Business Formation

Business Formation, Incorporation & Partnerships

The initial steps taken to form a business will impact its future governance, operations, finances, and exit strategies. With extensive experience in establishing and restructuring domestic and cross-border ownership structures, Gusto Law can help guide you through these considerations, prepare formation documents that align with your near and long-term goals, and provide ongoing legal and strategic guidance during your business’s evolution.

Starting your business involves decisions that affect the way it will shield its owners from liability, pay, defer or flow-through its tax liabilities, comply with applicable laws, and attract future investment or divestiture options.

Business formation, incorporation and partnership services

Canadian businesses can assume the following forms:

1. A sole proprietorship;
2. A partnership (general, limited and limited liability);
3. A corporation (limited companies; and unlimited liability companies — in Alberta, British Columbia and Nova Scotia only); or
4. A joint ventures

The owner of a sole proprietorship owns all the assets, receives all profits, and is responsible for all of the business’s liabilities, including taxes payable at their personal tax rate.

Compared to corporations, a sole proprietorship is much more limited in its allowable business expenses and deductions. It’s easy to set up, usually having only a trade name registration, business license, WCB account and tax number. However, since sole proprietors have uncapped personal exposure to the liabilities of the business, a sole proprietorship might be suitable only for specific situations: for example, where an independent contractor successfully negotiates out its responsibility for claims related to its services.

There are two forms of partnerships: general and limited.

General partnerships share some properties with sole proprietorship, insofar that there is an unlimited liability that each partner is exposed to on a joint and several bases. The only filing requirement is registration of its business or trade name.

Limited partnerships are formed by filing a declaration of partnership under a province’s governing legislation. Through a partnership agreement, each limited partner’s liability is limited to their respective contribution to the partnership. The trade-off is typical in that the limited partner contractually gives up the ability to control the partnership’s business. The decision-making responsibilities of the partnership are typically borne by its general partner, whose liability is often uncapped. Limited partnership agreements may also prescribe different allocations for the gains and losses of the partnership, as well as set out exit points for the business.

Although a partnership may have obligations to file declarations of partnership income, a partnership by itself does not pay income tax on its operating results and does not file an annual income tax return. Instead, each partner includes a share of the partnership income or loss on their personal, corporate, or trust income tax return.

An LLP or “limited liability partnership” is a distinct type of partnership used in several Canadian provinces for professional services and law firms. An LLP is a separate legal entity like a corporation, where each partner’s liability is limited. However, unlike a corporation, an LLP does not have shareholders or directors and is taxed like a partnership. The LLP partners will enter an agreement to provide for each partner’s interest to the assets, liabilities, and earnings of the LLP.

A corporation is a distinct legal entity that owns its own assets and liabilities. In most cases, corporate shareholders have no legal liability for the corporation’s actions. Corporations also have access to a broader set of allowable business expenses and deductions.

Federal and provincial business corporation laws are quite similar to each other, but have some differences that might drive a business’s decision on where to incorporate. For example, provinces have different rules for director residency requirements, flexible corporate proceedings, licensing requirements, fees and taxes. As well, certain businesses like banks, loan companies and insurance companies have their own sector-specific governing legislation for registration and ongoing compliance.

An unlimited liability company (or “ULC”) is another legal entity form for businesses registered in Alberta, British Columbia and Nova Scotia. ULC possess some attributes of partnerships, where the “members” or shareholders have unlimited liability in certain circumstances. ULCs were previously popular for subsidiaries of US-based sponsors, as they resulted in tax advantages as a tax flow-through vehicle for its cross-border parent. However, such benefits have since been limited by changes to the US-Canada tax treaty.

To set up a corporation, the shareholder owners will perform their initial capitalization of the corporation in exchange for shares, and appoint one or more directors to oversee the business. The directors may appoint a team of officers who represent the management team responsible for following the direction of the board, and for handling the day-to-day affairs of the corporation.

Bylaws of the corporation set guidelines for decision-making procedures, as among the shareholders and directors. These requirements are often prescribed by statutes and cannot be modifiable by shareholder consent. Additional governing documents, like the corporation’s unanimous shareholders’ agreement, set the criteria and limitations for the board or management’s decision-making authority, as well as defining each shareholder’s ability to sell or transfer their equity.

The corporation’s minute book is a record of all key corporate documents. The minute book will typically contain minutes of shareholders’ meetings and minutes of directors’ meetings, articles of incorporation, bylaws, directors’ resolutions, shareholders’ resolutions and annual reports.

The minute book should be complete and up-to-date. It is typically inspected by a corporation’s auditors, and may be reviewed by counterparties as part of transactional due diligence.

Joint ventures involve two or more parties working in concert toward a common business goal, while often maintaining each of the parties’ separate legal identities.

A contractual joint venture will be governed by one or more joint venture agreements, which will prescribe the procedures for decision-making, the allocation of joint venture costs and liabilities, and joint venturers’ interests in the assets and earnings of the business. A contractual joint venture may be ideal where the joint venturers have independent businesses, where each business’s scope extends beyond the defined boundaries of the joint venture project.

Each party will perform and make a different contribution to the joint venture. For example, one party may own intellectual property related to a technology, while its joint venture partner has goodwill with potential customers to market that technology. In the joint venture agreements, the parties will negotiate how each of their contributions would be valued relative to the others.

Gusto Law takes a flexible and transparent approach to fees for business formation, incorporation and partnership agreement-related services, offering the following arrangements:

• Flat-rate fees: This is appropriate where the proposed business structure is not complex, and off-the-shelf precedents can be adapted to your needs with minimal modifications.
• Ad hoc hourly rates: hire as required. This may be necessary where you need to accommodate tax considerations, particularly in the context of cross-border organizational structures.

At Gusto Law, an experienced counsel will help you optimize your business structure at the outset, and help you to adapt and refine your governing documents as you continue to grow.

If you would like to discuss your legal requirements, call 587-826-2027 or contact Gus for a free 20-minute consultation.

This webpage’s content has been prepared to provide a general overview of legal services offered by Gusto Law, and is not intended to constitute formal legal analysis.  It is not a substitute for legal advice and should not be relied on for any particular transaction or circumstance. The information is provided as of the date of its preparation, and the reader is cautioned that changes in the law, or its interpretation, may occur since that time. If you are forming a new business, please seek further individual consultation with Gusto Law.