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Choosing a legal structure for your business

Whether you bought a franchise, have one or more partners or are self-employed, if you’re going into business with little money and few personal assets, you’ll need to decide upon a legal structure for your business: a sole proprietorship, a partnership, a corporation or a cooperative.

Whether you bought a franchise, have one or more partners or are self-employed, if you're going into business with little money and few personal assets, you'll need to decide upon a legal structure for your business: a sole proprietorship, a partnership, a corporation or a cooperative.

Unincorporated sole proprietorship

  • You as an individual are the sole proprietor of the company, and no distinction is made between your personal assets and your business assets. You get all the benefits of the business but also assume all the risks.
  • If the business fails, both your personal and business assets can be seized.
  • There are no formalities required to run this kind of business.
  • If the business is run under a name that does not include your first and last names, you must register the business name with the business registry office.

Partnership

General partnership

  • Similar to a sole proprietorship except that revenues are shared with one or more partners.
  • Each partner is liable to creditors for all debts and financial obligations contracted by any of the partners.
  • Business must be registered with the business registry office. Declaration of registration form must be resubmitted when a partner leaves or a new partner arrives.
  • It is strongly recommended that a formal written agreement or contract be created to outline mutually agreed upon terms.

Limited partnership

  • Company that includes 2 types of partners:
    • General partners, who have the same rights and responsibilities as partners in a general partnership.
    • Limited partners, who have no decision-making power and whose liability is limited to the amount of funds or goods invested in the company.
  • Business must be registered with the business registry office.

Corporation

  • Most common type of business structure, even though legal requirements are more complex.
  • Corporations are considered legal persons and separate entities from its owners, the stockholders.
  • Corporations have their own assets and are liable for their own debts. They can sue and be sued.
  • Stockholders assume risks equal to the amount invested in the company. Financial institutions may ask stockholders to endorse company loans, especially when the firm first goes into business.
  • Legal requirements for business corporations differ from those of other legal business structures. A corporation must be created under one of two government jurisdictions: under provincial law (to operate in only one province) or under federal law (to do business across Canada). The process is complex and legal counsel is advised.

Cooperative

  • Legal entity made up of persons or companies seeking to satisfy the same economic, social or cultural need, or who come together to run a business according to cooperative principles.
  • Formed in accordance with a provincial cooperative statute (in Quebec the Loi sur les coopératives au Québec) or the Canada Cooperatives Act if the cooperative operates in 2 or more provinces.
  • Cooperatives operate democratically according to the 1 person, 1 vote principle.
  • Each member's responsibility is limited to the value of his or her shares.
  • Differs from other business structures in the way surpluses are distributed. Excess earnings are sometimes returned to members in the form of member dividends in proportion to use of services.

To learn more, see What is a cooperative and how do I create one?

Don't hesitate to see a specialist, notary or attorney for help choosing the right legal structure for your needs and situation.

Videos

  1. Antonio Drouin(in French only) (1 min 25 s)
  2. Anne-Marie Chagnon(in French only) (2 min 18 s)
  3. François Mainguy (in French only) (1 min 42 s)

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