This blog post is not legal advice and is for general informational purposes only. Always speak with a lawyer before acting on any of the information contained herein.
You have a brilliant business idea, but where do you begin? When establishing a business, it is critical to first decide on its business structure and then to register the company in Quebec. There are many factors to consider in making this decision, including tax and liability implications. Getting your business off to a promising start requires selecting the right legal form and a strong business plan.
Let's dive in.
TYPES OF LEGAL STRUCTURES
Sole proprietorship. With a sole proprietorship, you own 100% of the business and there is no distinction between you and the business. This structure is easy to set up and allows you to maintain full control over the business. However, since there is no separation between you and the business, you are personally liable for any debts or losses in the business. Some notable companies that started as sole proprietorships include A&W, Sears, and eBay.
Partnership. In a partnership a group of two or more people own the business. This allows you to share the start-up costs, the responsibilities, and the risks associated with starting a business. On the downside, the profit is also shared among the partners and each is liable for the partnership's obligations. Some notable companies that initially started as partnerships include Hewlett-Packard (HP), Procter & Gamble, and Ben & Jerry.
Corporation. An incorporated business is a separate legal entity independent from its shareholders, directors, and officers. This structure offers limited liabilities, with the possibility of transferring personal assets to the corporation to be used in the business, and it can exist forever. Since the corporation is a separate entity, it is taxed under a corporate tax rate structure, and not through your personal income tax. You can decide to incorporate under the federal or provincial regime. But federal incorporations come with steeper start-up costs than provincial incorporations. Some current notable corporations include Microsoft, FedEx, and IKEA.
Association. An association is implemented when a group of two or more people comes together for a purpose other than to make a profit. If your purpose is to launch a business to make a profit, then this is not the right structure for you.
SOLE PROPRIETORSHIP
In terms of legal structures, a sole proprietorship is the simplest and easiest to set up. There are only a few requirements, such as licensing and registration. It is no wonder this structure is quite popular among small business owners.
Since setting up a sole proprietorship involves few formalities, you will be up and running very quickly. You may be already a sole proprietor if you offer services under your name. This type of structure provides you with the freedom to control your decisions while limiting costs. Additionally, there are some tax advantages, as some losses and expenses can be deducted from your personal income and all profits are yours.
However, there is no difference between you and your business, and you are personally liable for all debts and losses in the business. Creditors have the right to claim your personal and business assets if you do not pay your business debts.
PARTNERSHIPS
Taking on the business world with others? Business partnerships are forged when two or more people (or corporations) pursue profit-making activities together. In Quebec, there are different partnership structures, each of which is formed through a contract: general partnerships, limited partnerships, or undeclared partnerships. However, for tax purposes, a partnership is not considered a separate legal entity. All profits and losses flow proportionally through each partner, and you and your partner(s) must each report these amounts on your tax returns.
Your partnership name must respect the Charter of the French Language requirements but it may also have an English version.
General partnerships
Two or more people establish a partnership when they agree to do business together to make a profit by contributing property, knowledge, and/or activities. As a partner in a general partnership each of you will be liable for the debts and obligations of the business on an unlimited basis.
Limited partnerships
A limited partnership is made up of at least one general partner and other limited partners. If you are a general partner, you will contribute your work, experience, and expertise and you will be the only one authorized to administer and represent the partnership. Each general partner is solidarily responsible for partnership debts.
If you are a limited partner, you will contribute money or property to the partnership. In terms of your liability towards the partnership's debts, it will be limited to the amount of your contribution.
There can be any number of general and limited partners under this structure as long as there is at least one of each.
Undeclared Partnerships (Joint Ventures)
In Quebec, you may form undeclared partnerships with others, also known as joint ventures. These partnerships can exist through a contract, or simply through the intention to establish an undeclared partnership. Unregistered general and limited partnerships are also considered joint ventures. This type of partnership is typically formed for a limited time for a specific purpose, for example, between artists or musicians collaborating on a project.
The property that you and your partners each contribute to an undeclared partnership remains the property of each partner. However, all of you are equally responsible for the debts and obligations of other partners contracted for the operation or service of the enterprise.
CORPORATIONS
A corporation is a separate legal entity that can be formed under either the provincial or federal regimes to carry out business activities for profit. In turn, the corporation distributes its profit to its shareholders, although the shareholders do not own the corporation.
No matter which regime is chosen, each corporation has its own set of rights and obligations. Besides having limited liabilities, corporations provide the capability of transferring assets easily, and they continue to exist indefinitely. Due to its separate legal existence, a corporation is taxed under a corporate rate structure.
As with partnerships, to incorporate in Quebec, refer to the Charter of the French Language and choose a French name compatible with its requirements but may also have an English version.
Choosing between the federal or provincial regime
Deciding to incorporate under the federal or provincial laws depends on various factors: (i) the costs; (ii) the jurisdiction in which the company will operate; (iii) the corporate name requirements and; (iv) the director's residency requirements.
It costs more to incorporate federally since you will also have to pay an incorporation fee to Corporations Canada and a registration fee to the Registraire des entreprises. However, no matter the regime and subject to certain formalities, you can register the corporation's business in another province where you wish to carry on an activity. Nevertheless, some industries have enabling laws and regulations that require you to incorporate under a specific regime.
A corporation is composed of shareholders, directors, and officers. The shareholders are responsible for electing the directors to manage the corporation. Federally incorporated companies must have at least 25% Canadian residents on their board of directors, and if there are fewer than four directors, one of them must be a Canadian resident. The Quebec incorporation regime, on the other hand, is more flexible since it does not set a residency requirement for the directors.
These directors may be held responsible for certain matters regardless of the regime, but insurances are available to protect against liabilities. The directors then appoint the officers who manage the day-to-day affairs of the company. In smaller privately held corporations, it is common to find the same person in all three roles.
ASSOCIATIONS
An association is formed through a written or verbal contract, or it can also result from facts clearly indicating the intention to form an association. An association is similar to a partnership, but the purpose is to pursue a common goal rather than to make a profit. Despite this, the association may make a profit as long as it is not distributed among its members. It may be the ideal choice for you if you aim to safeguard and develop the economic, social, or moral interests of those who will be members of your association.
It is essential to understand your options, tax implications, and the advantages and disadvantages of each business structure. Get familiar with the various types of business structures, so you can pick the one that suits your goals. In Quebec, it is vital to further consider elements like the French language requirements. Are you looking to start a business but do not know where to begin? Book a free initial consultation with us today to discuss your vision.