Starting a business is an exciting journey filled with endless possibilities and opportunities. As a new entrepreneur in Alberta, it is crucial to make informed decisions, including selecting the appropriate legal structure for your business. The legal structure you choose will not only impact how your business operates, but also determine your personal liability, tax obligations, and ability to raise capital. In this blog post, we will guide you through the various legal structures available in Alberta and help you make an informed choice regarding the Business Structure that is best for you.
- Sole Proprietorship
A sole proprietorship is the simplest and most common legal structure for new entrepreneurs. It is a business owned and operated by a single individual. Operating as a sole proprietorship allows you to have complete control over your business decisions. However, it also means that you are personally liable for all debts and obligations of the business. This means that if the business faces legal issues or debts, your personal assets may be at risk.
If you plan to start a business with one or more individuals, a partnership might be the right legal structure for you. In a partnership, two or more individuals share ownership and responsibility for the business. There are two types of partnerships: general partnership and limited partnership.
- General Partnership: In a general partnership, all partners are equally liable for the debts and obligations of the business. It is important to establish a partnership agreement that outlines the roles, responsibilities, and profit-sharing arrangements among partners.
- Limited Partnership: A limited partnership consists of one or more general partners who have unlimited liability, and one or more limited partners who have limited liability to the extent of their investment. Limited partners typically invest capital in the business, but have limited involvement in its day-to-day operations.
A corporation is a separate legal entity from its owners, known as shareholders. Incorporating your business offers numerous benefits, including limited liability protection for shareholders and potential tax advantages. To establish a corporation, you must file articles of incorporation with the Alberta government, pay the necessary fees, and meet ongoing regulatory requirements.
- Shareholders: Shareholders own the corporation and their liability is limited to their investment in the company. They can transfer or sell their shares, allowing for easy ownership transfer.
- Directors: Directors are responsible for managing the corporation’s affairs and ensuring compliance with legal requirements. They are appointed by the shareholders and play a crucial role in decision-making. There can be liabilities that arise in being a director.
- Officers: Officers are appointed by the directors to manage day-to-day operations. They hold positions such as CEO, CFO, or secretary, depending on the needs of the corporation.
If you envision a business that operates based on cooperative principles, a cooperative legal structure might be suitable for you. Cooperatives are owned and operated by their members, who have a say in the decision-making process. Members contribute capital and share in the profits and benefits of the cooperative. The cooperative model is often utilized by agricultural, retail, and community-based organizations.
- Limited Liability Partnership (LLP)
An LLP is a relatively new legal structure available to certain professional service businesses, such as law firms, accounting firms, and architectural practices. It combines elements of both partnerships and corporations, providing partners with limited liability while allowing them to participate in the management of the business. An LLP must register with the Alberta government and comply with specific regulations.
Choosing the Right Legal Structure
Selecting the most suitable legal structure for your business is a critical decision that requires careful consideration. Here are some factors you may consider with he Business Law Lawyers at Main Street Law LLP when considering your choices:
- Liability: Consider your personal exposure to financial risk. If you want to protect your personal assets, consider a structure that provides limited liability, such as a corporation or LLP.
- Taxes: Different legal structures have varying tax implications. Consult with a tax professional as well as the your Business Law Lawyer to understand how each structure will affect your tax obligations and potential benefits.
- Control and Decision-making: Evaluate how much control you want over the business. Some structures, like sole proprietorships and partnerships, provide more direct control, while others, like corporations, involve a more complex decision-making process.
- Growth and Funding: Consider your long-term goals for the business. If you plan to seek external funding or bring in investors, a corporation may be more appealing due to its ability to issue shares and raise capital.
- Compliance and Administration: Assess the administrative and regulatory requirements associated with each legal structure. Some structures, such as corporations, have more stringent reporting and record-keeping obligations.
If you choose a structure that requires administrative and regulatory compliance, the Business Law Lawyers and Corporate Law Lawyers at Main Street Law LLP can assist you in ensuring your needed compliance.
Selecting the right legal structure for your business is a crucial step in ensuring its success and protecting your personal assets. Each legal structure has its own advantages and considerations. It is important to consult with the Business Law Lawyers and Corporate Lawyers as well as your professionals to guide you through the decision-making process, based on your unique circumstances and business objectives. By choosing the most appropriate legal structure, you can set a solid foundation for your entrepreneurial journey.
Please be advised that this article was prepared by Eva Forys, with Main Street Law LLP in Spruce Grove in June of 2023. This article is intended as a general overview and general information on a legal subject as the law exists at the time of writing and is not intended to be legal advice. Often the specific facts of your legal matter may change or impact the applicability of this information. For legal advice related specifically to the facts of your concern, please consult with any of the Business Law Lawyers, Real Estate Commercial Lawyers, or Corporate Law Lawyers at Main Street Law LLP at any of our Spruce Grove, Edmonton, or Drayton Valley locations.