Small business legal advice Velletta & Company, Victoria, BC

Starting a Small Business

This outline is prepared by Michael J. Velletta, a lawyer practising in the areas of real estate, corporate and civil law. This outline is selective, and for discussion purposes only. This is not legal advice. Do not apply any of the information set out in this outline without first discussing it with your lawyer.

Velletta & Company represents hundreds of small and medium businesses, and has the experience, knowledge and resources to deliver cost effective legal services to enhanced and support business. We hope to be part of your business team.

Disclaimer

ORGANIZATION OF A BUSINESS

There are a wide range of business models that can be creatively applied to best meet the needs of your business plan. A brief review of some of the models is described below.

A. Proprietorship

Description:

  • The simplest form of business organization
  • A person carries on business in their own name
  • They may have employees
  • This is not a suitable form of business organization for a business with more than one owner

Advantages:

  • Easy and inexpensive to organize
  • No separate income tax filings – profit and loss is reported on the owner’s income tax return
  • Limited government regulation (specific industry regulation may apply as well as licenses, G.S.T., P.S.T., W.C.B., etc.)

Disadvantages:

  • Will not accommodate more than one owner
  • Does not offer the potential tax advantages of a Corporation
  • No limited liability
  • May not have the prestige of a Corporation
  • Income splitting potential with family not as great as a Corporation

B. Partnership

Description:

Two or more people carrying on business together. The Partnership Act of BC provides some regulation. Often partners will enter into a Partnership Agreement to govern the relationship between them or to vary aspects of thePartnership Act.

Advantages:

  • Easy and inexpensive to organize
  • No separate Income Tax filing. Profit and loss is divided among the partners and reported on their personal income tax returns.

Disadvantages:

  • No limited liability
  • Each partner may be jointly and severally liable for the acts of other partners
  • Income splitting potential with family not as great as a Corporation
  • Buying and selling partnership interests may be more complicated and subject to more tax than buying and selling shares in a Corporation

C. Incorporation

Description:

A separate legal entity created under the Business Corporations Act or Canada Business Corporation Act offering a flexible array of ownership, control and profit participation share structures. A statutory scheme with corporately established rules and governance. Although professional advice is recommended to best design a specific corporation, set up costs are surprisingly low.

Advantages:

  • Very flexible business structure
  • A two-year provincial tax holiday for most new businesses
  • Creates a marketable entity
  • Very flexible ownership options, allowing possible participation of family or key employees
  • Allows for different equity contributions, not all owners have to make the same investment
  • Allows for non-controlling ownership interests (i.e. non-voting shares) for family, key employees, etc.
  • Many income splitting options
  • Lower tax rates for high income individuals
  • Limited liability in most areas (tax liability, employee taxes and wages are not limited)
  • Allows preferred ownership interests through preferred share structures giving special rights to prescribed investors
  • A Corporation is immortal, creating a flexible and advantageous estate planning tool

Disadvantages:

  • Registration with government registries
  • Legal cost of set up, approximately $500.00 plus disbursements
  • Annual fees of about $150.00
  • Not absolute limited liability
  • Required to file separate corporate tax return

D. Limited Partnership

Description:

A legal entity under the Partnership Act consisting of one or more general partners and one or more limited partners. The limited partners contribute capital, no services and enjoy limited liability. The general partners can contribute capital or services, but do not have limited liability.

Advantages:

  • Provide a means for limited liability where a corporate structure will not work.
  • Often used to avoid Securities Act reporting requirements

Disadvantages:

  • Net 100% limited liability
  • Liability protection can be lost if not strict adherence to Partnership Act
  • Does not allow for full protection if limited partners

BUYING AN EXISTING BUSINESS

A. Asset Purchase

Buying the individual assets of an existing business, and then starting up a new business with those assets.

Advantages:

  • Decreased risk by not assuming liabilities of seller
  • Can negotiate allocation of purchase price for potential tax advantages

Disadvantages:

  • May lose goodwill associated with seller
  • Increased cost in setting up new business entity
  • Susceptible to Provincial Sales Tax on certain purchased assets

B. Share Purchase

Buying the shares of a shareholder of an existing corporation operating a business

Advantages

  • Assume existing business structure
  • May assume goodwill of business
  • Avoid G.S.T. and P.S.T.
  • May have tax advantages

Disadvantages:

  • Assume liabilities of Corporation
  • Assume book value of assets for tax purposes

DUE DILIGENCE – SEARCHES TO BE PERFORMED BEFORE BUYING A BUSINESS

  • Personal Property Registry
  • G.S.T.
  • Licensing
  • Provincial Sales Tax
  • WCB
  • Court Registries
  • Registrar of Companies
  • Revenue Canada
    • Income Tax
    • Employee Withholding Tax
    • CPP
  • and many, many more…

A. Name

  • Your name can be registered to confirm that it does not conflict with an existing name, and to help prevent someone else from taking or using your name
  • Each province has its own name registry
  • Each state of the USA has separate registries
  • Contact your lawyer to review rules for naming your business or Corporation

B. Leasing

Often one of the biggest expenses of a small business is leasing premises. See our article Leases the Chains that Bind and discuss leases with your lawyer to protect your rights.

C. Resources for Small Businesses

See our article Resources for Small Businesses In BC, packed with useful information and contacts for small business.
Call our office to arrange for a free, initial consultation with Michael J. Velletta or one of our other lawyers to discuss your real estate, corporate or business matters.