Choosing a structure can be difficult for business owners, but selecting the right legal structure is a necessary part of running your business. This decision will vary depending on your goals and your individual business, but understanding your options is important whether you’re just starting out or looking to grow your business.
This structure is only suitable for a sole owner of a business and is typically considered the simplest form of business organization. The key advantages of operating your business as a sole proprietorship are that it is inexpensive to establish, and you may be able to offset business losses directly against your personal income. The main drawback on the other hand is that there is no limited liability and, as a result, personal assets may be exposed in the event of liabilities associated with the operation of the business.
When two or more people are carrying on business together with a view of profit, as the name suggests, they may want to choose a general partnership. You and a business partner might choose a partnership because:
- It can be simple and inexpensive to establish;
- Allows for all partners to take part in the management of the company unless they agree otherwise; and,
- May allow for the partners to deduct business losses against personal income;
The major disadvantage of general partnerships is the liability that may arise from a partner’s conduct. Each partner is liable for the obligations and debts of the business. Therefore, the acts of one partner in conducting the business may bring liability to the other partners as well. As a result, a general partnership should only be used when the partners have great trust and confidence in one another.
If you do not enter into a written partnership agreement, there is a statutory framework that automatically comes into play under the Partnership Act. In many cases, there are additional terms that the partners want documented or revisions to the statutory framework, so the partners will enter into a written partnership agreement.
A limited partnership blends some of the advantages of a partnership, with some of the advantages of a corporation, which we will get to in a moment.
In a limited partnership, there are two types of partners, “limited” and “general” partners. Limited partners are typically investors and do not (in fact, in most cases should not) participate in the management of the business and instead leave that to the general partners.
This structure allows investors in a limited partnership to deduct losses of the partnership against their other income, while affording them a limit to their liability in the amount that they have invested. As a result, a limited partnership may be one attractive structure for business owners looking to raise capital. A limited partner needs to be aware however that if they later become involved in the operations of the partnership, they may lose their liability protection and be considered a general partner.
Limited Liability Partnership
A limited liability partnership (“LLP”) is a modified version of the general partnership and has only been permitted in British Columbia since 2005. Unlike a limited partner in the structure discussed above, a partner in an LLP can take part in managing the business without exposing themselves to the same liability in a limited partnership. A partner in an LLP is not personally liable for the obligations of another partner simply by virtue of being a part of the management of the partnership. However, a partner in an LLP still may be liable for their partner’s actions or obligations in some instances. As with all structures, if you are considering forming an LLP, it is important that you discuss the limitations with your lawyer.
Many businesses are carried out through a corporation. Creating a corporation creates a separate and distinct legal entity. What this means is that the corporation generally has a degree of separation from its individual shareholders and the corporation itself has certain rights, such as the ability to hold property in the corporation’s name, as well as sue and be sued.
Some advantages of establishing a corporation are:
- Continuity as it can continue to carry out business with evolving shareholders;
- Limited liability in some circumstances;
- Advantages when raising capital and tax planning; and,
- Creativity in structure and management.
Choosing the appropriate business structure is a significant decision and it is important to understand your options. A business lawyer will be able to provide you with valuable insight and assist you in making this determination to best position you and your business.
Author: Bennett Liddycoat
This information is general in nature only. You should consult a lawyer or appropriately qualified party before acting on any of this information. This information should not be considered as legal advice. To learn more about your legal needs, please contact our office at (250)448-2637 or one of our lawyers practicing in the area of corporate law at the following:
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