Forms of Business Organization (Choosing a Form and Registering Your Business)

Introduction

There are four legal forms of business organization for small businesses:

• sole proprietorship
• partnership
• corporation
• cooperative.

The appropriate form for your business depends on many factors, including: the type of business, the number of persons involved, whether you want full control or prefer to share responsibilities, capital requirements, tax regulations, and liability.

Unless your business structure is very simple, consult a lawyer about the legal aspects of your plans and an accountant about financial implications.

Sole Proprietorship

A sole proprietorship is a business owned and operated by one person. Of all the organizational forms, the sole proprietorship is the simplest, the least expensive, and the easiest to create. This makes it appealing to small business -- you must simply register a business name and obtain the appropriate zoning and licensing. However, as a sole proprietor, you are also:

• seen as being 'one' with the business, not as a separate entity. The life of the business is confined to the life of the owner.
• responsible for ALL aspects of the business, from daily operation to securing finances.
• the owner of the business assets. As such, you must claim business expenses and revenues in your personal income tax return. Tax rates may be higher than those of a corporation depending on your income level.
• personally liable for all business debts. For example, if the bills are not paid, your personal assets such as a house or car may be seized if legal action is taken.

Partnership

A partnership is an agreement between two or more persons to pool their talent and resources in order to operate as co-owners of a business. While they are often simpler and less expensive to form than a corporation, some partnerships can be quite complex. Seek legal advice to draw up an agreement which outlines every partner's rights and responsibilities. Generally, each partner is responsible for ALL aspects of the business and will be held accountable for the actions of the other partner(s). Every partner is also personally and jointly liable:

• for the full amount of all debts/obligations incurred in the name of the firm by another partner whether or not the obligation was authorized by other partners.
• for any wrongful act or omission by a partner in the course of business.

Like sole proprietorships, a partnership's business name must be registered. If a partner leaves (regardless of whether they quit, retire, or die) or when there is an unresolvable disagreement, the partnership must be dissolved and reconstituted.

There is an alternate form of partnership called a limited partnership.  With this type of structure, one partner is strictly an investor and is liable only to the extent of their capital investment in the company.  However, the limited partner cannot participate in managing the company and may not withdraw the invested capital during the term of the partnership.

Corporation

Corporations are another common form of organization in the business world, especially in big business. But corporations also rival partnerships as a way to carry on smaller operations. They are more expensive to start and complex to operate, but the advantages include:

• a corporation has a separate existence from its shareholders. As such, shareholders are liable only to the extent of their investment in the shares of the corporation. There may be less financial risk.
• frequently, there are certain tax advantages.
• shareholders elect directors who in turn elect executives who are responsible for supervising the corporation. In a small corporation, there need only be one shareholder and one director, making a single person corporation possible.

Businesses can be incorporated at either a federal or provincial level. You should reserve the corporation's name prior to incorporating. Above all, seek legal advice and understand all requirements and regulations.

Cooperative

A cooperative is a special type of corporation which is organized, owned and controlled by people who join together for a common benefit. Cooperatives differ from ordinary corporations because of six guiding principles: membership is voluntary and open to anyone; each member has one vote no matter how many shares are held; return on investment is limited by legislation; surplus earnings are returned to members; education is provided; and cooperatives act in cooperation with other co-ops. For information on co-operatives, contact:

• you intend to carry on business under a name other than your family name, such as 'Economy Plumbing'.
• you are in a partnership, such as 'J.H. Jones and F.H. Smith Plumbing'.
• your business name indicates that more than one person is involved, even if it is your family name, such as 'Jones & Company'.

If you are alone in business as a sole proprietor and operate under your own name, you do not have to necessarily register the business, providing you erect a sign in full public view giving your full name, such as 'J.H. Jones Plumbing'.   However, it is a good idea to register the business name even if you are using your own name as you will need to show proof of registration in certain instances, such as if you need to get a Provincial Sales Tax (PST) number.

If you are registering a new business, you must first reserve the name you have chosen for your business. A database search checks to see if an existing business is already using your intended name or similar name, and if it is not being used, then reserves it so that no one else can register the same name or one similar to it. If the name is cleared (this usually takes about 24 hours) and your business falls within a category that must register (see above), you must fill out registration forms and pay a registration fee within 90 days and within one month of starting business. The registration is effective for three years, and renewable upon further application.  ($40.00 to reserve, $45.00 to register). When registering or re-registering, you must supply:

• your full name and place of residence.
• the name under which you intend to carry on business.
• a description of the nature of the business and the location of the enterprise.
• if you are in business alone, a statement that no partnership exists.
• if you are in partnership, the full name of all persons involved and a statement attesting how long the partnership has existed.

Note:   DO NOT print business cards or stationery before registering or incorporating.

What if you change your business?

Several types of changes in the character of your business, such as any change in name (you must again reserve the new name), ownership or dissolution, must be registered within one month of their occurrence. If your business is a partnership, you must register:

• any change to the partnership.
• the dissolution of the partnership.

Where do you register?
To reserve a business name and to register a business, contact:

Manitoba Finance
10th Floor
405 Broadway
Winnipeg, Manitoba  R3C 3L6
Canada
Telephone: (204) 945-2500
Fax: (204) 945-1459
Toll-free (information): 1-888-246-8353
E-mail: MBTax@gov.mb.ca

ADVANTAGES AND DISADVANTAGES OF EACH FORM OF BUSINESS ORGANIZATION

Sole Proprietorship

Partnership

Corporation

Co-operatives

DISCLAIMER
Information contained in this document is of a general nature only and is not intended to constitute advice for any specific fact situation. Users concerned about the reliability of the information should consult directly with the source, or seek legal counsel.

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