Who’ll win: Corporation vs. General partnership

Simon and Léa chose to incorporate their business Troque tes fringues, but, as we mentioned here,  they could have chosen many other legal forms. Among those, there is the general partnership. Even though we briefly presented it before, the general partnership’s particularities are worth mentioning and can make this business legal form an interesting alternative for entrepreneurs reluctant to incorporate their business.

Is a general partnership a more advantageous legal form for entrepreneurs than a corporation? Of course, any answer to that question must be nuanced. Indeed, the answer will vary depending on the needs of the entrepreneur.

That is why we will compare these two legal forms based on five criteria: (1) creation and management facility, (2) actors’ liability, (3) decision-making facility, (4) fiscal treatment, and finally (5) longevity. Did Simon and Léa make the right choice by opting for a corporation rather than a general partnership? Find out below.

1st  Round: Creation and management facility

Winner: General partnership

One of the advantages of operating in a general partnership lies in its creation and management facility. Indeed, a general partnership is created through a partnership contract and must be registered in Quebec’s enterprise register.

On this occasion, the partners will have to choose a common name for the partnership. In the partnership contract, the future partners will detail the common goal they are pursuing, the contribution each of them will make, the distribution of the partnership’s profits and losses, the responsibilities of each partner and the causes for dissolution.

As you know, creating a corporation requires registering your business in Quebec’s enterprise register, and paying the costs associated with registration. Furthermore, you must also produce the of articles of incorporation, and the draft, the conserv and update a minute book containing the resolutions of the shareholders' and the board of directors' meetings as well as the corporation’s bylaws.

Thus, operating a corporation implies having to organize shareholders' meetings and board meetings. Of course, when a corporation only has one shareholder and one director, accomplishing those formalities is simpler.

Regarding the general partnership, it only has to produce an annual updating declaration concerning the information previously registered in the Quebec’s enterprise register. It is, administratively speaking, more advantageous to create a general partnership.

2nd Round: Actors’ liability

Winner: Corporation

A general partnership is not a legal entity; it does not profit from a separate legal personality. As you may know, this means that each partner is liable not only for what he does but also for what his partners do.

Moreover, as we mentioned in a previous article, the partners are severally liable for the debts and obligations contracted by the partnership. However, it is important to note that, even if a general partnership is not a legal person, it possesses a separate patrimony. This implies that the partnership’s creditors will have to drain the partnership’s patrimony before being able to access the partners’ personal patrimony.

Contrary to a general partnership, a corporation, being a legal person, benefits from a distinct legal personality. Consequently, the shareholders are not liable for the debts and obligations of the corporation.

Furthermore, the directors, who are responsible for the corporation’s management, will be liable for the company’s debts only if they have cautioned or personally guaranteed the corporation’s obligations.

Just like the directors, the officers of a corporation are not, a priori, liable for the debts or other obligations of the company, provided that they have not cautioned or personally guaranteed the company’s obligations.  however, directors and officers can be personally liable if they break the law or take a wrongful decision while performing their duties.

3rd Round: Decision-making facility

Winner: Not determined

Here is where things get tricky: no clear winner can be designated because it depends on your business.

Yes, in a corporation, the decision-making process is more legislatively regulated than in a general partnership. Indeed, subject to contrary provisions in a shareholder agreement or a unanimous shareholder agreement, the Quebec’s Business Corporations Act and Canada’s Business Corporations Act stipulate the majority necessary to adopt resolutions from the shareholders and the board of directors. The decisions are taken either by an ordinary resolution adopted by a majority of shareholders or directors, or by a special resolution adopted by a two-third majority of shareholders or directors.

In a general partnership, the decision-making process is detailed in the partnership contract. However, all partners must have the opportunity to express themselves on the collective decisions.

Thus, if you wish to have more freedom in your business’s decision-making process, creating a general partnership might be a good idea. While it is true that it is possible to bypass the provisions related to the decision-making process contained in Quebec’s Business Corporations Act or Canada’s Business Corporations Act with a shareholder agreement or a unanimous shareholder agreement, this requires the negotiation and the drafting of supplementary documents.

4th Round: Fiscal treatment

Winner: Corporation

Having a distinct legal personality and its own patrimony, a corporation benefits from a different fiscal treatment than individuals. Indeed, corporations are subject to a fixed tax rate, rather than a progressive tax rate. At the moment, corporations are subject to a tax rate of 19 %, for the first 500 000 CAD of profit, and of 26,9 % for the profits 500 000 CAD. Nevertheless, in a corporation, shareholders will be taxed individually for the dividends they receive from the company.

Let’s also underline that the tax rate to which these dividends will be subject to will be more advantageous than the rates applicable to employment incomes. What about the fiscal treatment of general partnerships?  A general partnership is subject to what we call the “flow through”. This means that a general partnership will not be taxed directly but through its partners.

As indicated before, in a general partnership, partners share the partnership’s profits and losses. Thus, partners will have to include in their declaration their share of the partnership’s revenues and will be taxed on those revenues.

The tax rate to which the partners will be subject, as you probably know by now, is the rate applicable to individuals. Even if the partnership is not directly taxed, it has to produce a tax return in which the partnership’s revenues will be detailed.

5th Round: Longevity

Winners: Corporation and general partnership, jointly

Once again, the status of a legal person makes the corporation one of this round’s winners. Indeed, because it is a separate legal person from its shareholders, directors, and officers, it survives their death, incapacity or bankruptcy. This grants longevity to the corporation because it has the potential to be “immortal”. The corporation’s “life” will only end when it is dissolved and liquidated pursuant to Quebec’s Business Corporations Act or Canada’s Business Corporations Act.

Likewise, the general partnership survives the death, the incapacity or to the bankruptcy of its partners. The occurrence of one of these events only induces the withdrawal of the partner in question. If at any moment, the partnership is composed of only one partner this doesn’t provoke its end, provided that this partner finds another partner within 120 days.

The end of the partnership will arrive at the term defined in the partnership’s contract (if applicable), at the occurrence of a cause for dissolution, as provided by the partnership’s contract, or when the partners unanimously consent to its dissolution.

So, what’s the score? Corporation: 3 c. General partnership: 2. The corporation is the big winner of this heated battle. However, it is important to mention that if you are hesitating between these two business legal forms, you could benefit from the precious advices of a lawyer.

Good thing Lex Start has partnered with plenty of lawyers ready to help you at a price accessible to entrepreneurs. Don’t hesitate to contact us by e-mail at bonjour@lexstart.ca or by telephone at (514) 378-6703.  If you wish to incorporate your business, get our incorporation kit here.

 

Me Gilles de Saint-Exupéry, L.L.M. et Vanessa Ntaganda

 

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