Legal Options for New Business Start-Ups
If you are planning to start-up a new business or you are planning to restructure an existing business, then you have a number of business organization options. Generally speaking a business may be organized as a sole proprietorship, general partnership, limited partnership or a corporation depending on the type of business, its risks, ownership structure and income level. The following represents a brief overview of the basic forms of business organizations.
Contact us for a consultation regarding the most appropriate business organization for your business.
If a person carries on business alone, the business is called a sole proprietorship. A sole proprietorship is a simple and cost effective way for an individual to start a business in British Columbia in that it requires no formal organization. The only legal requirement for a sole proprietorship is to file a declaration of the business name with the BC Business Registry in circumstances where the sole proprietor does not conduct business in his/her own name.
A sole proprietorship is suitable only for someone who intends to carry on a business alone, perhaps with the help of employees. It is not suitable if other people are expected to participate in the ownership of the business.
Potential advantages of a sole proprietorship include the relatively low start-up costs, the complete discretion of the sole proprietor in the control and management of the business and the ability of the sole proprietor to write off business losses directly against personal income. The main disadvantage of a sole proprietorship is that the sole proprietor is personally liable for all of business’s activities, including ownership of any business assets that are acquired and any obligations of the business that are incurred, such as debts. In this respect a sole proprietorship is not recommended for businesses that may be subject to third party liabilities. A sole proprietor also limits the ability of the business to share its pre-tax income with other stakeholders.
In many respects, a general partnership has similar attributes of a sole proprietorship with the obvious exception that there is more than one owner. Like the sole proprietorship, there are few legal requirements in organizing a general partnership apart from the registration of a trade name and the filing of a brief description of the partnership. In the absence of a partnership agreement, all partners are able to share in the management of the business. In some cases, a partnership may provide tax advantages because business losses can be deducted against other personal income. For example, if the owners of the business expect there will be losses in the first years of operation of the business, they may want to use a partnership so that they can apply these losses as individuals against other sources of income.
Like the sole proprietorship, the major disadvantage of a general partnership is the liability it imposes upon the partners. Each partner is personally liable for the losses of the business, and may also be liable for the wrongful acts other business owners. In this respect, the general partnership is only suitable for a relatively small number of owners whose business is not frequently exposed to third party liabilities.
Although not legally required a partnership agreement is integral to the proper function of a general partnership. The Partnership Act imposes certain rights and duties upon partners, which may not suit the business owners. For example, under the Partnership Act, all of the partners are entitled to share equally in the profits of the business. This may not be the arrangement that the partners want and they are free to change this by private agreement. Furthermore, a partnership agreement may be needed for many other reasons, such as to define management responsibilities, and to ensure the partnership’s continued existence after a partner departs.
Unlike a sole proprietorship and general partnership, llimited partnerships require formal organization under law. In British Columbia, these requirements are found in the Partnership Act. Limited Partnerships consist of general” and “limited” partners. General partners have much the same liabilities, rights and duties as ordinary partners whereas limited partners are principally investors. This structure allows general partners to maintain full control of the business while bringing on additional partners who do not share in the same level of control and typically cannot interfere in the day-to-day operations of the business (i.e. limited partners). This option may be advantageous in circumstances where you wish to take on partners for investment purposes without necessarily giving up control of your business or exposing your investors to personal liability from your business. Limited Partnerships provide investors limited liability while allowing them the income tax advantages of a partnership form of organization (that is, they can deduct losses against personal income).
A corporation is a more sophisticated form of business organization but may offer substantial advantages to business owners. Unlike a sole proprietorship or general partnership, a corporation is treated as a separate legal person from the business owners. As such, a business owner is not exposed to the same personal responsibility for the obligations of the company, such as debts or lawsuits associated with the business. A properly incorporated business can provide much needed protection to the business owners.
Please refer to the article titled “Why Incorporate” for a more detailed analysis of the costs and benefits of incorporating your business.
Contact us for advice on the proper business organization for your business.