Business Start-Up General Questions

This is the most common form of legal structure because it is the simplest and cheapest structure to start your business. A sole proprietorship is a business owned by one individual. You can operate a sole proprietorship under your personal name or any other name you have chosen, subject to the legal requirements in your jurisdiction. 

Advantages

• Easier start-up: A sole proprietorship is easy and inexpensive to set up and operate since there is minimal paperwork required to start the business.
• Fewer regulatory requirements: Contrary to a partnership or a corporation, the operation of a sole proprietorship is not highly regulated, so its management requires very little formalities. In most provinces, if you operate your sole proprietorship under your personal name, you don’t even need to register your business at the corporate registry. 

• Deductions and expenses: Just like a partnership or a corporation, a sole proprietorship enables you to deduct business expenses from your revenue and obtain certain tax deductions. 
• Direct control: The business does not have a separate existence from its owner, so the owner has unlimited control over the company. 

Disadvantages

• Liability: Since the business does not have a separate existence from its owner, the sole proprietor is fully responsible for all the debts and obligations of the business.
• Lack of continuity: The business is inherently tied to its owner. In the absence of the owner, the business does not exist. 
• Financing: A sole proprietorship does not provide a lot of options to raise capital.

• Name protection: Except for the limited protection created if you register your business name, a sole proprietorship does not benefit from extensive name protection. The best alternative would be to obtain a trademark for your business name. 

A partnership is an agreement between two or more people who combine resources in a business to make a profit. In Quebec, partnerships are either general partnerships, limited partnerships of undeclared partnerships.

Advantages

• Easier start-up: A partnership is also comparatively easy and inexpensive to set up and operate since there is minimal paperwork required to start the business.
• Limited regulation: There is limited regulation on partnerships, so its management requires little formalities. 
• Shared skills and resources: The partners can share their skills and resources for the success of the partnership.

Disadvantages

• Unlimited liability: The partners are liable for the debts and the obligations of the partnership. In the case of a general partnership, not only are the partners jointly liable for the obligations of the partnership, but they are also solidarily liable if the obligations have been contracted for the service or operation of an enterprise of the partnership.
• Possibility of conflict: Conflicts between partners could seriously affect the operation of the partnership.
• Lack of continuity: The life of the business is tied to the partners because the partnership is not a separate legal entity. In the absence of the partners, the business does not exist. 

A corporation is a legal entity that is created to conduct business. As such, it possesses the same rights and responsibilities of a natural person and it is completely separate from its founders, shareholders, directors, and officers. 

Advantages

• Limited liability: Subject to certain exceptions provided by law, the shareholders, directors, and other representatives of the corporation are not responsible for the debts and the obligations of the corporation.
• Unlimited life: The lifespan of the corporation is not limited to the existence of its owners. The ownership of a corporation can be passed from generation to generation.
• Flexibility: Operating through a corporation allows flexibility as to how to move the earnings of the business. There are a lot of options. You can choose to pay out your directors and shareholders through salary, dividends, or even loans. You can also choose to keep the profits in the corporation. You also have the possibility to split the income of the corporation between members of your family.
• Corporate structure: Having a corporation allows you to direct the earnings of the business towards other business ventures. For example, by creating a holding corporation that holds the shares of your operating corporation, you can move profits from your operating corporation to your holding corporation (inter-corporate dividends are generally done on a tax-free basis) and then redirect such profits in the same manner to any other operating corporation.
• Raising capital: A corporation allows you to raise capital by issuing shares to family members, friends, or other investors. You are also more likely to obtain a loan or an investment due to the limited liability. A corporation gives you access to more alternative sources of capital.
• Tax benefits: A corporation benefits from lower income tax rates. You can defer tax payment by keeping your earnings in the corporation. Shareholders can also benefit from the capital gains tax exemption at the sale of the shares of the corporation.

Disadvantages

• Start-up costs: You will incur fees for the incorporation of your business, such as government fees for the registration of your business and legal fees for the drafting of the legal documents for your corporation. 
• Possible double taxation: The income will be taxed at the corporate level (when earned by the corporation), then at the personal level, when received by the shareholders or directors (salary, dividends, etc.). However, there are ways to reduce and possibly avoid such double taxation. 
• Heavy regulation: The operation and the management of a corporation are highly regulated compared to the other two structures. There are also more formalities such as keeping a minute book for all the important documents of the corporation.