Things to Consider When Organizing a Business

 

The topics in the Dial-A-Law series provide only general information on legal issues within the province of Alberta. This service is provided by Calgary Legal Guidance funded in part by the Alberta Law Foundation. The purpose is to make you aware of your legal rights and responsibilities. This is not legal advice. If you require legal advice, you should contact a lawyer.

This topic will discuss some things you should consider when organizing a business form. You should consult a lawyer to assist you in determining the best way to organize your business to meet your needs.

A business may be organized in many different forms:

  • You may want to begin as a sole proprietorship.  It is the simplest business organization.  A proprietorship is a business owned and operated by one person.  You assume all responsibilities for the proprietorship and you are personally responsible for the debts and liabilities of your business. If your business does not succeed financially, all your assets, including your personal assets can be seized for payment against the debts you have incurred. You need to comply with local licensing requirements.  You must also register the trade name in Alberta that you operate under.
  • A partnership is a business where two or more persons are involved.  There is no limit on how many partners the business may have.  The partnership may be informal or it may be created by a formal signed agreement.   A partnership is a legal entity and can do all of the things an individual can do:  borrow money, pay wages, sue, be sued, and own property.  Persons associated in partnerships should file a declaration of partnership at the Corporate Registry.

You may have a partnership that is a general partnership or a limited partnership.  In a general partnership, each partner is jointly and severally liable for the debts of the partnership.  This means each partner is responsible for all debts and obligations that the other partner incurs in the name of the partnership.  Each partner is held responsible for the conduct of other partners who are acting in the ordinary course of business.  In a limited partnership, there are one or more persons who act as “general” or “managing” partners and other partners who are “limited” or “silent partners”.   A limited partner is liable only to the extent of their investment and only so long as the limited partner does not take part in the management of the business. If a limited partner takes on any management roles in the partnership, then the liability changes to that of a general partnership.

  • Incorporation is another form of business organization.  A corporation is owned by its shareholders who are people that buy shares in the business.  It is managed by the directors and officers, who may or may not be shareholders.  The corporation is also a separate legal person.  It can do all of the things an individual can do:  borrow money, pay wages, sue, be sued, and own property.

There are several advantages to incorporating your business.  First, a corporation can outlive the people who created it.  It will continue its existence despite the death of its shareholders.  The Corporation may be struck from the Corporate Register by winding up proceedings or dissolving the corporation.  This is different from a proprietor or partnership where if one person involved in that company dies, so does the proprietorship or partnership.

Second, the shareholders and directors are not generally held personally responsible for the debts and obligations of the corporation.  There are few exceptions.  In a partnership or proprietorship, the owners are held personally liable for the business debts and may have to forfeit their personal assets to pay the debts.

Third, it is easier to obtain investment financing.  Someone who invests in a corporation as a shareholder does not run the risk of being held responsible for the corporation’s debts.  The worst that could happen to a shareholder is that the shares become worthless.   At best, the investor’s shares gain in value as the corporation prospers.  An investor is more likely to buy shares in a corporation than to invest in a proprietorship or partnership where there could be personal liability.

Fourth, there are some tax savings for a corporation.  The advantages vary according to the circumstances of different businesses.   Consult an accountant for further information since tax law is complicated and changes frequently.

There are some disadvantages to incorporation.  For example, it may be more difficult to obtain financing from a bank.  Often shareholders and directors are asked to personally guarantee loans of the corporation.  Suppliers of equipment and inventory will also frequently demand personal guarantees. The guarantee in effect cancels the most important advantage of incorporation by making the guarantor personally liable for the corporation’s debts.

Also, corporations are the also most expensive form of business to set up and operate.  Incorporation forms must be filed with the Alberta Corporate Registry together with the incorporation fees.   Legal fees may also be added, as you should consult with a lawyer if you are planning to incorporate.  There is also more paperwork involved with a corporation because annual reports and tax returns must be filed accordingly.