One of the most important decisions you make when starting an outdoor/adventure business is what legal structure you select for the company. This decision can affect the amount of paperwork you may be required to do, the personal liability you may face, how much funding (government or otherwise) you may be able to obtain, and how much you may have to pay in taxes.
There are four types of business structures: sole proprietorship, partnership (both general and limited), corporation and co-operative. Each has its advantages and disadvantages.
Sole Proprietorship
A Sole Proprietorship is the simplest form of business, which involves conducting business on your own accord without acting as a legal business organization. In other words, the sole proprietor would be considered self-employed. You are the sole owner and are fully responsible for all debts and obligations related to the business. All profits are yours to keep, but if your business owes money, the creditor can make a claim against not only your business assets but your personal assets as well.
Advantages
- Simple to set up and dissolve (i.e. very little legal process);
- Minimal government or legal fees (e.g. low startup costs, minimal working capital required);
- Minimal legal requirements (e.g. no registration required if using own name, greatest freedom from regulation);
- Simple tax treatment and some tax advantages (i.e. pay ordinary income tax on any profits, business losses can be deducted from personal income, lower tax bracket when profits are low);
- All profits to you;
- Sole Proprietor is in control of all decision making.
Disadvantages
- Unlimited liability (i.e. any liability that arises from the business is the personal responsibility of the Sole Proprietor, regardless of how separate it is from proprietor’s other activities);
- No separate personality for unincorporated businesses, resulting in lack of continuity in business organization in your absence;
- No name protection;
- Difficulty raising capital (e.g. Sole Proprietor must secure the capital);
- Sole Proprietor must perform all of the functions required for the successful operation of the business (e.g. establishing and operating the business);
- If the business is profitable, it could put you in a higher income tax bracket;
- Accepting all losses.
General Partnership
A Partnership is a non-incorporated business. It is the relationship between one or more people who carry a business in common with a view of profit. Within a General Partnership, partners share the management of a business, and each partner is personally liable for all debts and obligations incurred. In other words, each partner is held responsible for the consequences of the actions of the other partner(s).
The internal structures of a General Partnership may be established by a partnership agreement, which is a form of contract among the partners that sets out the details of the relationship to each other. For instance, a partnership agreement can offer protection in the event of a disagreement or dissolution of a partnership.
Advantages
- Can combine talents and resources of multiple people;
- Easy to create, and partners can share startup costs;
- Modest/lower fees and legal requirements;
- Partnership agreements can specify rights and responsibilities;
- Equal share in the management, profits and assets;
- Possible tax advantages (e.g. partnership income is taxed as individual income, can use partnership losses to offset other sources of individual income because partnerships are not recognized as a separate legal entity);
- Corporations can form partnerships;
- Limited regulation.
Disadvantages
- Unlimited liability of each partner (e.g. for all partnership debts and obligations, including liabilities arising from acts of other partners);
- You are financially responsible for the business decisions made by your partner(s);
- Can be difficult to find the right partner;
- Unless otherwise agreed, partnership can unilaterally terminate;
- Difficult to assign partnership interests (i.e. can assign right to profit to another person but not management unless the other partner(s) consent);
- Sometimes partnership is automatically created (i.e. partners can legally bind each other without prior approval);
- No name protection.
Limited Partnerships
A Limited Partnership is a form of General Partnership, where the organization has at least one General Partner and one Limited Partner. Limited Partners contribute capital, but are not involved in the partnership’s management, which is left to the General Partner(s). Consequently, Limited Partners have limited liability for the partnership.
Whereas a General Partnership can arise organically, Limited Partnerships must register with the government to be recognized as such and to receive these protections.
Advantages
- Passive investors have limited liability (i.e. not liable for other partners);
- The Limited Partners may benefit from tax advantages (i.e. taxable income is subject to the personal tax rates of the individual partner);
- Limited Partners are entitled to be paid first upon dissolution of partnership (before the General Partners, though after creditors);
- A corporation can be made a General Partner to help limit liability.
Disadvantage
- Limited Partners may not participate in management (i.e. all important decisions are made by the General Partner(s));
- Any contributed assets by a Limited Partner become the property of the Limited Partnership.
Corporations
A Corporation is a legal entity that is separate and distinct from its members (shareholders). An incorporated company can sue and be sued, enter into contracts, hold property and go into debt.
Unlike Partnerships, ownership interests in a Corporation can be easily transferred by buying and selling shares (provided there are no restrictions in a shareholder’s agreement).
The following are the main characteristics that distinguish a Corporation from a Partnership or a Sole Proprietorship:
Advantages
- Limited Liability: generally, liability is limited to the corporation’s assets and no member (shareholder) can be held personally liable for the debts, obligations or acts of the company. To collect from member(s) of the corporation personally, it must be established that the member(s) were personally responsible for the wrongful actions or that they otherwise had guaranteed a debt or obligation of the Corporation;
- Corporate assets shielded from shareholders’ liabilities (known as entity shielding);
- Ownership is transferable (i.e. relatively easy to sell and transfer stock, unlike Partnership form where it’s difficult to transfer your interest);
- Perpetual existence: corporations are a separate legal entity, which means they have an existence beyond the life of its shareholders. Corporations also cannot be terminated unilaterally, unlike a Partnership;
- Name protection;
- Easier to raise capital;
- A single person can form a corporation.
Disadvantages
- More complicated and expensive government formation process;
- More onerous ongoing reporting obligations;
- Registration requirements to do business outside the province;
- Corporate formalities must be complied with (i.e. closely regulated, extensive record keeping requirements);
- Generally higher legal fees;
- Possible conflict between shareholders and directors;
- Possible double taxation of profits (i.e. corporations are taxed separately from and in addition to their shareholders).
Corporations can be formed under federal or provincial law. Generally, if the corporation intends on conducting business solely in one province, provincial incorporation may be advisable. However, if the corporation intends to expand its business outside of one province, federal incorporation may be preferable (however, incorporation in multiple provinces is also an option). Additionally, federally incorporated companies have heightened name protection under the Canada Business Corporation Act as compared to provincial laws.
Co-operatives
A Co-operative is an entity that is owned and controlled by an association of members. It is not as common as the other three structures above, but it can be useful where a group of individuals or businesses wants to pool resources and either obtain or share certain products or services.
Advantages
- Owned and controlled by its members – each member has an equal democratic say;
- Limited Liability;
- Profits distributed in accordance with the extent of members’ patronage.
Disadvantages
- Potentially longer or more difficult decision making process;
- Possible conflict among members;
- Less incentive to invest capital;
- Extensive record keeping required.
Key Takeaway for Outdoor/Adventure Businesses
Choosing the right business structure for your business is a vitally important decision. There are advantages and disadvantages of the three most common forms of businesses – Sole Proprietorship, Partnership and Corporation – that must be carefully considered and weighed, particularly in light of the unique considerations that come with an Outdoor/Adventure operation. Ryan Morasiewicz is able to muster the appropriate team of lawyers and other advisors who can properly counsel you on your options and help you build and grow your business.
Note: This article is of a general nature only and is not exhaustive of all possible legal rights or remedies. In addition, laws may change over time and should be interpreted only in the context of particular circumstances such that these materials are not intended to be relied upon or taken as legal advice or opinion. Readers should consult a legal professional for specific advice in any particular situation.
