Through many aspects, business formation impacts how your business will function, operate and be taxed. Creating a legal structure behind your endeavour is one of the crucial first steps you can make when starting any business. There are plenty of hurdles and protocols that make the process complex. However, being advised as to the most effective and efficient structure will allow you to plan out your next steps.
In essence, with each unique respective business venture, there is a structure that best matches the entrepreneur’s plans for determining the liability of each founder, what taxes to anticipate and how they will be paid.
Each structure allows for the appointment of guidelines regarding important aspects of any business, or simply put, the decision making. For example, a sole proprietor is free to make decisions on their own, as the business is entirely their’s. However, if a member of a partnership wanted to make a crucial decision they would legally have to seek approval from other partners before moving forward. The exception to this would be a sole proprietorship. If there is more than one person working on the business, you will want a business agreement which sets out the addition of parties, the removal of parties and how the business will be run on a day-to-day basis.
The several popular, and common, business structures in Canada apply to businesses that range from “mom and pop shops,” to large-scale corporations. Each business model comes with its own rules and guidelines, and before incorporating one, you should seek legal guidance on how to navigate through the various rights and obligations of each business structure and in particular understand the nuances of each one.
Business Formation Types
If you are a Sole Proprietor, then you and the business may be considered one in the same, which means you are fully responsible for all debts and any obligations pertaining to your business. As the sole owner, any profits made are entirely yours. However, as you are personally liable, any creditor can make a claim against business – and personal – assets in order to collect any debts. So, if you have a business and a home and your business is sued, your personal assets are also at risk. Furthermore, if you are operating under a sole proprietorship and want to use a business name, you will need to register it.
A partnership is a non-incorporated business that has been created in collaboration with two or more people. Entering into a partnership structure means that you and your partner(s) will have your financial resources combined and put towards the business. This also means that you and your partner(s) would share any and all profits of the business. While you don’t have to have a partnership agreement, it is highly recommended, as the agreement will address future disputes and disruptions in the business (i.e. death of a partner).
There are several different types of partnership:
- A general partnership where each partner is equally liable for any and all debts that the partnership may face.
- A limited partnership where a person is able to contribute to the business but is not involved in its operations.
- A limited liability partnership is typically afforded to a group of professionals. Groups such as lawyers, financial accountants or medical professionals.
Before entering into a partnership, having a partnership agreement is crucial. A partnership agreement will establish the terms of the partnership to help avoid any disputes relating to business operations. Seeking out legal counsel can help you save both time and money moving forward with your venture.
Incorporation can be done at one of two levels: federal or provincial/territorial. When your business is incorporated, it will then be considered a legal entity that is separate from any shareholders. If you are the shareholder of a corporation, you will not be liable for any debts, obligations or any acts of the corporation. There are tax considerations with corporations and annual compliance, but these typically do not circumvent the advantages of being incorporated. If there is more than one shareholder, a shareholders agreement is imperative as it can address many issues, including cash calls if the company needs money or the removal of a shareholder or director of the corporation.
These ventures are owned and controlled by an association of members. A co-operative can be set up as either a for-profit or not-for-profit organization. While this is one of the least common forms of business, it can be advantageous in situations where a group of individuals or businesses decide to group their resources together. This pooling of resources can provide access to common needs such as, delivery of products or services, the sale of certain products or services and employment.
While this is just a short list of examples, it highlights some of the most common business ventures in Canada. Before seeking out any venture, or if you are unsure of what structure to follow, seeking legal advice from a qualified Business or Corporate Lawyer can be advantageous to you if you are looking to pursue business formation.
The Business & Corporate Law team at Hummingbird Lawyers LLP can sit down with you to help you organize your structure, register your business or help with drafting a shareholder agreement or any partnership contracts that you may need. Contact Hummingbird Law today if you are soon starting your dream venture.
References and Footnotes
- The Government Of Ontario: 5 steps to incorporating ↩