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A. If you are the sole party involved in a commercial activity, you may carry on business by means of a Sole Proprietorship or a Corporation. If there is more than one party involved the venture, you may carry on business by means of a Corporation, a Partnership, a Limited Partnership or a Co-ownership. Q. What are the legal characteristics of the various methods of carrying on business? A. Sole Proprietorship It exists when an individual carries on business for the individual's own account without using any other form of business organization. There is only one owner. All profits or losses flow to the sole proprietor. The sole proprietor is personally responsible for carrying out all the contractual relationships relating to the business. A sole proprietor's business and personal assets may be seized in the fulfilment of his business obligations and liabilities. The sole proprietor is taxed at the progressive rates applicable to individuals under the Income Tax Act. It is the simplest arrangement for carrying on a business. If an individual carries on business under a name or style other than his own name, he must register the business name with the provincial government. Partnership It exists when two or more persons carry on business together with a view to making a profit. Its members are called "partners". The partners share in the income or losses of the partnership. The partnership is not a legal entity separate from its partners. Each partner has the power to bind the partnership and hence, bind the other partners jointly and severally. The partnership must also register its partnership name and the names of the partners with the provincial government. Limited Partnership It exists when two or more partners carry on business with a view to making a profit but their liability is restricted to the amount of money or other property that they each contribute. The partners share the profits and losses of the limited partnership based on their proportionate contribution to the business. Co-ownership It exists where two or more persons own property jointly. Each co-owner owns and is free to deal separately with his interest in the property unless he has limited his freedom to do so by contract with the other owners. Holding real-estate in a co-ownership is a common occurrence. The owners are not agents for the co-ownership as is the case with a partnership. The Corporation A corporation with share capital is the business entity used most frequently to carry on commercial activities. It is a separate legal entity distinct from its shareholders. The shareholder's liability is limited to their contribution to the corporation in exchange for their shares unless they have signed personal guarantees. A shareholder can also be an employee, a director and an officer of the corporation. There may be one or several shareholders holding shares in the corporation. There are several tax benefits to this method of carrying on business. The corporation is generally more expensive to maintain due to its separate tax returns and ongoing compliance with the Business Corporation's Act. Q. How do I choose the best method of carrying on business? A. No one method is best in every case. Your lawyer and your accountant will examine the arrangement which best suits your needs and will make recommendations. Some of the factors to consider are the number of business people involved, the need for limited liability, estate planning, the number of future business partners, employees, immediate and on-going costs, tax planning etc. Q. I'm selling/purchasing a business. What steps must I take? A. You must first determine whether the transaction involves shares or assets. You must then negotiate the purchase/sale price, the terms and conditions of the transaction, the various representations and warranties being offered by either party, the list of what you intend to purchase/sell. Once the foregoing is determined a lawyer will generally draft a letter of intent or a Buy/Sell Agreement. Each party should have their own lawyer. The lawyers will ensure that their respective clients are aware of all aspects of the transaction. The Purchaser's lawyer will conduct a number of searches to ensure that the Vendor's representations and warranties are accurate. The Vendor's lawyer will ensure that all corporate steps have been taken to give effect to the deal and will participate in all aspects of the transaction. Upon completion of all searches and document preparation, the parties will meet with their lawyers at a mutually convenient time to complete the transaction. Q. There are two investors in my business. Can we determine the outcome of one's incapacity, death or purchase/sale of one's share in the business in advance? A. Yes. You should hire a lawyer to draft a Unanimous Shareholder Agreement or a Partnership Agreement. These contracts allow you to determine, in advance, the outcome of one's incapacity, one's death or the sale or purchase of one's interest in the business. These documents can also restrict the possibility of having other third parties involved in the business. Most entrepreneurs do not wish to deal with strangers to the business such as a widow or a subsequent purchaser. Such agreements can prevent great hardship between business associates when they are drafted while the parties are having a favourable relationship. |
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