receives profit from the business as dividends and shares. It can be an individual (Natural person) or a corporation (Legalperson). Shares represent ownership of a company. Shareholders choose who runs a company and are involved in making important decisions, such as whether a business should be sold.
Officer
An officer is essentially an employee of a corporation. Only a natural person can be an officer. Most common officer designations are President, CEO, and Secretary. Designations play a bigger role in large corporations, not so much in smaller corporations. Designations are changeable.
Unincorporated Business
This covers Partnerships and Sole Proprietorships. In a sole Proprietorship, the owner and the business are one and the same, and there is no formal separation between them. A partnership is made up of two or more individuals who divide ownership and management duties. Both types typically have unlimited liability, meaning the owners’ personal assets are at risk for business debts and obligations.
A sole proprietorship
Is an unincorporated business that is owned by one individual. It is the simplest kind of business structure. The business is owned and operated by one person, and there is no legal distinction between the owner and the business.
A partnership
A general partnership is an unincorporated business that is owned by 2 or more individuals or corporations. General Partnerships are registered under the Partnership Act. Each partner is liable for the debts and obligations of the partnership on an unlimited basis.
A Trade Name
is registered when a corporation wants to add another name to their business or start a new business with a new name under the same corporation with different activity. A trade name is also known as Doing Business As(DBA) or Operating Name in some provinces. A Trade name cannot end with a legal suffix as a corporation’s legal name.
A limited partnership (LP)
Is an unincorporated business that is owned by 2 or more individuals or corporations. It consists of general partners and 1 or more limited partners. Limited Partnerships are registered under the Limited Partnership Act. The general partners operate the company with unlimited liability.The general partners’ information is filed with the government and the limited partners’ information is stated in the partnership agreement.
A Limited Liability Partnership (LLP)
in Canada is a business structure that provides limited liability protection to its partners. This means that the personal assets of the partners are generally shielded from business debts and liabilities. LLPs are regulated by provincial law in Canada. Some provinces only allow certain professions, such as law and accounting, to form LLPs. Liability Limited Partnerships are registered under the Limited Partnership Act.
Taxation
Corporated Business
Corporations must pay corporate income tax on their profits, according to tax laws. Shareholders are also required to pay dividend taxes. This is often referred to as “double taxation” because the same income is taxed at both the corporate and individual levels.
Unincorporated Business
In a sole proprietorship or partnership, business income is usually reported on the owner’s or partners’ personal tax returns. This is known as pass-through taxation because the business itself does not pay taxes; instead, the owners pay taxes on their share of the business income.
Management and Ownership
Corporated Business
They are run by a board of directors that are elected by shareholders. Ownership is represented by shares of stock.
Unincorporated Business
Managed by the owner (sole proprietorship) or owners (partnership) directly, without a separate board of directors. Ownership is usually not represented by shares of stock but rather by partnership agreements or sole proprietorship status.
Liability
Corporated Business
Shareholders have limited liability, meaning their personal assets are usually protected from business debts and legal actions.
Unincorporated Business
Owners (sole proprietors or partners) typically have unlimited liability which means that business debts and legal claims may be settled with their personal assets.
Advantages of Incorporated Business
Limited Liability:
Shareholders have limited liability which protects their personal assets from business debts and legal liabilities.
Access to Capital:
Corporations can raise funds by issuing shares of stock, which can attract investors and promote expansion.
Perpetual Existence:
Corporations have a perpetual existence, meaning they can continue to operate even if ownership changes.
Tax Flexibility:
Depending on the business structure there may be opportunities for tax planning and benefits.
Credibility:
Being a corporation can improve credibility with customers, suppliers, and partners.
Disadvantages of Incorporated Business
Double Taxation:
Corporations, depending on their nature, may face double taxation, where corporate profits are taxed at the corporate level and again when distributed to shareholders as dividends.
Complexity and Cost:
Setting up and maintaining a corporation involves more paperwork, formalities, and costs compared to unincorporated businesses.
Potential for Conflicts:
Governance issues, conflicts of interest, and disputes among shareholders or with the board of directors can occur.
Disadvantages of Incorporated Business
Simplicity:
Unincorporated businesses are generally simpler to set up and operate, with fewer legal formalities and administrative requirements.
Pass-Through Taxation:
Sole proprietorships and partnerships benefit from pass-through taxation by avoiding double taxation on business income.
Flexibility:
Owners have more freedom in decision-making and management without the formalities of a corporate structure.
Lower Costs:
Unincorporated businesses often have lower startup costs and ongoing operational expenses compared to corporations.
Direct Control:
Owners have direct control over business operations and strategies without the oversight of a board of directors.
Disadvantages of Unincorporated Business
Unlimited Liability:
Owners have unlimited personal liability for business debts and legal obligations which risks personal assets.
Limited Capital:
It can be challenging to raise significant capital or attract investors due to the lack of shares or stock options.
Perceived Credibility:
Some partners, suppliers, or customers may see unincorporated businesses as less stable or reliable than corporations.
https://www.sfu.ca/~mvolker/biz/startup.htm
https://www.bdc.ca/en/articles-tools/start-buy-business/start-business/incorporating-busi
ness-key-advantages-entrepreneurs
https://incorporationpro.ca/product/ontario-incorporation-package?gad_source=1&gclid=
Cj0KCQjw0_WyBhDMARIsAL1Vz8t4kxhq_AxG-OpIBY6K2seXGWIqZxMpJofubusLQvjK
CqCU1LQP7XIaAt8DEALw_wcB
