What is the best legal structure for your business ?
Sole Proprietorship
Sole proprietorship - or sole trader - is a legal structure with one owner, operated by that single person. Typically, entrepreneurs who use this type of structure often call themselves freelancers: this is why we often see this business type for consultants, self-employed professionals, home-based businesses, or by individuals who sell products online as a side hustle.
Benefits of Sole Proprietorship:
It is a simple and low-cost legal structure.
Delays with setting up this business structure are usually quite short.
Being the sole proprietor and manager of the business, you entirely control decisions. You are the official owner of the business.
Disadvantages of Sole Proprietorship:
The business doesn’t have its own legal heritage: there is no distinction between your personal life and your company. You are therefore personally liable for any business debts.
It is more difficult to obtain financing through banks or investors
Being the sole proprietor of the business, you are not considered an employee. You are entitled to any social benefits, from parental leave to any benefits from the CNESST.
Joint Stock Company
A joint stock company is a business legal structure with shareholders and managers. What exactly is the difference between a shareholder and a manager? Shareholders will share between themselves the company’s profits, while managers are part of the executive board, which operates the business in order to make a profit.
Because the joint stock company is a separate legal entity, it has its own rights and obligations. This type of company can be constructed under the provincial system or the federal system.
Benefits of Joint Stock Company:
The business is separate from its shareholders, meaning their responsibility is limited.
There are numerous tax benefits related to this structure. For example, it can, under certain circumstances, benefit from the tax deduction granted to small businesses.
This entity type allows a number of financing options, through banks or investors. Amongst those: convertible loans, private equity, etc.
The business’ profits can be reinvested in the company or shared between shareholders as dividends.
Disadvantages of Joint Stock Company:
Start-up fees for a joint stock company are more expensive and there is a lot of paperwork involved at the beginning.
Managers can be held accountable for, amongst other things, taxes and unpaid salaries.
General Partnership
A general partnership is a business legal structure where a group of people, named associates, work collaboratively to operate a business. Associated will contribute by pooling assets, knowledge or activities, and will share between each other pecuniary profits and losses.
The general partnership must be created with a contract which, amongst other things, will establish clearly what the common goal is, what is the contribution of each associate, the percentages of profit and loss sharing per associate and their individual responsibilities.
This business structure is often used for professional firms such as law firms, notaries, dentists, and so on.
Benefits of General Partnership:
Revenues are shared among all associates
Each associate is responsible of all debts and obligations contracted by the society
It is highly recommended for this type of legal structure to negotiate with all partners and put on paper a contract which defines the firm’s main aspects.
Disadvantages of General Partnership:
The firm must have a partnership contract. It is highly recommended to have a clear contract on paper which defines the company’s main aspects.
Associates are personally accountable
Each associate will have to declare in their own tax report the percentage of income from the society which they are entitled to receive, which can become a disadvantage if the company’s income is significant.
Based on the above, we recommend you take the proper time to analyse all options available to you once you decide to start your own business. Do keep in mind that the legal structure you will select will have an impact on your tax obligations: it is therefore important to consult a lawyer or an accountant to fully understand which option is best suited to your current situation, overall goals and future needs.
Notice: the content is this article does not constitute legal advice. The reader must not make any decision solely based on this article: they must seek instead legal advice adapted to their needs.
Contact
Catherine Gosselin is the Founder and President at CGB Legal, a business law firm specialised in legal services for entrepreneurs of today and tomorrow.
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