Choosing an organizational form for a new Alberta business
Each available business structure has its own pros and cons.
When an Alberta entrepreneur is ready to kick off a new business, an early and significant decision is choosing a business structure. To do this, three aspects of the business require analysis considering short- and long-term business goals:
- Tax matters: Which tax scheme would be most financially beneficial?
- Business founder control: Does the business owner want tight, personal control over business decisions and operations; to share responsibility with others; or to hire someone else to run the business?
- Personal liability for business debt: Will the business founder’s personal assets be at risk of loss to satisfy business liabilities?
These are the three key considerations in deciding which structure to use.
Top organizational forms
Most Alberta businesses have one of these three structures:
- Sole proprietorship
An experienced business lawyer can provide detailed and individualized legal counsel about this decision and then help the client establish the chosen structure. This process can be quite intricate and may involve making legal filings and obtaining licenses or regulatory approvals, choosing a business name, hiring employees and completing many other tasks.
When one person goes into business for themselves a sole proprietorship is automatically created. The owner and the business are legally the same entity in that the owner pays taxes on the business profits and is personally liable for business debts or lawsuits against the business. In fact, the owner reports business gain (or loss) on their personal income tax return.
They can retain total control over the operations if they prefer or they can hire employees to take on responsibilities. Generally, a sole proprietorship may have fewer regulatory and recordkeeping responsibilities, but still must comply with registration, permitting and licensing laws.
A partnership is like a sole proprietorship but with two or more owners, usually established using a partnership agreement negotiated among the parties. The partnership agreement sets up structures and processes for handling operations, decision making and responsibilities as well as division of earnings, expenses and liabilities. Taxes are handled like a sole proprietorship and are prorated on each partner’s personal tax return.
In a general partnership, each partner is completely responsible for partnership liabilities – even liabilities created by other partners.
A corporation is a standalone legal entity owned by shareholders who invest in the business by purchasing shares. Initially, it must create articles of incorporation. Directors and officers manage the corporation’s operations. The corporation may hire the founder or founders who will then draw salaries for their work, on which they are taxed personally as income.
Taxable corporate gain and other corporate debts are liabilities of the corporation itself (except in some situations of individual wrongdoing). Generally, the tax rates for corporations are lower than for individuals.
The founder may incorporate under Alberta or another province’s law or as a federal corporation. Federal incorporation may be desirable if the corporation will do business in multiple provinces or internationally, but an Alberta corporation may also register to do business in other individual provinces.
Corporations have significant recordkeeping duties and at least annual governmental reporting responsibilities about financial matters.
While these are the three main business structures, others are available such as limited partnerships, limited liability partnerships, cooperatives or nonprofits that may be good choices for certain businesses.
The lawyers at Bruce & Birklein Law in Calgary, Alberta, advise business clients in Calgary and the surrounding area about organizing their new businesses considering their commercial goals.