Colours of Business Law

BY MONICA BEFFA FOUNDER OF BEFFA LAW PC

#1 TIP FROM THE PROS ...

Choose the right legal structurefor your business

1. SOLE PROPRIETORSHIP

A sole proprietorship is perhaps the most well-known and common option chosen by start-ups. It is an entity where the business is owned and controlled by one individual who is accountable for the business’ debts and obligations.

Particulars of Sole Proprietorship

• The sole proprietor/owner may need to register a business name (if the business is not carried in the owner’s name) and to obtain the required business licenses and permits.

• The owner is personally accountable for any liabilities incurred by the business.

• Income from the business is reported on the owner’s personal income tax return.

PROS

• INEXPENSIVE: The registration and lawyer’s fees are lower.

• EASY: The sole proprietorship is straightforward to set up and manage.

• CONTROL: The owner has full control of the business.

• SIMPLE: The administration of the business and taxes are the simplest of all structures.

• PROFITS: The sole proprietor receives all profits and claims all losses.

• MANAGEMENT: The owner has sole responsibility for the decision-making.

• TAXES: The sole proprietor pays personal income tax on the net income generated by the business

CONS

• UNLIMITED LIABILITY: The owner is liable for all debts and obligations of the business.

• LEGAL ENTITY: There is no separate legal entity of the company.

• RISKS: The owner assumes the risks of the business which may extend to the owner’s personal assets.

• FINANCING: It is more challenging to raise capital and obtain financing from the banks.

• CONTINUITY: The sole proprietorship cannot be passed to another individual if the owner dies or decides to close the business.

• TAX: The owner must declare all revenues and expenses of the business at the time of filing the personal income tax return.

TAKE AWAY

For a small business owner, the sole proprietorship option may be the easiest way to get your business off the ground and running. However, if your business is sued for any reason, you could be personally on the hook for any damages.

2. PARTNERSHIP

A partnership consists of two or more individuals that join together to carry on a business. Each partner contributes money, labour, property, or skills to the partnership and is entitled to a share of the profits or losses of the partnership. Partnership agreements are needed to set out the rights and responsibilities of each partner and may limit potential conflicts between partners. Limited Liability Partnerships may be suitable for certain professions and may provide some protection to the partners from personal liability for certain acts done by other partners.

Particulars of the Partnerships

• Partners share profits and financial responsibilities of the business; are personally liable for the business’ obligations; have fiduciary duties to the partnership and one another; and, pay taxes through their individual tax returns.

PROS

• INEXPENSIVE: Partnerships have low registration and set-up costs.

• PROFITS: Profits flow through to the partners.

• RISK: In partnerships, the risk is shared between the partners.

• SIMPLE: Partnerships are easy to set up and to report the taxes.

• CAPITAL: The start-up capital of the partnership may be divided amongst partners.

• MANAGEMENT: In partnerships, the management is shared between the partners.

CONS

• ENTITY: A partnership does not have a separate legal existence from its partners.

• LIABILITY: All partners are jointly and severally liable for the debts, obligations, and responsibilities of the partnership. Each partner can bind the partnership, and therefore, any partner may be responsible for the actions of the other partners.

• PROFIT-SHARING: All partners share the profit of the partnership.

• BUYOUT: A partnership’s buyout may be difficult if a partner leaves the partnership.

• MANAGEMENT: All partners take the decisions jointly.

• DISPUTE: Partners may disagree over the partnership’s decisions.

TAKE AWAY

If a partner fails to meet a contractual obligation, any partner could be personally liable. Alternatively, you can register a limited liability partnership to protect you from other partners’ malpractice or wrongdoing.

3. PARTICULARS OF LLPs

• Partners must file registration documents with the local government.

• A partnership agreement sets out the rights and responsibilities of the partners and how the business will be governed.

• Partners can choose to be taxed either as a partnership or as an individual.

PROS

• LIABILITY: In, LLPs partners have limited liability.

• ADMINISTRATION: For LLPs, there is a reduced amount of record-keeping and filings than with other legal structures (e.g. corporations).

CONS

• DISSOLUTION: If a member leaves or dies, the partnership dissolves, however the partnership agreement prepared by a lawyer can be designed to prevent this situation.

4. CORPORATION

Corporations are legal entities that can include one or more shareholders, directors, and officers. A corporation has the same legal rights as a natural person; hence it can sue, be sued, enter into contracts and obtain a loan.

Particulars of the Corporation

• Corporations are required to file paperwork with the local government.

• Corporations need to establish several by-laws that govern the business’ operations.

• A corporation must adhere to specific corporate formalities on a regular basis.

PROS

• ENTITY: Corporations have a separate legal identity from their shareholders.

• LIMITED LIABILITY: Shareholders are not responsible for the company’s debts or obligations.

• FINANCING: Corporations can easily raise capital from investors and obtain financing from banks.

• PROFIT: A corporation’s business income may be paid out to its shareholders by way of salary or dividends, allowing shareholders to optimize their own income taxes.

• CONTINUITY: A corporation has continued existence, and therefore, it could be sold or transferred.

• TAX: Corporations have some flexibility with the disbursement of income and expenses (e.g. nondeductible expenses, income splitting) in order to gain tax advantages.

CONS

• EXPENSIVE: Most expensive business structure to set up and maintain.

• COMPLEX: Incorporating and maintaining a corporation may be more complex.

• REGULATION: Corporations are tightly regulated and are required to file paperwork with the government on regular basis.

• PROFITS: Corporations are taxed when they earn profits.

• DIVIDENDS: The dividends distributed to the shareholders are taxed.

• LIABILITY: The shareholders, directors, and/or officers may be found personally liable for the debts of the corporation.

TAKE AWAY

PROFESSIONAL CORPORATION

Certain professionals (e.g., dentists, lawyers, accountants) can form a Professional Corporation which allows for limited personal liability for the shareholder.