types of business Archives

By: Garnet E. Brooks, Business Lawyer, Wickwire Holm

This article is part of a series of short, informative articles designed to assist entrepreneurs and business people to become aware of how a business lawyer can help them understand business legal issues.

Benefits To Incorporation

Should I incorporate or not?

One of the first decisions an entrepreneur makes is whether or not to incorporate. This article will discuss some of the benefits and challenges to consider in making this decision.  Some main benefits to incorporating include the following:

  • A Share Structure

First of all, when a company is incorporated it is divided into units called shares.  The “owners” of the company are called the shareholders.  There may be one or there may be several.  This share structure provides flexibility for the entrepreneur as the company grows and develops.

  • Limited Liability

Shareholders enjoy the limited liability benefits that incorporating has to offer.  This means that, as shareholders, they are only liable to the extent of their investment in the company (i.e. how much they paid for their shares).  If the corporation has any debts or liabilities, the shareholders’ personal assets will not be available to creditors of the corporation, unless the shareholders have guaranteed the obligations.  The latter is one reason why I urge you to always consult a lawyer when signing any contracts, obtaining financing, entering into leases, etc, in order to ensure you understand the implications of what you are doing.

  • Separate Legal Entity

An incorporated company is a completely separate legal entity from you, and/or any other shareholder in the company.  This is the basis for the limited liability benefit described above, and further, it allows for the perpetual existence of the business (therefore allowing it to be sold, or otherwise dealt with).  With a sole proprietorship or a general partnership on the other hand, there is no legal separation between the business and entrepreneur and in order to deal with the business, it involves dealing with the personal affairs of the proprietor or partner.

  • Access to a Lower Corporate Tax Rate

Corporations are taxed at a lower corporate tax rate than individual proprietors. Sole proprietors and partners are taxed on business income at the higher personal tax rate because in those cases, income derived from business is taxed as personal income (remember the ‘no legal separation’ issue of unincorporated businesses).

  • Access to more capital / funds

Corporations are better suited to attract outside capital than unincorporated businesses.  One chief reason for this is the flexibility a share structure provides in taking on investment.  For example, instead of incurring debt, which would be a negative entry on a balance sheet, as a sole proprietorship is limited to in order to access outside investment capital (*without changing the control and fundamental structure), a corporation can issue shares in return for investment funds. This will result in an increase in share equity, which is a positive entry on the balance sheet.  Control can also be maintained as the share structure can be arranged in a way that the people involved agree to.

  • Income Splitting

This refers to the ability to cause income that would be earned by one individual to be earned by another individual at a lower tax rate (i.e. splitting income between spouses).

  • Access to Capital Gains Exemption

Individuals may have access to a capital gains exemption under the Income Tax Act (Canada).  This means that if certain criteria are met, on the sale of on the sale of shares of a qualified small business corporation, the individual could be exempt from income tax on capital gains of up to $750,000.

On the other hand:

The following are some important things to keep in mind beyond the obvious benefits of incorporating:

  • More Expensive

Incorporating a company involves higher costs to start up as well as maintain.  Although the cost can vary, in Nova Scotia the total costs will generally be in the $1500 – $1600 range on average (including a name search / reservation, legal fees and government fees and other disbursements).  There are also yearly fees involved to maintain the corporate / business name and registration, and if you want your lawyer to act as recognized agent there will be a fee as well.

  • More Formalities

There are more formalities involved with setting up and maintaining a corporation such as;

  • Choosing a share structure;
  • Choosing directors and officers;
  • Reporting to the local companies office, or other governing body;
  • On-going record keeping and annual filing/reporting;

The list of things to consider can be endless, and depends on your individual situation.  For example,  in cases where there are more shareholders involved, shareholders with spouses, an opportunity for income splitting, and the list goes on.  You are urged to always consult a lawyer to determine what and how to best structure your business.  on that note, please feel free to contact me at the law firm Wickwire Holm to discuss whether incorporating is right for you, and how to structure your corporation based on your individual needs and goals.

I can be reached as follows:

For more info on incorporating a company, click here:  http://entrepreneurlaw.ca/starting-a-business/what-is-a-corporation-businesscorporation/

For more info on sole proprietorships, click here: http://entrepreneurlaw.ca/starting-a-business/sole-proprietorship-structuring-your-new-business/

The Business Corporation:

Limited liability and the corporate entity

by: Garnet Brooks

What is a Corporation?

what is a corporation?Entrepreneurship involves risk.  One of the most common ways entrepreneurs limit their risk is through the operation of a corporate entity, known as a corporation, or company.

A corporation or company is a creation of law.  The federal legislation which governs corporations is the Canada Business Corporations Act (“CBCA”).  The provincial legislation in Nova Scotia is the Nova Scotia Companies Act (“NSCA”).  From a strict legal perspective the entity will be a corporation or a company, depending in which jurisdiction it is incorporated.  For the purposes of this article, I will refer to both as simply a “corporation”.

A corporation is a distinct and separate legal entity from its “owners”.  That means it can enter into contracts incur debt, hold assets and sue and be sued.  Its value is divided into shares which are owned by shareholders.  The shareholders elect the directors, who are the directing “mind(s)” of the corporation who manage and control the company.  The directors in turn, appoint the officers who are responsible for the daily operations of the business.

Advantages of using a Corporation

An advantage of using a corporate set-up for business is that it facilitates ease of capital investment from various people. For instance, the people who have great business ideas and expertise may not have money to get their business off the ground.  With a corporate structure, they could sell shares in the company to investors to raise capital (this may be subject to securities laws however, so it is best to seek the advice of a lawyer).  These people can benefit from the company’s success through the increased value of their shares as a result of the success of the company.  Different types of “classes” of shares can also be designed to have different characteristics depending on the needs and wants of the entity and the investors.

Corporations also provide limited liability to its shareholders.  Liability is limited to the assets of the corporation, which means creditors are limited in recovery to the assets of the corporation, and therefore shareholder risk is limited to their investment in the company.  Needless to say, this model is well suited to business people who may want to protect various assets such as a home, retirements savings, and other assets.  Often, business people set up a corporation for each separate business venture in order to shelter each from the others, in case one runs into trouble, the others will not be affected.

That being said, there are circumstances in which the “corporate veil” may be pierced, or set aside, resulting in personal liability to the shareholders.  Courts will not tolerate abuses of the corporate form as a shield from certain wrongdoings by the shareholders who also may be the directors of the corporation.

Also, If debt capital is sought (i.e. business loans), be aware that creditors may require personal guarantees from the “owners” (the principals of the company), which give the creditors a right to take action against the guarantor personally, if the corporation doesn’t make its loan payments.  This means that, even though a corporation has been formed to run the business, there is still a risk of personal liability where a guarantee has been provided.

Registration & Record Keeping Requirements

There are more registration requirements involved with setting up a corporation than with a partnership or sole proprietorship.  These include the incorporation documents which must be filed with the Registry of Joint Stock Companies, for a Nova Scotia corporation.  Among these are the articles and memorandum of association, as well as various notices and resolutions, which contain information that will be accessible by the public.

Additionally, a corporation is obligated to keep its corporate records up to date and accurate.  This is typically done by maintaining what is known as a “minute book”.  It is common for the corporation’s lawyer, or law office to keep and update the corporate minute book on behalf of the corporation. Annual “minutes” should also be prepared which update and confirm the corporate information and changes on record from year to year.

Corporations must also file an annual renewal with the governing office in its jurisdiction and pay an annual renewal fee as well.   Corporations are also required to file a separate corporate tax return each year.

There are more initial and ongoing costs and efforts involved with a corporation, but depending on the business, it may be well worth it for many reasons including the benefits of limited liability, freely-transferrable shares, perpetual existence and the relative ease of attracting investment.

What is a Share?

Generally, a share is a proportional part of certain rights in a corporation, and in its assets upon dissolution.  There are basically two types of shares; common and preferred shares.  Common shares represent the residual ownership of the corporation, and may have more rights to control and long term gain, while preferred shares normally have more discretionary rights as well as preferential dividends.

If there is only 1 class of share, it will be a common share.  The NSCA and CBCA both require that shares of a company distribute the right to vote, dividends and rights to share property/assets on dissolution.  Shares may be divided into different classes and all shares in each class must have identical rights but not every class of shares must.  This allows the company to facilitate the varied needs of the parties involved in a corporation through creating and issuing shares with different characteristics, as long as all required rights are distributed.

“Par value” is a concept which causes confusion and misleads investors and is not used widely anymore, though still alive in the NSCA (but not CBCA).  A share with a “par value”, simply means an arbitrary or nominal dollar amount assigned to the shares by the issuing company, and it has no significance as to the real market value. (When dealing with par value shares, however, it is important to be careful, especially when reorganizations are undertaken to ensure that the shares are dealt with properly to avoid negative tax consequences.  This is beyond the scope of this article and will be addressed in a future article).

Governance

There are two essential documents that each corporation will have. These are the Memorandum of Association and Articles of Association in a NSCA company, and in a CBCA Company the Articles of Incorporation and By-laws.

These are the company’s constitution and set out such things as the name, objects of the company and original subscribers.  The Articles of Association (NSCA) (Bylaws for CBCA company) set out the detailed information regarding the capital structure, powers, and procedures and obligations of/when doing business.

Shareholders’ Agreements

It is prudent for shareholders to enter into a shareholders’ agreement.  This sets out the rights and obligations of each shareholder in respect of his/her involvement in the business and procedures for compensation, entering, exiting the business (in regards to share ownership), duties and obligations.  The topic of shareholders’ agreements is vast, and will be addressed in a future article dedicated to that topic.

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This article was intended to be a brief and general discussion, and is NOT intended to be legal advice.  As each situation varies, and it is recommended that entrepreneurs seek the advice of a qualified lawyer. 

Garnet’s law practise has a focus on providing legal services to entrepreneurs and businesses at various stages of operation from start-up, to growth and expansion, reorganization and exit.  If you would like to contact Garnet Brooks, you may do so at Wickwire Holm in Halifax (902) 482-7021, (www.wickwireholm.com) / email Gbrooks@wickwireholm.com.    Follow Garnet on Twitter @can_entrelawyer and LinkedIn Linkedin.com/in/entrepreneurlawyer

Aboriginal Entrepreneur Law – The Limited Partnership (“LP”)

by: Garnet Brooks

(As featured in the Mi’kmaw & Maliseet Newspaper – Atlantic Canada)

With an increase in Aboriginal entrepreneurship in Canada, there is an increasing desire for entrepreneurs at all stages to become more informed on the basic legal concepts which concern them and their respective businesses.  There are legal consequences to owning and operating a business.  There are also unique considerations that are particular to being a status Indian entrepreneur in Canada that should be made by Aboriginal entrepreneurs.

Garnet Brooks is a business lawyer, an experienced entrepreneur and Aboriginal.  He practises law with a focus on business and entrepreneur clients at Wickwire Holm in Halifax.  Garnet writes “Entrepreneur Law” articles in order discuss and bring awareness of some of the important legal issues entrepreneurs may encounter as they venture into the world of business.

Introduction

In previous articles I discussed the sole proprietorship and general partnership business structures, which are commonly utilized by new small business entrepreneurs who are starting out.  This article will discuss the limited partnership structure, which is a step up in terms of complexity.  This structure is often used when there are more specific goals with respect to facilitating certain investment structures and / or tax planning needs.  First Nations may also utilize the limited partnership vehicle as part of their overall economic development set-up, which could be structured to achieve significant tax benefits and also to gain the limited liability protection offered through this structure.   This article will not delve into specific details of tax or liability planning.  Those items would be more appropriately discussed in the context of specific legal advising.  This article will discuss some general characteristics of a limited partnership, and what distinguishes a limited partnership from a general partnership, or other business structure.

The Limited Partnership (“LP”)

Limited partnerships may carry on any business that a general partnership may, and offers the benefit of limited liability to some partners known as “limited partners”.  For this reason, this business structure is commonly used in partnerships in which a passive investment vehicle is desirable for some investors (the limited partners).

A limited partnership has at least one general partner and one limited partner.  General partners are responsible for daily management/control of the business and have unlimited liability.  Liability of the limited partners is limited to their investment so long as they do not participate in the management/control of the business per s. 17 of the Nova Scotia Limited Partnerships Act, RSNS  1989 c. 259  (“LPA”).  S. 8 (1) states that limited partners may contribute cash and other property, but not services to the limited partnership.  The importance of understanding and adhering to this cannot be stressed enough, because if a limited partner oversteps his or her role in the partnership, the benefit of having the limited liability status of a limited partner may be lost.  It is very important to have a partnership agreement, (just as it is with a general partnership).  The agreement in a limited partnership is typically called a Limited Partnership Agreement.  This agreement will set out the expectations and roles of the partners in the limited partnership.

A limited partnership in Nova Scotia is created by filing a certificate pursuant to the Act with the Registrar of Joint Stock Companies, per the LPA, at s. 5 (1), which contains detailed information about the nature and terms of the limited partnership.

The tax implications are similar for a limited partnership as they are a general partnership, however there are some differences which are beyond the scope of this article.  It is always recommended that when taking advice in starting a business that you get tax legal and accounting advice specific to your unique situation.

The limited liability feature for limited partners is an attractive feature for investors seeking a passive investment.  This feature which limits a limited partner’s liability for partnership debts and other obligations can only be imposed by a statute.  Further, limited partners have the same rights as general partners to information, profits as and return of their contribution, and they may enter and leave the business with ease as per LPA s. 19.

This model would not be ideal where all parties intend to contribute skills and services, in addition to money, which would disqualify each of them from being a limited partner.

To discuss if this, or a different business structure is most appropriate for your business venture, feel free to contact Garnet Brooks at Wickwire Holm.

This article was intended to be a brief and general discussion, and is NOT intended to be legal advice.  As each situation varies, and it is recommended that entrepreneurs seek the advice of a properly qualified lawyer.  This will help entrepreneurs to be more informed, and better equipped to make decisions that will help them avoid potentially costly mistakes as they move forward toward achieving their business dreams and goals.  

Garnet’s law practise has a focus on providing legal services to entrepreneurs and businesses at various stages of operation from start-up, to growth and expansion, reorganization and exit.  If you would like to contact Garnet Brooks, you may do so at Wickwire Holm in Halifax (902) 482-7021, (www.wickwireholm.com) / email Gbrooks@wickwireholm.com  

 

 

Aboriginal Business – Sole Proprietorship (Aboriginal Considerations)

Aboriginal Business LawWith Aboriginal entrepreneurship on the rise, it is increasingly necessary to have a basic understanding of the legal issues that entrepreneurs, their businesses, and business partners face, in particular when issues unique to Indian status in Canada are thrown into the mix.

There are various ways an entrepreneur can structure a business.  One of the simplest structures is known as a “sole proprietorship”.  This post will discuss sole proprietorship and a few of its features including some unique to the Aboriginal (Status Indian) entrepreneur / Aboriginals business context.

A sole proprietorship is a business that is operated by one person (hence ‘sole’), without partners.

This business structure is a quick and easy way to start operating a business because it comes with very few registration requirements and lower costs compared to some other possible structures.

One consideration is whether or not you will have to register a business name.  In Nova Scotia, a business name must be registered if the entrepreneur intends to call his or her business something other than only his or her first and last name.  In other words, if your name is John Smith, and you call your business “John Smith”, you don’t have to register a business name.  However, if you intend to  add to your name, such as “John Smith Consulting”, or “John Smith Technology”, or use a different business name altogether, such as “Super Awesome Consulting Services”, then a business  name must be registered.

Another important aspect of proprietorship that entrepreneurs should be aware of is that there is no legal separation between the business and the owner.  This means that if you are a sole proprietor and your business gets sued for something, you are being sued personally, and therefore your personal assets, such as your home, any vehicles you own, your bank accounts, etc., may be at risk if you become liable (note – when you have an incorporated business, the corporation is legally separate from you.  This will be discussed in more detail in an upcoming article on corporations & corporate entities).

Tax considerations can often be a significant factor in whether an entrepreneur will choose to incorporate a business or operate as a sole proprietor.  For this reason, the advice of a lawyer with expertise in tax can be very important, in particular when issues related to status Indians in Canada may be relevant.

Aboriginal (Status Indian) entrepreneurs in Canada must also consider particular issued related to being a Status Indian (under the Indian Act (Canada)), when choosing how to structure a business.

First, s. 89 of the Indian Act, provides that any property that is owned by an Indian (as defined in the Indian Act), that is located on a reserve, generally cannot seized by non-Indians.  Therefore, if a non-Indian sues an Indian sole proprietor and wins, and the sole proprietor’s assets are located on a reserve, those assets will not be subject to seizure.

However, the Indian Act doesn’t prevent another Indian from legally seizing the on-reserve assets of Indian.  However, the liability must have been that of a Status Indian in the first place,  as Canadian Courts have established that a liability cannot be assigned by a non-Indian to an Indian in order to side-step the s. 89 protection of in-reserve assets.

Another reason Aboriginal entrepreneurs who operate a business on-reserve may find the sole proprietorship to be a preferred business structure is that s. 87 of the Indian Act provides a tax exemption in certain situations to Indians.  Canadian Courts have said that business income earned by an Indian on reserve (if the requirements of the legal test are met) is not subject to income tax.  Therefore, because there is no legal separation between the sole proprietorship and the owner, there will not be any income tax payable on the business income earned by a Status Indian running a sole proprietorship business on a reserve, as long as all relevant conditions are met.

However, it is important to note here that this exemption does not apply to Aboriginal entrepreneurs who operate a business off-reserve, as is often the case these days.  The exemption would also NOT be available to an incorporated business, even if its shareholders are all Status Indians.  Corporations will be discussed in an upcoming article.

This article is not intended to be a full review of all possible legal issues and is NOT legal advice.  There are many other important legal considerations to be made when choosing how to operate a business, and for this reason entrepreneurs should always contact a lawyer to obtain legal advice.  It is always easier, and often less costly in the long run, to start off correctly, than to change things later. 

Garnet Brooks is an experienced entrepreneur, and he now practises business law and Aboriginal business law at the law firm, Wickwire Holmin Halifax.  Garnet is originally from Bible Hill / Truro, Nova Scotia.  He can be can be reached by email at Gbrooks@wickwireholm.com / www.wickwireholm.com.

Limited Liability Partnerships (“LLP”)

A limited liability partnership (“LLP”) is very similar to a general partnership.  The biggest difference is that “innocent” partners have some protection from the unknown negligence or misconduct of other partners.  Limited liability partnerships are governed by the Partnership Act, in Nova Scotia.

LLP - limited liability partnershipAs in a general partnership, all partners in an LLP may participate in the management of the partnership.  Although this model affords innocent partners personal liability protection from the negligence or misconduct of other partners under s. 57(1) of the Partnership Act (Nova Scotia), partners can be liable if they are aware of the negligence, and did not take any reasonable steps to prevent it.

Limited liability partnerships must carry liability insurance per s.51(1)(c) of the Partnership Act.  All partners continue to remain responsible for all contractual liabilities of the firm.

Not every business may register as a limited liability partnership.  The Partnership Act states in s. 51(1) that a limited liability partnership can be registered if its sole reason for carrying on business is the practise of a profession which is governed by an act (a self regulating profession) which allows for a limited liability partnership.  It is common for legal and accounting firms to operate as limited liability partnerships.

The Limited Partnership (“LP”)

Introduction:  Previous articles discussed characteristics of sole proprietorship and general partnership.  This article will discuss the limited partnership business structure.

limited partnership (LP)Limited partnerships can carry on any business that a general partnership may, and offers limited liability to some partners, known as the “limited partners”.  For this reason, this business structure is often used in partnerships in which a passive investment vehicle is desirable for certain investors (the limited partners).

A limited partnership has at least one general partner and one limited partner.  General partners are responsible for daily management/control of the business and have unlimited liability.  Liability of the limited partners is limited to their investment so long as they do not participate in the management/control of the business per s. 17 of the Limited Partnerships Act, RSNS  1989 c. 259  (“LPA”).  S. 8 (1) states that limited partners may contribute cash and other property, but not services to the limited partnership.  The importance of understanding and adhering to this cannot be stressed enough, as if a limited partner oversteps his or her role in the partnership, the benefit of having the limited liability status of a limited partner may be lost.  It is very important to have a partnership agreement, (just as it is with a general partnership).  The agreement in a limited partnership is typically called a Limited Partnership Agreement.  This agreement will set out the expectations and roles of the partners in the limited partnership.

A limited partnership is created in Nova Scotia by filing a certificate pursuant to the Act with the Registrar of Joint Stock Companies, per the LPA, at s. 5 (1), which contains detailed information about the nature and terms of the limited partnership.

The tax implications are similar for a limited partnership as they are a general partnership, however there are some differences which are beyond the scope of this article.  It is always recommended that when taking advice in starting a business that you get tax legal and accounting advice specific to your unique situation.

The limited liability feature for limited partners is an attractive feature for investors seeking a passive investment.  This feature which limits a limited partner’s liability for partnership debts and other obligations can only be imposed by a statute.  Further, limited partners have the same rights as general partners to information, profits as and return of their contribution, and they may enter and leave the business with ease as per LPA s. 19.

This model would not be ideal where all parties intend to contribute skills and services, in addition to money, which would disqualify each of them from being a limited partner.

Partnerships - The General Partnership

Partnership - general partnership

Entrepreneurs often get involved in business projects together, or in ‘partnership’ with one or more other entrepreneurs or investors. There are various types of partnership structures.  Three common partnership structures include general partnerships, limited partnerships, and limited liability partnerships (LLP).  These blog posts will provide a brief overview of the general characteristics of each.

The first point I want to make is that a partnership is not a separate legal entity (as is a corporation).  A partnership is a relationship that exists among persons who carry on business in common.   In fact, the term, “partnership” is defined in s. 4 of the Partnership Act (“Nova Scotia”), as a relation between two or more people carrying on business in common with a view to profit.

The definition of partnership was judicially considered by the Supreme Court of Canada in Spire Freezers Ltd. v. Canada [2001] 1. S.C.R. 391, and in Backman v. Canada [2001] 1 S.C.R. 367.  An important point from these cases is “the determination of the existence of a partnership will depend on the true contract and intention of the parties as appearing from the whole of the facts of the case” (Spire Freezers, at para 18).

Entrepreneurs must realize that before a partnership is entered into, they should understand the legal consequences of what they are getting involved in, because if a partnership is found to exist, the risks and responsibilities of being a partner cannot be avoided.  Keep in mind that the courts normally consider, among other things, the parties intentions in regards to profit sharing, sharing of losses, contributions and control in making a determination of whether or not a partnership exists.

A business name will have to be registered if the partnership is operating under a name other than that of its partners.  The same penalties for non-registration apply to a partnership as for a sole proprietorship.

A further risk factor to consider is that because each partner is an agent of the other partners, any individual partner may be exposed to increased liability by virtue of the fact that there are more people involved.  This is addressed in s. 8 of the Partnership Act (Nova Scotia), supra, which states as follows:

Every partner is an agent of the firm and his other partners for the purpose of the business of the partnership, and the acts of every partner who does any act for carrying on in the usual way business of the kind carried on by the firm of which he is a member bind the firm and his partners, unless the partner so acting has in fact no authority to act for the firm in the particular matter, and the person with whom he is dealing either knows that he has no authority or does not know or believe him to be a partner.

Partners are agents of the other partners, as well as of the partnership.  This means that any partner can bind the partnership, and/or its partners in contract, and each partner is responsible for the wrongful or negligent acts of the other(s) in relation to the partnership.

Like a sole proprietorship, the owners/partners have unlimited liability which is joint and several.  This means that if one partner does not have sufficient assets available to satisfy his/her ‘share’ of liability, other partners’ assets can be responsible for greater than their share.  Because every partner can bind the partnership (and partners therefore), being a general partner is frequently unacceptable in a situation where there is a wide group of investors who do not know each other (see limited partnerships, corporations).

Since there are more people/agents involved in a partnership, it logically follows that there is a greater risk of action being brought against the partnership, and therefore it is important to have the ability to defend an action.  Commercial insurance may be purchased to limit risk, but as explained in the article on sole proprietorship, insurance has limits. 

Partners have default rights under sections 22-34 of the Partnership Act, supra, which include that all partners will share equally in the capital and profits, as well as contribute equally, its share toward the losses of the business.  Partners by default, are also equally entitled to participate in the management of the business, and all existing partners must consent to new partners being admitted into the partnership, and several others.

However, as stated in s. 22 of the  Partnership Act, these default rights may be contracted out of, and in fact often are through the use of a partnership agreement.  The reasons for this are many, and include that it is rare that all partners will be equal in their input into the partnership business.  In new, small business particularly, conflicts can easily arise when expectations are not understood, this can have a crippling effect on a small, and closely held (friends or family) business partnership.  It is important for partners to set out their roles clearly from the beginning with an agreement that reflects the true intentions of the partners and provides some guidance in many of the items which are addressed and agreed to in a partnership agreement.   It is prudent and recommended that partners enter into a professionally prepared partnership agreement which clearly sets out the roles, rights and responsibilities of each party in plain language.  This will protect the business by helping to avoid and/or settle any disputes or misunderstandings which may arise during the course of the partnership.

A partnership may be dissolved in several ways which include by agreement of the partners, or upon the occurrence of acts of dissolution as set out in a partnership agreement, by Court Order, upon the death or bankruptcy of a partner or pursuant to the Partnership Act.  Other partners who wish to carry on the business may be able to do so by starting a new partnership, or by following an express provision in the partnership agreement setting out the procedure for continuation of the business.  Such clauses will usually address funding a buy-out with life insurance on death, purchase and sale/exit procedures in the event a partner retires/exits from the business.  Upon dissolution, or the exiting of a partner be sure to engage legal tax advice and accounting advice as there may be very important tax considerations to be aware of before action is taken in any direction by remaining partners.

Advantages of partnerships include access to more resources from the shared capital, skills and other resources of the partners without necessarily having to incur debt, though it is common for partners to leverage instead of using their own funds.

Although a partnership is not a separate legal entity, the computation of income (or loss) is initially calculated from each source at the partnership level as if the partnership were a separate person.  Once income (or loss) is computed at the partnership level, it is then allocated to the partners who report the income or loss in their individual tax returns and pay taxes accordingly.

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Garnet Brooks is able to help entrepreneurs set up a partnership, or discuss other business structures to meet the business needs of entrepreneurs.  Garnet is also ready and able to draft partnership agreements for entrepreneurs going into partnership with one another.

Garnet Brooks is a business lawyer serving entrepreneurs at the law firm, Wickwire Holm, in Halifax, Nova Scotia, Canada.  Keep in mind that the information contained in the posts on this website are NOT legal advice.  Should you wish to receive legal advice from Garnet Brooks, he can be reached using this link, or by emailing directly gbrooks@wickwireholm.com.

The Sole Proprietorship

Sole Proprietorships in Nova Scotia

by Garnet Brooks, Business lawyer

sole proprietorshipOne of the decisions a new small business entrepreneur faces is how to structure their business.  This series will be a brief look at some of the most common ways new small businesses are structured.

A sole proprietorship is a business that is operated / owned by one person without partners.  This is the easiest way to start a new business because there are no registration requirements in Nova Scotia, New Brunswick, Prince Edward Island (PEI), or in Newfoundland and Labrador, if the business operates under the owner’s name.

If the business uses a name other than that of its owner’s personal name, a search must be conducted and, provided the business name is approved, it must be registered as required in section 4(1) of Partnerships and Business Names Registration Act, (Nova Scotia).  This helps avoid name conflicts with other businesses, provides some protection from potential later registrants using or attempting to use your business name and lets customers know who they are dealing with.  Business name registration, however, does not deliver the same level of protection afforded by trademark legislation, and is limited, generally, to the province of registration.

Further, there may be consequences to operating a business under an unregistered name (which is not the name of the sole proprietor him or herself) which may include monetary penalties or fines, and a restricted ability to bring or defend legal proceedings.

With a sole proprietorship, there is no legal separation between the business and its owner.  A consequence of this is that an owner cannot employ him or herself because a person can’t contract with him or herself.  Business income is calculated and taxed as the owner’s personal income (normally called “Self Employment Income” on a tax return).  This can be an advantage when losses are incurred during the start-up phase of the business.  The losses can be used to offset other taxable income (such as the common situation when a new entrepreneur keeps a regular job while starting up his or her business) resulting in less income tax payable on the other employment income.  However, the opposite is that if a sole proprietorship turns a profit, the money is taxed at the personal income tax rate in addition to other employment income.

A disadvantage with having a sole proprietorship is that the owner has unlimited liability and is personally responsible for all liabilities of the business.  Therefore, the owner’s personal assets are available to creditors in satisfaction of liability.  One way to limit liability would be through insurance.  This would however, only be within the limits and coverage of the policy, anything in excess is still at the entrepreneur’s personal exposure.

A sole proprietorship cannot expand its capital base without incurring debt.  If a person or entity makes an equity investment (capital contribution) in a sole proprietorship, it will no longer be a sole proprietorship. (see the legal definition of partnership)

Sole proprietorships may be the most appropriate choice for structuring a new business.  However, this decision would depend on the risk profile of the business you are getting into.  If the industry is a higher risk one, it may be best to spend the extra money to incorporate the venture.  The merits of this can be discussed with your professional advisor.

One last note, if you start a sole proprietorship with the intention to later incorporating, you may be able to do a s. 85 Rollover pursuant to the Income Tax Act (Canada).  This will allow you to transfer the business to an incorporated company on a tax deferred basis. (more information on s. 85 rollover’s here).

 

Garnet Brooks is a lawyer in the business law practise group at the law firm, Wickwire Holm, located in Halifax, Nova Scotia, Canada. 

If you would like to contact Garnet Brooks you may do so by clicking here

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