Business Law

Business Structure Basics

Starting a business takes a lot of time and energy. There are lots of things to do – from marketing to raising capital to ordering product to leasing or buying premises, to hiring, and so on. How will the business be carried on? As a proprietorship? As a partnership (if there are two or more entrepreneurs)? As a limited liability corporation? There are other types of business structures as well, such as joint ventures or limited partnerships, but these are not commonly used.

 Proprietorship

There are times when, for example, a proprietorship may be recommended to start the business, with the intention of incorporating later on. There are other times when starting out as a company is advisable. Consult an accountant and lawyer before deciding on what structure a business will have.

Proprietorships are often ‘one-person shows’ – the business owner invests the capital to get the business running, does the labour and manages the business as well. Proprietorships can offer flexibility and cost efficiency (they are easy to start and dissolve) and may offer tax benefits in some situations. However, if a proprietor is sued, the proprietor’s potential personal liability is unlimited. There is no name protection for proprietors, so if the business name is unique or expansion across the province or the country is a possibility, there is no assurance that a proprietor’s business name cannot be used by someone else. Registration of a trade name does not necessarily prevent someone else from using the same name.

 Partnership

General partnerships can be formed by verbal or written agreement – or sometimes, through conduct – by two or more parties. Partners should have a written agreement to reduce the risk of disputes or to assist in resolving a dispute if it arises. Partnerships can be for a specific project, for a certain time period or operate until further notice. A written partnership agreement will, amongst other things, set out each partner’s contributions to the business (capital, labour, and so on), how the business is to be managed, and how profits and losses will be allocated. Each partner is jointly and severally (meaning together with other partners and individually) liable for business debts so there is potential for unlimited personal liability. A partner is not an employee of the business and any money a partner withdraws from the business is a ‘draw’ against that partner’s share of earned the profits. For tax purposes, partnership income or losses and expenses are reported on each partner’s tax return and each partner pays tax and makes remittances accordingly. As with proprietorships, there is no name protection for a partnership’s business name.

 Incorporation

Companies are distinct legal entities and can own property, sue, be sued or sign agreements. Shareholders can be individuals or other companies who subscribe and pay for shares and, unless a shareholder guarantees company debts, they are not liable for these debts. Shareholders elect directors to make decisions for the company. The directors, in turn, elect officers to run the day-to-day business. Directors are personally liable for some liabilities, such as government remittances, WCB, six months of wages, and gross negligence. Shareholders risk losing their investment in the company and that is the limit of their personal liability. Directors, as noted, may be personally liable at times.  A company itself has limited liability; creditors may not be paid if a company has more debts than assets. A person can be an employee of a company he or she owns; companies may keep some earnings for future growth and may pay some profits out as dividends. Companies pay tax and their employees and those who receive dividends are also taxed; while there is ‘double taxation’ the goal is for the tax burden to be about the same as what an individual would pay and there may be tax benefits for certain small businesses. Companies can be set up to operate federally, in a certain province, or in a number of provinces; there is name protection for companies in the jurisdictions they are registered. Professional corporations (such as those set up by doctors, accountants or other professionals) have some specific features and restrictions that do not apply to other companies.

 Business arrangements can be complicated and can change; seek professional advice before starting a business and make sure to have regular consultations with an accountant and lawyer to monitor whether changes to business structure are advisable.

The above is for information purposes only and is not legal advice.

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Lois A. Potter Law Corporation
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