Corporate Law – Top 10 Questions Asked by Clients
Prepared For: Legal Education Society of Alberta
Complete Lawyer
Presented by:
Nikki J.L. van Mulligen
MacLachlan McNab Hembroff LLP
Lethbridge, Alberta
For Presentation in:
Lethbridge – May 6, 2016
CORPORATE LAW – TOP 10 QUESTIONS ASKED BY CLIENTS
STARTING A BUSINESS
1.
I am considering starting a business. What types of business structures are there?
a.
Sole Proprietorships
A "sole proprietorship" is a business that is owned and operated by a single individual
(i.e. a sole proprietor).
One of the primary advantages to setting up a business as a sole proprietorship is
simplicity. Since a sole proprietorship does not involve a separate entity, it is often
an easier structure for clients to understand. This allows the client to focus on their
business operations during the critical startup phase.
Another major advantage of a sole proprietorship is the low startup costs. Apart from
the general business expenses that are incurred with any business, there are no
additional costs incurred setting up the structure. For new businesses, keeping costs
down is often one of the most important considerations.
Although registration of the business name as a “trade name” at Corporate Registry
is only mandatory for businesses engaged in trading, manufacturing, contracting, or
mining1, registration is recommended if the client intends to carry on business under
a trade name. It is important to note that the registration of a trade name does not
create any rights to the name, nor does it prevent other businesses from operating
under a similar, or even the same, name.
The primary disadvantage of sole proprietorships, and the primary reason they are
not recommended, is personal liability exposure. Since a sole proprietorship is not
treated as a separate legal entity, the business forms a part of the client’s personal
assets and liabilities. As a result, all of their personal assets are available to satisfy
the liabilities of the business. If clients choose this business structure, they should
be advised to carry substantial insurance coverage in order to help mitigate the
significant risk exposure.
1
Partnership Act, RSA 2000, c. P-3, s. 110 [PTA]
1
The other major disadvantage of sole proprietorships is the tax treatment. For tax
purposes, all income from the business is taxed at the personal level as ordinary
income. This means that clients will pay between 25% and 48% tax2 on their
earnings. In comparison, small business corporations only pay between 13.5% to
27% tax3 on their active business income.
b.
Partnerships
A "partnership" is a type of relationship; it is a business formed between two or more
persons carrying on a business in common with a view to profit4. Although
partnerships are recognized under the Partnership Act and the Income Tax Act, they
are not treated as separate legal entities. Similar to trade names, registration at
Corporate Registry is recommended even though partnerships only need to be
registered if they are engaged in trading, manufacturing, contracting, or mining5.
For legal purposes, each partner is considered an agent of the partnership and all
partners are bound by the actions of each partner6. Accordingly, all partners are
jointly liable for the debts and obligations of the partnership (except where a partner
acts without authority or where the partnership is a limited liability partnership7).
For tax purposes, the income of the partnership is determined at the partnership
level and then attributed to each of the partners at the personal level, thereby
ultimately being subject to the tax at personal tax rates.
Overall, the advantages and disadvantages of partnerships are similar to that of sole
proprietorships in that they are simpler and cheaper to start up, but they are less
attractive due to the personal liability exposure and higher tax rates.
2
http://www.kpmg.com/Ca/en/IssuesAndInsights/ArticlesPublications/Pages/taxratespersonal.aspx
3
http://www.kpmg.com/Ca/en/IssuesAndInsights/ArticlesPublications/TaxRates/Income-Tax-Rates-for-CCPC.pdf
4
PTA, s. 1(g)
5
PTA, s. 106
6
PTA, s. 6 and 7
7
PTA, s. 11 and 12
2