BUSINESS FORMATION REFERENCE. I intend to set up a business. What are my choices for organizing it?

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1 BUSINESS FORMATION REFERENCE I intend to set up a business. What are my choices for organizing it? You can choose to enter into business as a sole proprietor, within a partnership, or through a corporation. Tell me more about sole proprietorships. If you intend to go into business alone, and you want an inexpensive way to begin your business operations, a sole proprietorship may be an ideal route for you. A sole proprietorship is well suited to a simple idea that doesn't involve a lot of linkages with other businesses or large customers, and that doesn't involve many contractual commitments. This is because a sole proprietor is directly liable for any act that it can be proven the business brought about. So, for example, if it is proven that a person fell and suffered injuries as a result of a slippery floor left unattended by a sole proprietor in a cleaning business, the sole proprietor may be liable not only to the tune of what is in his or her business account, but also in his or her personal account, as well as other assets such as a home. Further, even with a Business Name Registration, there is little name protection for a sole proprietorship. So, for example, a sole proprietorship with the registered name Carol's Cookies has less rights to that name than a corporation that starts using the name even 5 or more years after the sole proprietorship adopted it!

2 On the other hand, a sole proprietorship only requires occasional maintenance, as opposed to the annual and more onerous maintenance required of a corporation. Also, the sole proprietor personally owns all the assets being used in, or that have been accumulated through, the business. Thirdly, the sole proprietor files the tax returns of the business as part of his or her personal tax returns, and in many but not all instances, can claim expenses that can actually reduce personal tax liability in the event the business makes a loss in any given year. Despite this advantage however, a net benefit, from the point of view of taxation, may still be obtained through incorporation as opposed to a sole proprietorship. A sole proprietorship is established pursuant to a Business Name Registration, resulting in a Master Business Licence. Information typically required for such a registration includes: - business name - business address - principal place of business in the province of registration - registrant's name and address (postal boxes are typically not accepted) - activity carried on by the business - person authorizing the registration of the business Okay. So, what about partnerships? If you have more than one person involved in your business idea, you could consider a partnership. Setting up a partnership requires both a Business Name Registration and a Partnership Agreement. Similar to a sole proprietorship, the owners of a partnership personally own all the assets of the partnership that are being used in, or have been accumulated through, the business. Liability in a partnership can be limited, or similar to a sole proprietorship, unlimited. However, as there is more than one person involved in a partnership, the mix between limited and unlimited liability can get complex. In essence, business partners can establish a general partnership, or a limited partnership, or a limited liability partnership.

3 In a general partnership, the liability of each partner, which can engage the partner's personal assets, as well as the liability of the partnership, which engages the assets of the partnership, are unlimited. In a limited partnership, it is required that there be a general partner, whose liability is unlimited, but there must also be one or more limited partners, who can limit their liability to the value of their contributions to the partnership. Limited partnerships can be useful for investors or silent partners who wish to financially assist the business of a general partner in exchange for a measure of profit, but do not wish to be actively involved in the business, and do not wish to incorporate. A limited liability partnership is a bit of an hybrid. In contrast to a general partnership, if a limited liability partnership is found liable for, say, negligence, the personal assets of the partners won't be in jeopardy, except for the partner who was the root cause of the negligence either through personal action or through a failure to properly supervise an employee. In addition, and this is true for all partnerships, the assets of the partnership would be on the line to be paid out for such a liability. A limited liability partnership is used for setting up professional services firms. It should be noted that if a partner leaves a partnership, it may be necessary to dissolve, and if desired, re-constitute the partnership. That is a lot to digest, but I get it. Now, what about corporations? Whether you are going into business alone or with others, and whether your business plan is simple or more involved, a corporation tends to be a good idea as a means of setting up the business. A key advantage of incorporating is that the corporation actually has its own legal identity, separate from the people involved in the business it is carrying on, the people who control it. In legal terms, the corporation is a "legal person"! The result is that the corporation can invest separately, acquire credit separately, own property separately, and be separately liable for anything

4 that may require liability payments as a result of business operation, without a resort to the assets of the people who control it (unless they give personal guarantees or are directors that become bound by law as liable). Additionally, as a legal person, and unlike the case can be with partnerships, the exit of a shareholder or a change in shareholders will generally not result in any impact on the corporation that may require a full-scale re-organizing. This is beneficial for estate planning purposes as the corporation continues to exist after any shareholder dies. Further, a corporation is in most cases taxed at a lower level compared to the payroll taxes paid by most working persons. That advantage can hold even after double taxation. That is, after both the profit made by the corporation, and the dividend paid to shareholders, have been taxed! In fact, deriving income via a corporation's dividend payments as opposed to via a sole proprietorship is recognized as a tax planning option for many business owners. Also, with incorporation, the corporate name receives some measure of protection. That protection is not as much as a trade mark, but it is more than a registered sole proprietorship or partnership. A subsequent person will not be able to use the name with regard to the incorporation of a separate business. Further still, rules for some governments in Canada make it possible for only some of the directors of a corporation to be Canadian citizens. For businesses with an international dimension, this fact can be very useful. There are, however, some things to consider when contemplating incorporation. Since a corporation has its own identity, it also has to file its own tax returns. The individual shareholder must file his or her personal tax return, and one for the corporation must also be filed by the "controlling minds" of the corporation. Additionally, the initial set-up cost for a corporation is higher compared to a sole proprietorship or a partnership. Further, having a corporation means more paperwork. Not only are you required to maintain personal records for yourself as a shareholder, the records of the corporation must also be maintained, and the corporation

5 must comply with rules that may apply to a corporation operating in the chosen area of business. Wow. That was a lot of information. I have a clear picture of the differences now. So, what should I be thinking about if I want to set up a corporation? It is important to note that corporations can be designed in many ways, and so a number of variables, which one may also refer to as choices, apply to the set up of corporations. First, is the corporation to be federally or provincially incorporated? There are mostly no big differences here. It is mostly a matter of preference and perceived status. Second, is the corporation to have a name or is it to be numbered? Typically, corporations that you want to have act behind the scenes, that is, corporations that won't deal with the public, can make do with being numbered. If you want to put the corporate name out there, that is, if you want to cultivate a brand presence or otherwise have a known corporate presence, then a name is necessary. Note that it is possible to proceed with a numbered corporation, and then have it register a business name. That is, you can have your corporation behave like a sole proprietor! This can be useful, for example, if you think you might end up exploring multiple business ideas one after the other until one takes flight, but you don't want to have to incorporate for each one. Thirdly, is the corporation to be commercial or not-for-profit? Unless it is your intention to establish an organization that isn't aimed at profit generation, you'll be looking at establishing a commercial corporation. A notfor-profit can be set up for many reasons, such as community activities, condominium operations, and associations. A not-for-profit can take the extra and separate step of seeking charitable status from the Canada Revenue Agency, allowing it to issue tax receipts.

6 Fourth, is the corporation to have more than two classes of shares? Shareholders run and deal with the corporation through shares. For most corporations that need more than one class of shares, two classes of shares will suffice. These are typically called Class A or Common Shares, and Class B or Preferred Shares. Shares, especially when designated into classes as indicated above, can be used to separate control from profit taking, for instance allowing investors to make a profit early in the life of the corporation without diluting the control of the brains behind the business idea. For shares used for control, each share typically allows for a vote, although shareholders can also decide to have equal votes regardless of the number of shares held by each. For complex corporations, more and more classes of shares can be set up for any number of valid reasons. In essence, the options for organizing business relationships through shares are endless. Fifth, is the corporation to have more than one business line? Most corporations have only one business line, and even if multiple business lines are present, they can be accommodated within a single corporation, for taxation and other reasons, without the need to set up separate and special share structures. Alternatively, a separate corporation can be set up for each new business line. So, for instance, one corporation can be for a cleaning business and another can be for a corner store business. In a few instances however, business owners may prefer to set up multiple business lines, with separate and special share structures, within a single corporation. Since this results in more classes of shares, it results in a complex corporation needing specialized maintenance, attentiveness and upkeep. In addition to the choices listed above, a corporation should have a corporate record book and that record book should include by-laws. In essence, the articles of the corporation, which are set out during incorporation, are like the constitution of the corporation, and the by-laws of the corporation are like the laws or rules of the corporation. Good to know. I am a professional and I want to set up a professional corporation. Should I be aware of anything?

7 A professional corporation is, in many ways, like any other corporation. However, there are a few key differences. Remember the indication made earlier that the liability of shareholders is limited by the corporate structure so that their individual assets aren't on the line if the corporation is found at fault for some wrong-doing? Well, for professional corporations, professional liability is not limited by incorporation. This necessitates insurance as a means of ensuring potential liability claims can be addressed without overwhelming professionals. It should be noted that professional liability is a specific sub-set of all possible liabilities. For instance, for a dentist, professional liability would include an allegation of a botched root canal but wouldn't include a slip and fall on the premises of the dental practice. Also, there is a key consideration that applies to professional corporations. The shareholders of the corporation must be practitioners of the profession at issue. So, a non-dentist investor can't be a shareholder along with a dentist in setting up a professional corporation. Among other things, this fact introduces additional considerations into the matter of corporate continuation, succession and estate planning. Further, for professional corporations, additional steps typically need to be taken with the governing body of the professional group, and additional stipulations regarding the structure of the corporation may need to be set out in the articles of incorporation. Professionals that may operate through professional corporations include chartered accountants, certified general accountants, lawyers, health professionals, social workers, social service workers, veterinarians, architects and engineers. Okay. So, what about not-for-profit corporations and charitable corporations? Not-for-profit corporations are incorporated either federally or provincially, through a very distinct process that, understandably, requires information not requested of commercial corporations.

8 A not-for-profit corporation may additionally wish to, but does not have to, acquire the status of a charitable corporation, which is granted by the Canada Revenue Agency, and which allows a corporation to issue tax receipts to those that contribute to the cause of the corporation. If it is your intention that your not-for-profit corporation become a registered charity, it is very important that the process of incorporating, inclusive of the terms and language used, be very specific, purposeful and aimed at that ultimate objective. Otherwise, you may have to make an application for Supplementary Letters Patent, that is, amend your not-for-profit corporation, if the Canada Revenue Agency requires changes. The federal government, both in incorporating not-for-profit corporations and in designating them as charitable corporations, applies a great deal of scrutiny. Rejections of applications, with the stipulation that additional information be provided or changes made if a re-submission is to be attempted, are not at all out of the ordinary. Okay, I know a lot about corporations now. So, if I am setting up a business, do I need a trade mark registration? In essence, the answer is possibly, but in most cases, it would be the best thing to do. A trade mark is a word, or words, a design, or a combination of those, used to identify the goods or services of a business. Trade marks are registered. For a business seeking to establish a clear and distinct brand or marketplace presence, a trade mark registration is highly recommended. A trade mark registration is really about granting the ultimate protection to your business identity, your products and your services, in the marketplace. To own the trade mark is to truly own the word, or words, design or combination of those, for commercial purposes. That ownership is separate from and can be in addition to incorporation, which grants you protection over the corporate name - that is, the usage of the name in the identification of a corporation. In contrast, a trade-mark registration provides prima facie evidence of actual ownership of the name or design. In a dispute, the

9 registered owner does not have to prove ownership; the onus is on the challenger. So, a trade mark registration ensures that you don't labour to establish and build a brand or marketplace presence, and then discover one day that someone else has taken it all from under you by simply registering the name or design! In addition to business protection, trade marks are about being original, distinct, and unique - about standing out. Your trade-mark helps your customers distinguish your products and services from others in the marketplace. Your trade mark registration gives you the exclusive right to use the name or design across Canada for 15 years. Your registration is renewable every 15 years after that. Thanks. That is definitely good to know. I noticed you offer other services like making business changes, business and corporation maintenance, corporate supplies, and permits. Tell me about those. On changes, whether you have a partnership or a corporation, the fact is that things change as times change. People may come and go, moves of location may occur. Approaches to business may change. In essence, life happens. That is all fine of course, but not keeping your business organization up to date as life happens can cost you, both through government fees and through unintended and sometimes very serious consequences. So, taking the time to file those changes with the relevant government, or to seek amendments to partnership agreements or articles of incorporation, is generally a good idea. Apart from changes for which governments require immediate filings, a good rule of thumb is to review your business organization structure once every

10 three years, and decide whether that structure still covers all your interests or whether it would be good to seek a change. Business and corporation maintenance always includes the making of changes, but it also entails additional activities. Corporations are required to file an annual report with the incorporating government. This report is separate from tax filings. A failure to file can lead to de-registration, with the result that the protections enjoyed through incorporation suddenly cease, exposing the business owner to risks and eliminating the many advantages of incorporation. Additionally, depending on the area of business or industry, other filings, regarding reports, permits, licenses or registrations, may be required. Also, businesses, including corporations, and those that control them, typically have obligations that are specific to their area of business or industry, imposed by governments or by courts. Being aware of all these obligations as they develop and change, and keeping informed on what to do, can quickly begin to take up the time that should be dedicated to your core business. Additionally, businesses enter into agreements that typically ought to be negotiated, drafted or reviewed by a lawyer in order to protect the interests of the business. Once signed, and with things going well and people busy running the business, it is easy to misplace those agreements as time passes. Further, businesses, and especially corporations, need to keep records, and those records of course change as time passes. It is always a good idea to have up to date records, and to electronically back-up those records, or as permitted, default for electronic records only. So, corporate changes, annual reports, filings regarding permits, licenses and registrations, awareness of the need to comply with obligations imposed by governments, agreement negotiation, agreement drafting, agreement review, agreement depository and electronic record keeping are some of the reasons for businesses, including corporations, to subscribe to a maintenance package. The package we offer, with its mix of reports and filings done for you; a virtual, electronic depository of documents and records; prepared information on what governmental obligations you may need to comply with; and some included hours of consultation, agreement

11 negotiation, drafting and review, is best suited to a busy business seeking a worry-free approach to the basic legal side of things. Corporate supplies are required by corporations for various purposes, such as maintaining records and registers, issuing shares, and executing agreements. Our incorporation services include an option to select corporate supplies for your business, but you can also purchase them separately at a later time, or purchase for the purpose of replenishing. For our business and corporation maintenance clients, the need for some supplies may be negated by the use of our electronic records-keeping services. Permits, licenses and registrations are required of businesses in various settings. After taking the steps to set up your business structure, your next question should be whether or not you need any permits, licenses or registrations, and if you do, which, when, how and how often. From the obvious ones like harmonized sales tax registrations, payroll registrations, and workers' compensation registrations, to the not so obvious ones like import/export numbers, takes the next step means knowing what you need to get and acting to get it. So, where does all this information leave me? At the end of the day, what are my options? Well, in essence, you can think of it in terms of steps: a) first, you need to decide on how you'll structure your business and then select your choice from the list on our Virtual Corporate Counsel page; b) depending on your choice of business structure, you may have to make secondary choices, and those have been very easily set out for you on whatever page you land on after making your selection from the list on our Virtual Corporate Counsel page; c) once you're done ordering up your business structure, and if you chose to incorporate, you'll be given the choice of ordering corporate supplies as well, to ensure you start your corporation's life on the right foot and keep it on that foot;

12 d) once all of that is done, and you receive confirmation that your business structure is set up, you should re-visit our Virtual Corporate Counsel page to see about any permits, licenses or registrations you may need and to secure those; and e) once you re all set up, but before you go too deep into running your business and gaining marketplace exposure, you should turn your mind to registering the trade mark of your business, and once again re-visit our Virtual Corporate Counsel page to get that process started. Then, if you want a worry-free approach to the legal side of your business you can subscribe to our Business and Corporation Maintenance package immediately or later; and if you need an off-the-shelf agreement, or work on an agreement specific to your circumstance, you can visit our agreement links, all from the convenience of our Virtual Corporate Counsel page and from the convenience of your home or office.