Sole-proprietorships, Partnerships and Corporations

Sole-proprietorships, Partnerships and Corporations

Before registering your business and obtaining a Business Number (BN) form the Canada Revenue Agency, you should consider the different business structures that are available. From a legal point of view, there are three common types of business structures in Canada - 1) sole proprietorship, 2) partnership, and 3) corporation. Each structure has different and important implications for liability, taxes, and succession planning.

In this Getting Started Guide, we’ll have a look at each business structure and highlight the advantages and disadvantages of each.  As always, GoForth recommends you contact a lawyer or accountant if you’re not sure which type of business structure is the right one for you.

Sole proprietorships:

Starting a sole proprietorship business is the simplest way to set started in business. Sole proprietorships are usually for self-employeds. As a sole proprietor you’d be responsible for all debts and obligations related to your business. A creditor with a claim against a sole proprietor would normally have a right against the sole proprietor’s individual assets, whether business or personal. This is known as unlimited liability.

In a sole proprietorship, you would perform all the functions required for the successful operation of the business. These include:

• Securing the capital
• Establishing and operating the business
• Assuming all risks
• Accepting all profits and losses

ADVANTAGES	DISADVANTAGES
Lower start-up costs Greatest freedom from regulation Owner in direct control of decision making Minimal working capital required Tax advantages to owner All profits to owner	Unlimited liability Lack of continuity in business organization in absence of owner Difficulty raising capital No business name protection

Partnerships:

A partnership is an agreement in which you and one or more people combine resources in a business with a view to making a profit. In a General Partnership, you and one or more other owners would share the management of a business, and each partner would be personally liable for all debts and obligations incurred. This means that each partner is responsible for, and must assume, the consequences of the actions of the other partner(s).

In order to establish the terms of the Partnership and to protect yourself in the event of a disagreement or dissolution of a Partnership, a partnership agreement should be drawn up.

ADVANTAGES	DISADVANTAGES
Easy to form Lower start-up costs Additional sources of investment capital Possible tax advantages Limited regulation Broader management base	Unlimited liability Divided authority – two or more bosses Difficulty in raising additional capital Hard to find suitable partners Possible development of conflict between partners Partners can legally bind each other without prior approval Lack of continuity No business name protection

Corporations:

A corporation, also known as a limited-liability company (LLC), is a legal entity that is separate and distinct from its members (shareholders). When a company is incorporated, it acquires all of the powers of an individual - an independent existence – separate and distinct from its shareholders, and an unlimited life expectancy. In other words, the act of Incorporation gives life to a legal entity known as the corporation, commonly referred to as a company. A company can acquire assets, go into debt, enter into contracts, sue or be sued. Ownership interests in a corporation are usually easily changed. Shares may be transferred without affecting the corporation’s existence or continued operation.

The following characteristics distinguish a corporation from a partnership or sole proprietorship:

• Limited Liability: normally no member can be held personally liable for the debts, obligations or acts of the corporation beyond the amount of share capital the members has subscribed. Each shareholder has limited liability. A creditor with a claim against the assets of the company would normally have no rights against its shareholders, although in certain circumstances shareholders may be held liable. As always, we recommend that you seek professional legal advice.
• Perpetual Succession: because the corporation is a separate legal entity, its existence does not depend on the continued membership of any of its members.

ADVANTAGES	DISADVANTAGES
Limited liability Possible tax advantage (if you qualify for a small business tax rate) Specialized management Ownership is transferable Continuous existence Separate legal entity Easier to raise capital Name protection	Closely regulated Most expensive form of business to organize Charter restrictions Extensive record keeping necessary Possible double taxation of profits Shareholders (directors) may be held legally responsible in certain circumstances Personal guarantees undermine limited liability advantages

Incorporation can be a very involved process and it is recommended that you seek the advice and services of a lawyer and/or an accountant.

You have the option to incorporate at a provincial level or at a federal level. If the company intends to carry on its activities solely in one province, provincial incorporations may be preferable. If the company wishes to expand its activities outside of its provincial jurisdiction at a later date, it must obtain an extra-provincial license from every other province in which it wishes to open an office or obtain a physical presence.

You should consider federal incorporation if you want to carry on business in more than one province or outside the country. The heightened name protection to federal corporations is also a reason for choosing incorporation under the Canada Business Corporation Act. This is seen as an important element of the right to carry on business throughout Canada. Once federally incorporated, the corporate name has a protected status second only to trademark protection.

Once you’re finished your business planning stage, it’s time to think about training. Do you really know how to run a successful small business?  That’s why we offer Canada’s leading online small business training. Make the investment in your future today – get started now. 

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