One of the earliest legal decisions founders of a new enterprise must make is one which has repercussions throughout the lifetime of the business. That decision is known as the choice of entity.
When it comes to choosing a business structure, there is no such thing as “one-size-fits-all”. As such, lawyers and their clients must carefully consider all of the relevant facts and analyze the priorities, both present and future, of each new enterprise. The ultimate decision will affect numerous aspects of the business, including how the endeavour will be taxed, how it will raise money, how much personal liability its stakeholders will be exposed to, how much paperwork it will have to complete, and so on.
At Pushor Mitchell, we’re here to help. The following information is not comprehensive; rather, it is meant to highlight some notable features of commonly adopted business structures which entrepreneurs and business owners may want to consider:
1) SOLE PROPRIETORSHIP
A sole proprietorship is the carrying on of a business, by one individual, on his/her own account.
Advantages:
- Most straightforward and inexpensive form of business organization.
- Designed for individuals intending to operate a business by themselves and grants the proprietor direct control of decision making.
- Proprietor reaps all of the rewards (but, as seen below, is subject to all of the risk).
- Tax benefits including the ability to write off business losses against personal income.
Disadvantages:
- Proprietor has full personal exposure to all liabilities associated with the business.
- Legal structure does not facilitate investment in the venture by third parties.
- As the business grows, so too will the liability exposure of the proprietor.
- Death of the proprietor results in the death of the business
Note: If the business is carried on under a name other than the personal name of the proprietor, then the name of the sole proprietorship must be registered with BC Registry Services. The benefit of name registration is that the proprietor may use the registered name on business documents instead of his or her personal name.
2) PARTNERSHIP
A partnership is a contract between two or more persons (including corporations), who join their resources together to carry on a business in common with a view to profit.
Advantages:
- Few formal requirements to forming and maintaining a partnership means it can be relatively simple and inexpensive to create (note: increased complexity may lead to increased costs).
- All partners are legally able to share in the management and profits of the business.
- The ability to create a unique “Partnership Agreement” provides organizational flexibility and allows partners to determine their roles, rights to profits, how new partners will be brought on, etc.
- Partners can deduct business losses against other personal income (could be very advantageous during first few years of operation if losses are anticipated).
- Ability to include new partners facilitates new sources of capital.
- By registering the name of the partnership with BC Registry Services, the business can be operated under that name without having to identify the personal names of its partners on business documents.
Disadvantages:
- Important to have a partner who you trust as conflict between partners can be very damaging to the partnership business.
- In the event that a partnership’s assets prove insufficient to cover debt/damages incurred, each partner is liable to the full extent of his or her personal assets.
- Each partner, regardless of consent or knowledge, is personally responsible for the actions of his fellow partners and employees (so long as said acts committed are in connection with the business).
- Each partner is bound by any contract agreed to by the other partners in connection with the partnership business.
- If a partnership consists of only two partners, the death of one results in the dissolution of the partnership.
- If the partnership is engaged in trading, manufacturing, or mining, it must register its name with the Registrar of Companies. Although not a disadvantage in and of itself, it is possible that the Registrar will refuse to register the partnership name if the name is sufficiently similar to another registered business so as to confuse or mislead the public.
Note: A partnership can legally come into existence unintentionally – all that is required is two or more persons contributing to and participating in a business which has a view to profit.
3) LIMITED PARTNERSHIP
Briefly stated, a limited partnership is similar to a partnership in many ways, however there are a few notable differences:
- Instead of consisting entirely of notionally equal partners (as is the case in a partnership), a limited partnership designates at least one general partner to be responsible for managing the affairs of the business, and one or more limited partners who are able to contribute capital but are disallowed from participating in the business.
- The general partner has full exposure to the liabilities of the limited partnership’s business; however, often the general partner will take the form of a corporation which, as discussed below, provides certain protections against liability.
- In contrast with the general partners, the amount of liability to which limited partners are exposed to is limited (hence “limited” partnership) to the amount of capital they have invested.
- It is important to emphasize that limited partners must take careful steps to ensure that they are not found to be playing any role in the management of the limited partnership, otherwise they will be deemed to be a general partner and will assume all of the risk of a general partner.
Ultimately, a limited partnership is an excellent vehicle for business growth as it provides a respectable level of liability protection for investors who wish to remain hands-off while also maintaining the advantageous tax consequences and structural flexibility associated with partnerships.
4) CORPORATION
When a business is incorporated in British Columbia, a legal entity known as a corporation (or company) is created and exists as separate and distinct from its shareholder(s).
An individual or group of individuals will supply capital to their newly incorporated private company and become shareholders in that company. Their shares provide them with a number of defined rights and allow them to elect the company’s Board of Directors. This Board is responsible for business management and will dictate the actions of the company.
Advantages:
- A company is a separate legal entity from its shareholders, meaning that the company may carry on business, enter into contracts, own property, incur debt, etc. all in its own name.
- Shareholders have no exposure to liability through the company unless they give personal guarantees.
- A company is legally unaffected by the death or bankruptcy of any of its shareholders.
- British Columbia corporations can be registered extra-provincially, allowing the corporation to conduct business in other provincial jurisdictions.
- Ownership of the company is transferable and the raising of capital is easily facilitated.
- Corporations benefit from certain tax advantages and corporate name protection.
- British Columbia has no residency requirements for company directors.
Disadvantages:
- Companies must comply with certain administrative filing requirements.
- Directors can be liable for losses suffered as a result of their voting, either in favour or against, the passing of certain resolutions, for tortuous conduct committed regardless if they were in the best interest of the company, for conflicts of interest, etc.
- Provincial name protection is subject to approval by the Registrar of Companies and is subordinate to that of Federal Corporations.
Choosing a business structure can be a complicated and difficult task. Please contact the lawyers of Pushor Mitchell’s Business Law Group should you require assistance.
