| I was approached by a client the other day with a | | | | means you don't have personal liability for debts, |
| question I couldn't immediately answer. He has a small | | | | obligations or even acts of the company. You're not |
| construction business and was looking for a partner so | | | | personally responsible for any decisions someone else |
| he could win bigger contracts, and he wondered how | | | | in the corporation makes, and you're only liable up to |
| he should go about doing that. I had to tell him I couldn't | | | | the amount of unpaid portion of shares you own. |
| give him advice on structuring a small business | | | | Sounds pretty good so far. |
| because I'm not a lawyer or an accountant, but I knew | | | | Limited liability is a big advantage over other forms of |
| I could give him information, so I started to research. | | | | small business structure. And there are more |
| I knew from setting up my own company about the | | | | advantages. Corporations continue to exist after their |
| various structures Canadian small businesses can use. | | | | shareholders die and can be passed on to family or |
| I thought his choices would be limited to sole | | | | friends. Raising money is easier for a corporation than |
| proprietorship, partnership and incorporation. There's | | | | either sole proprietorship or partnerships. There can |
| also a co-operative, but that doesn't apply to my client. | | | | also be tax advantages. |
| I guessed that the best way to help him out would be | | | | So what are the disadvantages? Well, there's more |
| to define and give him the advantages and | | | | paperwork because you're required to keep records |
| disadvantages of each. | | | | and you have to file a separate tax return. It costs |
| Sole proprietorships are owned by one individual, and | | | | more to register a corporation than setting up a sole |
| are legally considered an extension of yourself. That | | | | proprietorship or a partnership. And, if you give a |
| means that any liability or obligation your business | | | | personal guarantee, which banks often ask for, you |
| incurs is also a personal liability or obligation. So, if your | | | | may be liable for that amount even if your company |
| sole proprietorship fails, your personal assets can be | | | | ceases to exist. |
| seized to pay for that liability of obligation. I'd say that's | | | | I thought my client's choice would be limited to those |
| a pretty big disadvantage. On the plus side though, sole | | | | three choices, but further research showed I was |
| proprietorships are the easiest to set up and, and don't | | | | wrong. There is another one: joint venture. A joint |
| even have to be registered if its name is exactly the | | | | venture is like a partnership because it's an agreement |
| same as your own. | | | | between two or more people or small businesses, but |
| A partnership is an agreement between two or more | | | | there are important differences. In a joint venture, two |
| persons to carry on business together. Partnerships | | | | or more people contribute goods, services or capital to |
| are a separate legal entity from you, and must have at | | | | one business enterprise. To date, Canada does not |
| least one general partner. All partners can be general, | | | | have specific laws governing joint ventures, as it does |
| but there must be at least one general partner. | | | | with all the other small business forms. |
| Partnerships are relatively easy to set up, but although | | | | A joint venture agreement outlines joint venture terms, |
| not a requirement, the parties should have a contract | | | | contributions of each party, management structure and |
| between themselves outlining responsibilities and | | | | how the profits will be divided. Joint ventures avoid the |
| obligations. | | | | partnership disadvantage of joint and several liability, |
| A general partner is responsible for business decisions, | | | | and also allows each joint venturer to regulate their |
| running the company and acting on its behalf. Each | | | | own tax deductions. That's a big advantage for joint |
| general partner is jointly and severally liable for | | | | ventures. |
| partnership debts. This means one partner can be held | | | | However, a joint venture has sometimes been defined |
| responsible for the decisions, debts and obligations of | | | | by the absence of key partnership elements. This |
| another partner. Strike one against general | | | | means small businesses intending to enter into a joint |
| partnerships, I'd say. | | | | venture agreement must thoroughly understand |
| So what about a limited partner then? Limited partners | | | | partnership elements and avoid using them in order to |
| are not involved in decision-making or in the day-to-day | | | | avoid being deemed a partnership rather than a joint |
| running of the business. Usually, a limited partner's | | | | venture. What might have started out being a joint |
| contribution is financial, and their liability is limited to the | | | | venture could lose its joint venture advantage by being |
| amount they invested in the firm. What that means is | | | | deemed a partnership, and inherit the disadvantages of |
| you basically have no say over how the money you | | | | a partnership instead. |
| invested is used, which means you have zero power. | | | | You can incorporate a joint venture, which would then |
| And, the moment a limited partner becomes involved in | | | | have the same advantages and disadvantages of any |
| running the business or acts on behalf of the business, | | | | corporation. And it would have the advantages and |
| they become a general partner. | | | | disadvantages of a joint venture. Could this possibly be |
| A corporation is a separate entity from yourself, which | | | | the best solution? |