Introduction to Business Structures

Before registering a business, it is important to understand your options for business structures. The following post will provide information on the three main types of for-profit business structures: corporations, sole proprietorships, and partnerships. Each structure has important implications for financing, taxation, liability, and succession.

Sole Proprietorships

In a sole proprietorship, there is no legal distinction between the individual and the business. The sole proprietor is responsible for the operation of the business including securing the capital, establishing, and operating the business, assuming all risk, and accepting the profits and losses. Sole proprietorships are easy to set up and are subject to little regulation.  

However, a sole proprietorship is not considered a separate legal person. Therefore, any income from the sole proprietorship is treated as the income of the sole proprietor. This can be advantageous or disadvantageous. If the business generates a loss, the loss can reduce income from other sources of the proprietor. Conversely, if the business generates profit, that profit will be applied to any other income of the sole proprietor. Lastly, as a sole proprietorship is not a separate legal entity the sole proprietor is personally liable for all debts and liabilities of the business.           

General Partnerships

A general partnership exists where two or more people carry on a business together with a view of profit. Individuals who are carrying on a partnership are governed by the Partnership Act.[1] It is therefore important to familiarize yourself with the partnership act if you choose to use this business structure.  Like a sole proprietorship, general partnerships are easy and inexpensive to form. In addition, general partnerships are not treated as separate legal entities for taxation purposes. As noted above, this may be advantageous, or disadvantages.

However, in a general partnership, all the partners are jointly and severally liable for the debts and obligations of the partnership. Further, any act or omission of a partner may create liability for the other partner(s) provided it occurs in the ordinary course of business.

Corporation

Corporations are used for a wide range of businesses. A corporation has all the rights, powers, and privileges of a natural legal person. Incorporation can occur either federally under the Canadian Business Corporation Act (“CBCA”) or provincially under the British Columbia Business Corporation Act (“BCBCA”). A corporation’s organizational structure includes a board of directors, officers, and shareholders. The directors manage the corporation and may appoint officers to manage the day-to-day operations, while the shareholders own the corporation. Each share provides a “bundle of rights” to a shareholder including voting rights, dissolution rights, and dividend rights.

 A corporation may provide significant tax advantages as the Canada Revenue Agency considers corporations a separate legal person. Further, corporations are subject to commercial tax rates. An additional advantage of the corporate form is limited liability. Normally, no shareholder can be held personally liable for the debts, obligations, or acts of the corporation beyond the amount of share capital the member has subscribed to. However, for small businesses, many lenders will require a personal guarantee for any loans to the corporation to secure their loan. Lastly, a corporation provides the ability to finance a business quickly through the issuance of shares.

It is also important to note the disadvantages of the corporate form. First, corporations are expensive to form and organize, and they are subject to significant regulation. Lastly, there are strict recordkeeping requirements for corporations including records for shareholders and director’s meetings and annual filings with the government.

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If you are looking for further assistance choosing the right business structure or have any other questions, please feel free to contact the Business Law Clinic at (250) 472 -4522 or blc@uvic.ca

Disclaimer

Nothing on this post constitutes legal or other professional advice. The post is for general information purposes only.

[1] Partnership Act, RSBC 1996 c 348.