One flew over the different business legal forms

Do you remember Simon and Léa? Those two young entrepreneurs who started Troque tes fringues, a clothing exchange online platform. They decided to incorporate their business and benefit from the advantages of an incorporated business.

However, Simon and Léa could have chosen many other legal forms to run their start-up. Indeed, the laws of Quebec allow entrepreneurs to operate a business under many legal vehicles. Which ones? Lex Start tells you all about them below.

Succeeding alone with flying colors

If Simon and Lea had decided that the time to incorporate Troque tes fringues had not yet come, our young entrepreneurs could have registered Troque tes fringues as a sole proprietorship (french blog post) in Quebec’s enterprise register. Creating a sole proprietorship involves the least administrative procedures. What would have happened if Simon and Lea had chosen this legal form?

Firstly, Simon and Lea would be considered self-employed entrepreneurs. Secondly, Simon and Lea’s patrimony would be mixed in with their company's patrimony. Thus, fiscally speaking, the expenditures made by Troque tes fringues would have been assimilated to Simon and Lea’s personal expenditures. Consequently, Troque tes fringues would only be taxed on its profits. Additionally, being a sole proprietorship would allow Troque tes fringues to benefit from tax credits.

On the flip side, operating a sole proprietorship exposes the entrepreneur to a lot of personal risk. Indeed, contrary to a corporation, a sole proprietorship does not have its own legal personality. Thus, the entrepreneur operating a sole proprietorship is liable for any fault leading to a prejudice committed while running his or her business.  

Therefore, if Troque tes fringues were a sole proprietorship and that it unfortunately became insolvent, its creditors could collect their debt from Simon and Léa’s own patrimony.

Unity makes strength

If Simon and Léa had been repelled by the formalism associated to the constitution and management of a corporation and by the idea of operating a sole proprietorship, they could have decided to form a limited partnership (french blog post). A happy combination between the advantages of a sole proprietorship and those of a corporation, a limited partnership is created through a limited partnership agreement and gathers two types of actors: the sponsors and the sponsored - united in the spirit of running a business project together. In contrast with a corporation, a limited partnership is not a legal person and only requires to be registered in Quebec’s enterprise register in order to be constituted.

Furthermore, just like a sole proprietorship, a limited partnership is composed of sponsors and sponsored, responsible for providing support to the partnership whether monetary, material or intellectual. However, the sponsors are not involved in the management and representation of the partnership, that role is assumed by the sponsored.  

Hence, the sponsors provide a passive investment and can only give advisory opinions regarding the partnership’s management. By not getting involved in the partnership’s management, the sponsors limit their liability to their investment.

However, if the sponsors were to exceed their role in the partnership, they could be personally liable for the acts committed as sponsors and for the partnership’s obligations. As for the sponsored, they are personally and severally liable for the partnership’s obligations. This means that if Troque tes fringues were operated through a limited partnership of which Simon and Léa were the sponsored, they could be personally responsible for the partnership’s debts.

Moreover, because they would be severally liable, a creditor could ask for the entire amount of their debt from either Simon or Léa.

Cooperative spirit

General partnership is another legal form that Troque tes fringues could have chosen. Conceptually near the sole proprietorship, the general partnership is composed of a group called partners unified in a cooperative spirit. Together, those partners wish, inter alia, to run a joint undertaking and share the profits and losses amongst themselves.

With this in mind, each member of the partnership will provide a contribution to the business. For example, if Simon and Léa decided to make Troque tes fringues a general partnership, Simons’ contribution could have been the provision of the business’ premises and Lea’s could have been her computer-related expertise. Based on a partnership contract, which is recorded on the Québec’s enterprise register, the general partnership is not a legal entity.

However, the business has a separate patrimony from the partners who compose it and can therefore conclude contracts under its own name. However, partners remain personally and severally liable for the contractual obligations of the business, though due to its separate patrimony, the business' creditors have to empty its patrimony before turning to Simon or Léa.

It is important to highlight that partners' responsibility can be limited by a general partnership’s creation if, for example, they exercise a profession legally recognized by the Québéc’s professional code.

For the common good

although they are not consistent with the project and the business model of Troque tes fringues, other legal business forms exist and deserve mention. For example, entrepreneurs can operate a business in the form of a cooperative.

A cooperative has its own legal personality and is composed at least of 5 people who have common needs, be they economic, social or cultural, and who unite forces in order to fulfill those needs through the exploitation of a profitable enterprise. Besides the cooperative, the not-for-profit organization is another potential legal form for a business of more than two people. Unlike the cooperative, the not-for-profit organization's purpose is not to make profits.

After its incorporation, the non-profit organization will be considered as a legal person under the Business Corporations act or under the Canada Not-for-profit Corporations Act. Like the corporation, the non-profit organization has an executive board. Its function is to manage the organism, but it can delegate some of its power to an executive director or a management committee.

If parallels can be established between the non-profit organization and the corporation, it’s important to keep in mind that the not-for-profit organization doesn’t issue capital shares, doesn’t pay any taxes and is not taxed on the capital it collects.

As you will have noticed, there are many legal forms of businesses, but which is best? The strength of a legal form depends on its relevance to the needs of the business.

If you hesitate on the legal form that your business should take, please contact us at bonjour@lexstart.ca or 514-621-2750, and we will put you in touch with our partner lawyers at a flat rate. And, if you are ready to make the leap to a sole proprietorship, a corporation or a not-for-profit organization, you can consult our legal kit.

Gilles de Saint-Exupéry, LL.M. and Vanessa Ntaganda

 

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