Business Law

You may organize as a sole proprietorship, partnership, or corporation, described in detail below. There is no one-size-fits-all business model. There may be advantages and disadvantages to each, depending on your particular circumstances. Your needs may change as your business changes and your exposure to liabilities increase. 

The sole proprietorship is the most simple and straightforward business organization. In a sole proprietorship, the business and the operator are one and the same. The sole proprietor has full control over the business and its operations. All contracts are entered into personally by the proprietor and the proprietor is personally liable for debts incurred by the business.

The main advantages of sole proprietorship are that they are relatively simple, flexible and start-up costs are minimal. In addition, the revenues earned by the business are not shared among partners or the corporation. This comes with tax implications, including paying taxes at the higher personal tax rate rather than the lower business tax rate.

If you are just starting out, you may consider staying a sole proprietor. As the business grows, and your liability exposure increases, you should consider a partnership or incorporation. 

A partnership is the relationship that exists between persons carrying on business in common with a view to profit. In Alberta, the Partnership Act sets out the legal framework for this business organization.  

A partnership comes with the main advantages of sharing costs, clients, and business with your partners. The major disadvantage of the partnership is that there is the potential for liability incurred by the partners. In a partnership, there is joint and several liability with all the other partners for the debts and obligations of the partnership incurred while that person was a partner. It is therefore very important that you can trust your partners because each and every partner has the power and authority to bind the other partners.

It is possible in some circumstances to register as a Limited Liability Partnerships (LLP), which is available to professions such as accounting or law. In an LLP, partners are not liable for the acts of their fellow partners unless they were involved in a negligent act themselves.  

A corporation is a more complex legal entity, creating a separate person in the eyes of the law from their founder. In Alberta, a corporation can be incorporated under the Companies Act, the Business Corporation’s Act (Alberta) or the Business Corporation’s Act (Canada).

There are several advantages of incorporation over sole proprietorship and partnership. Perhaps the greatest advantage is that, as the corporation is a separate legal entity, it attracts its own liability. The founders’ personal assets are therefore protected from creditors and lawsuits. There are also tax advantages to incorporation, including paying at the lower corporate tax rate. A corporation also has a perpetual existence and will continue to operate even after their founder dies.

A special type of corporation is the Professional Corporation. A Professional Corporation is a separate entity at law and can engage in things such as holding property, entering into contracts and hiring employees. A professional corporation must be registered with the Corporate Registry of Service Alberta and is only available for certain permitted professions, requiring an endorsement from the profession’s governing body.

You should organize as a not-for-profit (NFP) if your organization has a purely social or charitable purpose. With a NFP, the directors and managers cannot derive any private benefit from the organization. NFPs, quite literally, cannot make a profit, nor sell shares, declare dividends, or sell the organization to a buyer.

You may want to further consider registering as a charity. With charitable status, your organization can take donations and issue charitable receipts.