William E. Demers
Please see disclaimer below*
When forming a new business, entrepreneurs may do so in their own names, under trading or registered business names, in partnership or joint venture with others, or through a corporation. The costs, complexities, liabilities, and efficiencies vary.
Trading under one’s own name or business name, as a sole proprietor, is easy and may be advantageous from a personal income tax standpoint, depending on the circumstances, but may risk personal assets and reputation more directly than other modes. There remain costs associated with registering a business name, obtaining necessary licenses, preparing income tax filings, etc., in addition to day-to-day business costs.
Partnerships, while possible to define narrowly and structure with limitation of liability in mind, may create a host of unintended liabilities and degree of agency for its partners. Though the term “partnership” is used commonly, even when not intentionally referring to a legal partnership, this form of business relationship has deep roots in common law and is further regulated by statute. Partnerships are often beneficial from a tax standpoint, which would-be partners must weigh against their possible liabilities.
Joint ventures, as an alternative, may have very different practical meanings depending on the nature in which they are constructed, i.e., incorporated, or unincorporated, and may allow a great degree of flexibility in contract to define parties’ relationships. Depending on the personalities of its constituents and relationships so defined, parties may attempt to mitigate liabilities and improve tax efficiencies, whilst also deliberately reducing formalities and providing flexibility in concluding such ventures.
Corporations are one of the most common and effective vehicles for conducting business and with good reason. The corporation is at law its own personality and interacts with others, i.e. its employees, contractors, vendors, customers and creditors, as such. Its shareholders enjoy limitation of liability to the extent of their participation, except in circumstances which give rise to piercing of the corporate veil, e.g., in cases of fraud, or where shareholders are also involved in the company’s governance or management and personal liability arises.
Corporate structures may be simple or complex. For instance, a corporation can have a sole shareholder, with a single class of shares, who is also the corporation’s sole director, officer, and employee. Alternatively, a corporation can issue a multitude of classes of shares, each class affording unique rights for their holders. It can ratify detailed bylaws, mechanics for board appointments and procedures, detailed protocols for management’s execution of its powers, and so forth.
Critically, corporations are subject to different taxes than individuals and the participation of an individual in a corporation also gives rise to unique personal tax situations. One should look at corporate structuring through the lens of both the individual shareholders’ and the company’s possible tax liabilities and objectives to pursue best outcomes.
The costs and complexities of corporations are generally higher than those of a sole proprietor. These complexities become more apparent when a corporation becomes subject to securities regulation, such as in the case of an offering corporation, or where a business operates through multiple corporations (often across multiple jurisdictions). It is nevertheless with good reason that the corporate structure is so popular for business owners across jurisdictions, as the benefits generally outweigh the costs.
* The above article provides information of a general nature and does not constitute legal advice or the formation of a lawyer-client relationship.
For further information or advice on these topics, or for assistance in forming a general or limited partnership, joint venture, or corporation, please contact:
William E. Demers
Business Lawyer
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