Incorporating a Sole Proprietorship

Langley Lawyers_Surrey Lawyers_Incorporating a Business

What is a Sole Proprietorship?

Lots of entrepreneurs start out as sole proprietors. While incorporating a business can take some time and planning, a sole proprietorship is the most basic form of business.

It is easy to see why so many businesses start out as sole proprietorships. Setting up a sole proprietorship is easy, as anyone who begins doing business in their personal capacity is by definition a sole proprietor. There are no government filings required to form a sole proprietorship, although there may be business licensing requirements and if the sole proprietor runs under a trade name, a declaration of that name may be filed at the corporate registry. Sole proprietorship income is taxed directly in the hands of the sole proprietor, and in many cases business losses may be set against personal income from other sources.

However, one of the main disadvantages of the sole proprietorship is unlimited liability of the sole proprietor. A sole proprietor is personally liable for all of the obligations of their business. This liability extends to the sole proprietor’s personal assets. Therefore, a legal action against the sole proprietor’s business is an action against the sole proprietor themselves.

What is a Corporation?

A corporation is a legal entity that is separate from its owners, or shareholders. In Canada, corporations can be formed provincially or federally. Once a corporation comes into existence – that is, after a certificate of incorporation has been issued by the appropriate government – a number of things happen.

When a corporation is formed a new legal entity has been created. Therefore, the corporation must file its own tax return, may enter into its own contracts, and can sue or be sued. As well, since a corporation is legally distinct from its shareholders, corporations offer shareholders limited liability with respect to the corporation’s business activities. Not all corporations offer limited liability – for example, lawyers cannot achieve limited liability with respect to professional negligence through incorporation. Similar rules apply to numerous health and other professionals, such as dentists, architects, veterinarians and massage therapists (to name a few).

For the majority of sole proprietors, however, a corporation can provide the benefit of limited liability to its shareholders, as well as other benefits such as perpetual existence, the possibility of having multiple owners, and certain opportunities for estate and tax planning.

How Sole Proprietorships are Incorporated

Once the decision to incorporate has been made, there is a relatively straight-forward process to get the new company up and running. Before incorporating, the sole proprietor will ideally involve two professionals for advice: a lawyer and an accountant.

Generally speaking, the lawyer advises on the legal implications of incorporating, and will draft the legal documents required to incorporate. The accountant will advise on issues such as tax planning, ownership structure for tax purposes, and a tax-effective means of transferring the business assets into the new company.

Once an appropriate share and ownership structure has been determined, and the decision whether to file a tax election to move business assets into the new company has been made, the sole proprietor will usually be ready to incorporate. From that point on, it is a matter of reserving the corporate name, deciding who will sit on the board of directors, preparing and filing the appropriate paperwork, and creating the corporate record book, which is a binder of all of the documents corporations are legally required to keep.

The Lawyer’s Role in Incorporating

Some of the lawyer’s main roles in incorporating a sole proprietor’s business are as follows:

  1. Considering whether a company structure will accomplish the sole proprietor’s goals and whether the incorporation will violate any laws (for example, legislation concerning ownership of certain types of businesses or professions, securities laws, fraudulent conveyances or preferences).
  2. Considering whether the new company will acquire assets or liabilities from the sole proprietor, and identifying where professional tax advice is needed (see The Accountant’s Role, below).
  3. Preparing the legal paperwork for incorporation. For a typical BC company, this will include the incorporation agreement, articles and incorporation application.
  4. Preparing a corporate records book for the company. For a typical BC company, this may include organizational shareholder and director minutes, a central securities register, register of directors and officers, consents to act as directors, share subscriptions and share certificates.
  5. Discussing the legal effect of incorporating with the sole proprietor, such as the separate legal nature of a company, the duties and obligations of directors, rights and remedies of shareholders, and ongoing filing requirements to keep the company in good standing.
  6. Discussing the advantages and disadvantages of incorporating a company provincially or under federal law.
  7. Considering whether the company needs to adopt any pre-incorporation contracts.
  8. Advising whether the company needs a GST, PST or WorkSafe BC registration.

Summary

There are several reasons why many entrepreneurs start out as sole proprietors. Ease of set-up, low start-up costs, and the potential in some cases for tax benefits in the early stages of the business. That said, many sole proprietors eventually make the decision to incorporate, and there are a variety of legal and tax reasons for doing so.

A sole proprietor who is thinking about incorporating should consider speaking with a lawyer and an accountant. Both professionals play a key role in setting up a corporate structure so that the legal and tax goals of incorporating can be met.

Share:

More Posts

Langley and Surrey Personal Real Estate Corporation Lawyer

Incorporating a Personal Real Estate Corporation

A personal real estate corporation is a special type of corporation available to licensed realtors in British Columbia, through which real estate services may be provided. In this article, we discuss the basics of incorporating a personal real estate corporation.

Langley_Surrey_Lawyers_Annual_Reports_Business Law

Annual Reports for BC Companies

In this article, we discuss the Annual Report and other routine annual paperwork that would apply to a typical, privately held British Columbia company.

Leave Us A Message

Please do not send confidential or time-sensitive information through this form. This inquiry does not create a solicitor-client relationship.