What are the options for structuring a business?
The most common ways to structure a business are sole proprietorship, partnership, joint venture and a corporation.
What is a sole proprietorship?
A sole proprietorship is owned and operated by an individual. It is not a legal entity and there is no distinction between the individual and the business. It is the simplest way for you do business.
What are the advantages and disadvantages of a sole proprietorship?
The primary benefit of a sole proprietorship is its simplicity: it is easy to establish and operate which makes it ideal for small business. The primary disadvantages are: (i) any income earned in a sole proprietorship flows directly to the individual proprietor resulting in any income earned being taxed at the personal versus corporate level and (ii) the lack of separation between the individual and the business means that the individual proprietor is personally liable for the debts and legal liabilities of the business.
What kinds of partnerships are there?
There are three types of partnerships: (i) General Partnerships, (ii) Limited Partnerships, and (iii) Limited Liability Partnerships.
What is a General Partnership?
A General Partnership is formed when two or more individuals agree to share in all assets, profits and financial and legal liabilities of a jointly owned business. A General Partnership can be formalized by a Partnership Agreement or it may exist by operation of law based on the conduct of the parties. The primary benefit of a partnership is that it is easy to form and operate giving the partners the ability to structure their business as they see fit. The primary disadvantages are: (i) any income earned by the partnership flows directly to the partners who are taxed at the personal versus corporate level and (ii) the partners have unlimited legal liability for the debts and legal liabilities of the partnership.
What is a Limited Partnership?
A Limited Partnership is made up of two or more partners. A Limited Partnership is formed by written agreement and must include a General Partner and one or more Limited Partners. The General Partner is responsible for managing the partnership while Limited Partners play no role in the management of the partnership business. The General Partner has unlimited liability for the debts and legal liabilities of the partnership while the Limited Partners are only liable up to the amount of their investment in the partnership.
What is a Limited Liability Partnership?
Limited Liability Partnerships are commonly referred to as an LLP. An LLP is commonly used by professionals such as lawyers and accountants to pool resources and lower overhead costs. An LLP is a formal structure that requires a written partnership agreement. The partners in an LLP enjoy limited personal liability – one partner generally cannot be held personally liable for the debts, liabilities or obligations resulting from the negligence or misconduct of another partner. Limited liability means that if the partnership fails, creditors cannot go after a partner’s personal assets or income. However, a partner’s interest in the property of the LLP is not protected from claims against the firm as a whole.
How do I start a partnership?
The first and most important step in creating a partnership is choosing the right business partner. As you should in any relationship, it is important that you ensure that you and your partner clearly understand what you expect from each other. We recommend formalizing a partnership relationship with a well-drafted partnership agreement that sets out the rights, obligations and responsibilities of each partner. Doing so will help ensure there is an equitable separation of assets, profits and liabilities.
How do I end or dissolve a partnership?
A partnership can end by operation of law or by agreement amongst the partners. Some examples of a partnership ending by operation of law include the death, bankruptcy or disability of a partner. When a partnership is ended by the mutual agreement of the partners it is important that partners negotiate and enter into a dissolution agreement. This is particularly important when there is no formal partnership agreement in place or when the existing partnership agreement does not address the rights, obligations and responsibilities of the partners on dissolution. When a partnership is dissolved, the authority, rights and obligations of the partners only continue to the extent necessary to wind up the affairs of the partnership and to complete any transactions not settled at the point of dissolution.
What is a Joint Venture?
A joint venture is a business arrangement between two or more participants that allows those participants to work together and pool their resources for the purpose of accomplishing a specific project or task, including projects that have a continuing purpose. Joint ventures can take on different forms of structures such as corporations and partnerships. Choosing the right form of structure for a joint venture is critical to minimize liability to the participants in the joint venture. Additionally, it is imperative that a detailed joint venture agreement be entered into between the participants setting out the objectives of the joint venture, the contributions by the participants to the joint venture, the management of the joint venture as well as the allocation of profits and losses.
What are the advantages and disadvantages of a Joint Venture?
Some of the advantages of forming a Joint Venture include: (i) a joint venture is typically a temporary arrangement and allows the participants to avoid longer-term commitments, (ii) in the event the joint venture project fails, costs are shared among the participants which avoids one party bearing all the costs, and (iii) by pooling resources and expertise the participants of a joint venture are more likely to success and accomplish their business objectives.
Some of the disadvantages of a Joint Venture include: (i) the objectives of a joint venture are not always clear which can lead to miscommunication of objectives between the participants, (ii) participants do not always participate and contribute equally in terms of resources and skills brought to the joint venture which can lead to strain in the business relationship; (iii) a participant may realize that another participant to the joint venture is not a reliable business partner, and (iv) by participating in a joint venture a participant may be prevented from pursuing outside business opportunities that relate to the business of the joint venture.
How do I start a Joint Venture?
A Joint Venture is created by way of contract. The contract is often referred to as a Joint Venture Agreement. It is important to ensure that a Joint Venture Agreement stipulates the term and the purpose of the Joint Venture. A well-drafted Joint Venture Agreement will set out the rights, interests and obligations of all parties.
How do I end a Joint Venture?
When a Joint Venture is created for a specific term it will end upon the expiration of that term. A Joint Venture can also be terminated upon the written agreement of all parties to the Joint Venture Agreement.
What is a Share Redemption?
A share redemption is sometimes referred to as a “share buyback” or a “purchase back”. It occurs when a company requires a shareholder to sell back certain shares to the corporation. The shares subject to the redemption must be designated as redeemable before the corporation repurchases them.
What is a rollover?
A rollover is a transfer of assets done pursuant to the Income Tax Act. One of the most common forms of rollovers is a section 85 rollover. A section 85 rollover allows a taxpayer to transfer “eligible property” to a taxable Canadian corporation for consideration that includes shares of the capital stock of the corporation. In order to utilize section 85, a taxpayer and a corporation must file a joint election known as Form T2057 with the Canada Revenue Agency. When filing Form T2057 the taxpayer can choose an “elected amount” between the taxpayer’s tax cost (adjusted cost base – ACB) and the eligible property’s fair market value. Electing at a taxpayer’s tax cost will allow a taxpayer to defer the realization of any capital gains on the rollover.
What is a Share Exchange?
A share exchange is a transaction that takes place pursuant to the Income Tax Act. Share exchanges are sometimes referred to as Section 86 Exchanges. A Section 86 Share Exchange involves a shareholder of a corporation exchanging all his or her shares in one class for shares in a newly authorized class. When exchanging shares under this section a shareholder must exchange all his or her shares of the particular class. Partial exchanges are not permitted. In addition to receiving shares of the newly authorized class of shares, a shareholder is permitted to take back forms of non-share consideration such as a promissory note. Section 86 Exchanges require a corporation to amend its articles to create newly authorized classes of shares.
What is a Share Conversion?
A share conversion is a transaction that takes place pursuant to the Income Tax Act. Share Conversions are sometimes referred to as Section 51 Exchanges or Section 51 Conversions. A Section 51 Share Conversion involves a shareholder of a corporation converting some or all of his or her shares of a particular class for shares in a pre-existing class of shares. A taxpayer utilizing the provisions of section 51 are not permitted to take back any form of non-share consideration.
How can I finance my business?
There are a number of ways to finance your company including: (1) bank financing, (2) sale of shares or equity, and (3) sale or lease of assets and equipment. It is important to review these options carefully with your financial, legal and financial advisers to ensure you select the option best for you.
Am I personally liable for business debts?
Protection of your personal assets is an important factor when considering how to structure your business. If you are operating a sole proprietorship, general partnership, or in some cases joint venture, creditors of your business may obtain a judgment against you personally to satisfy the debts of your business. Such structures can place your personal assets at risk. Corporations provide limited liability – shareholders of a corporation are only liable for the investment they have in the corporation. Shareholders themselves are not personally liable for the corporation’s legal liabilities.
What is a personal guarantee?
A personal guarantee is a form of guarantee given by an individual wherein the individual guarantees some or all of a corporation’s indebtedness. While shareholders are not normally liable for the debts of a corporation, a shareholder who grants a personal guarantee to a creditor of a corporation in which they are a shareholder will be liable to the creditor up to the amount of the guarantee in the event the corporation defaults on its obligation.
What is a corporation?
A corporation is a legal entity created by statute. Legally a corporation enjoys the rights and obligations of a person. Corporations are subject to corporate tax rates at the federal and provincial level. Shareholders of a corporation are not taxed unless they draw salaries or dividends from the corporation.
Unlike other forms of business, corporations offer their shareholders limited liability. Subject to certain exceptions, such as personal guarantees, shareholders are only liable up to the limit of their investment in the corporation.
Should I have a Unanimous Shareholder Agreement?
A Unanimous Shareholders Agreement (USA) is not required by law. However, shareholders of a corporation should consider implementing a USA when a corporation has two or more shareholders. A USA sets out the rights and obligations of the shareholders and addresses important issues such as the management of the corporation. A well-drafted USA will provide tools to address issues including but not limited to: shareholder disputes, the unexpected death or disability of a shareholder, marital or relationship breakdown, insurance and share valuation.
What is a minute book?
A corporation’s minute book holds its important corporate documents such as articles of incorporation, shareholders and director resolutions, share certificates, by-laws and often key contracts. A corporation is legally required to maintain a minute book and to maintain and fulfill annual reporting and filing requirements. KMSC Law can assist with the maintenance of your minute book and your annual reporting and filing requirements.
What is a board of directors and who can act as a director?
A board of directors is comprised of individuals who are elected by the shareholders to provide management and oversight of the corporation. In order to act as a director, an individual must be at least 18 years of age, not bankrupt and not declared incapable.
What are the risks of using an agent?
Agents are appointed by principals to act on their behalf. Principals can be individuals or corporations. An agent can enter into legally binding contracts on behalf of his or her principal which can result in contractual liability for the principal.
What is a parent and subsidiary and why are they used?
A parent corporation owns the shares of its subsidiary. The parent corporation is often a “holding” corporation through which the profits of the subsidiary are funnelled upwards through the payment of tax-free corporate dividends. The subsidiary corporation is often an “operating” corporation that incurs most of the risk and liability from day to day business operations. By moving profits from the operating corporation (subsidiary) up to the holding corporation (parent) the shareholders are able to protect the accumulated profit of the business from being attached by creditors.
What is a dividend?
When a corporation makes a profit, it retains that profit in the form of retained earnings. Corporations can declare a dividend from those retained earnings to its shareholders. Subject to certain criteria being met, the Income Tax Act sets out different types of dividends that can be declared. When a dividend is declared on a class of shares, each holder of that class is entitled to participate in the dividend. Dividends may be declared on one class but not another. Directors have discretion as to when a dividend is declared and to which classes it is paid. Dividends are reported by shareholders as income and are subject to dividend tax rates that vary depending on the type of dividend declared.