INCORPORATING A COMPANY
There are a number of possible forms of business organization or
ownership in the Province of Nova Scotia. The most common forms
are Proprietorship, Partnership and a Limited Company.
A Proprietorship is a business operated and controlled by a single
individual. In this form of business enterprise, any income of the
business is treated for tax purposes as personal income of the proprietor.
The principal disadvantage of this form of business organization
is that liabilities arising from the operation of the business are
the direct personal responsibility of the individual business owner.
The principal advantage of a proprietorship is that it is the most
inexpensive form of business organization.
A Partnership is an enterprise in which two or more individuals
carry on business together and agree to share profits and losses
of the business. For tax purposes, the income of a partnership is
allocated to the individual partners on the basis of the agreement
which they have reached between themselves. In a partnership, as
in a proprietorship, the partners are directly personally responsible
for all debts and other liabilities of the business, including those
incurred by another partner. If this form of business enterprise
is chosen, it is highly advisable to have a written Partnership
Agreement, which establishes the details of the relationship, including
such matters as responsibilities, control, division of income or
losses, and procedures for amending or terminating the agreement
between the partners.
In many cases, a lawyer will recommend the incorporation of a business
enterprise to take advantage of the many benefits of this form of
business organization and ownership. A Limited Company is a legal
entity separate and distinct from its individual owners or “shareholders.”
The company is responsible for its own debts, assets and obligations.
Incorporation is accomplished by a legal procedure which requires
the filing of constitutional documents, including a “Memorandum
of Association” and “Articles of Incorporation.”
Additionally, officers and a board of directors are selected and,
often, a Shareholders’ Agreement is entered into by the Shareholders.
ADVANTAGES OF INCORPORATION
The principal advantage of incorporation is that the owners of the
company have limited protection from claims of creditors in the
event of a business failure. The liability of a shareholder of an
incorporated company is normally limited to the amount which he
has invested or has agreed to invest in the company. Creditors can
normally claim only against the assets of the company itself to
satisfy their claims. Thus, subject to the comments below concerning
Personal Guarantees, the personal assets of the company owners are
not at risk in the event of a business failure, as they are with
a Proprietorship or a Partnership.
The advantages of this “limited liability” are not
as absolute as many people believe. Normally, most of the business’
obligations will be to its bank, trust company or credit union,
and these institutions almost invariably require a “personal
guarantee” of the principals of the company. Thus, in the
event of default by the company, the debt would become an obligation
of the individual shareholders who have personally guaranteed the
debt. An incorporated company may involve some financial advantages
as a result of special tax rules which apply to corporations. An
incorporation may also be a prerequisite to obtaining certain types
of federal government assistance. It may also enhance the business'
image. Incorporation has the additional advantage of providing a
form of business organization which, in theory at least, can go
on forever, notwithstanding the death of the original business owner
or owners. Upon the death of any single shareholder or director,
the company may carry on, managed by the surviving members. Ownership
in a corporation is much easier to transfer than is ownership in
a Proprietorship or Partnership. An additional advantage of incorporation
is that a limited company may raise capital more easily than other
types of businesses, simply through the issuance of shares.
Although they are normally outweighed by the advantages, there are
certain disadvantages to the incorporation of a business enterprise.
These should be discussed with your lawyer before proceeding. A
limited company can be much more costly to set up and more complicated
to maintain than other types of business enterprises. There are
very strict government regulations regarding filing of annual statements
and payment of registration fees. The initial set up of a limited
company involves a large amount of legal work and may involve substantial
accounting fees. Thus, the total cost of setting up a limited company
may be a deterrent to some very small enterprises. The assistance
of a lawyer is essential when incorporating a company and one would
be well advised to also seek the advice of an accountant to ensure
that any relevant tax consequences have been considered. In addition
to the government regulated annual registration procedures in order
to maintain the existence of a limited company, there are certain
internal matters which much be attended to on a regular basis including
election of officers and directors, shareholders’ and directors’
meetings, and the maintenance of a corporate minute book.
A lawyer will be able to advise you as to the form of business
organization which best suits the goals and needs of your business.
Your accountant will be able to advise you regarding the relevant
tax consequences of whichever form of business organization you
may be considering. The Landry McGillivray ADVISOR is intended to
give general information only so that you will be aware of some
of the issues which you should consider when contemplating the organization
of a new business enterprise. For specific advice on your business,
you should seek advice from your Landry McGillivray lawyer.