Choosing the Right Legal Structure for Your Business

By reading this article, you will learn about the different legal business structures in Quebec, as well as their advantages and disadvantages. This non-exhaustive guide is intended to help you choose the right business structure.

However, it is always important to consult a legal advisor before starting your business to ensure that your choice aligns with the type of activities you want to undertake.

Before choosing the legal structure

You should know that most types of businesses must be registered with the Quebec Enterprise Registrar (Registraire des entreprises du Québec) under the Act Respecting the Legal Publicity of Enterprises (L.R.Q., c.P-45). Registration means your business will be recorded with the registrar, and certain information about your business will be publicly accessible.*

As such, anyone wishing to start a business in Quebec is required to submit a registration declaration to the Enterprise Registrar no later than sixty (60) days after starting operations. This declaration can now be filed online at the following address: www.registreentreprises.qc.ca.

Once registered, you must update the information declared in your registration annually, as well as whenever there is a change to your business, such as a change in the head office address. These updates can also be made online. On the registrar’s website, you will find all the information you need on how to submit your registration declaration and update your business information.

Additionally, some individuals or entities are exempt from the obligation to register with the Enterprise Registrar, including:

• A sole proprietor operating a business in Quebec under their first and last name;
• A partnership;
• A joint venture;
• An unincorporated association (not a nonprofit corporation).

*Registration also allows you to reserve your business name, ensuring exclusivity of that name.

How to choose the right business structure

The first question to ask yourself is: Will I operate alone or with others?

A sole proprietor has two options for the type of business structure: a sole proprietorship or a single-shareholder corporation.

The first type of business is not incorporated, while the second is an incorporated legal entity.

An individual may choose to operate their business with other people. In this case, several business structures can be used: the general partnership, the limited partnership, the joint venture, the association, the corporation, and the cooperative.

Types of business structures

Sole Proprietorship

A single person owns all the business assets and is responsible for all obligations and debts.

Advantages:

• The simplest, fastest, and most economical legal form to set up, operate, and dissolve
• All profits go to the same person.
• Full freedom of action and decision-making.
• Minimal working capital required.
• The owner can employ staff as needed.
• Option to use small claims court.
• Possibility to deduct business losses from other income sources.
• Fewer regulatory requirements and greater confidentiality (financial statements do not need to be disclosed).

Disadvantages:

• Personal and business assets are combined. In case of bankruptcy, all personal assets may be seized due to unlimited personal liability.
• Business failure results in personal bankruptcy.
• High tax rates since business income is taxed at personal rates.
• Limited growth due to difficulty obtaining capital, as financing depends on the owner’s resources and credit.
• The business ceases to exist upon the owner’s death.

Partnerships (General, Limited, and Joint Ventures)

A partnership is operated by two or more owners who are jointly and severally responsible for obligations and debts. A partnership agreement outlining rights and responsibilities is highly recommended.

Advantages:

• Simple to establish, manage, and dissolve.
• Confidentiality due to the non-disclosure of financial statements.
• Business losses can be deducted from partners’ other income sources.
• Additional capital from multiple partners, with contributions that may be financial, professional, or otherwise.
• Broader skill sets and resource pooling.
• A partnership agreement can ensure continuity despite the death of a partner.

Disadvantages:

• High tax rates since business income is taxed at personal rates.
• Partners are jointly liable for all obligations, regardless of their capital share.
• Business ceases to exist upon a partner’s incapacity or death without an agreement.
• Lack of confidentiality and risk of conflict among partners.
• Partners share profits based on ownership percentages.
• The bankruptcy of the business leads to the bankruptcy of the owners.
• Each partner holds social units, and it is based on the proportion of units held by each partner that their share in the company’s profits is determined.
• Finding suitable partners can be challenging.
• Unable to use small claims court

In a general partnership, all partners are administrators, unless they have designated a manager or administrator. They are jointly liable for the obligations of the partnership.

Thus, in the event of a lawsuit, if the assets of the partnership are insufficient to cover the debts, the partners become personally and unlimitedly liable for the amount exceeding the value of the partnership’s assets: this is known as joint and several liability.

A limited partnership is made up of two parties: general partners and limited partners. Each partner participates in the financing of the business. Limited partners contribute money or assets, while general partners contribute their work and entrepreneurial spirit. General partners are the only ones to manage and represent the partnership, while limited partners are associates who may receive their share of the profits. In a limited partnership, only the general partners are held jointly and severally liable for the debts of the partnership. In the event of bankruptcy, if the assets of the partnership are insufficient to cover the debts, the general partners become personally and unlimitedly liable to the creditors. Limited partners are liable for debts up to the amount of their capital contribution.

Corporation

Also known as a company or corporation, this structure is more complex and requires professional advice to establish.

Advantages:

• A corporation is a separate legal entity with its own rights and obligations.
• Shareholder liability is limited to their investment.
• Survives the death of shareholders and allows for easy transfer of shares.
• Tax advantages and greater financing options.
• The company more easily meets the requirements of financial institutions.

Disadvantages:

• More expensive and complex to establish and manage.
• More technical legal structure requiring more frequent use of professionals.
• Requires compliance with numerous governmental obligations (e.g., annual updates, tax declarations, financial statement disclosure).
• Low level of confidentiality
• More complex administration (meeting minutes…)
• Inability to deduct company losses from the shareholder’s other income.
• Unable to use small claims court

Shareholder and partner agreement

When you have business partners, creating a written and signed agreement is essential. It can prevent future disputes and provide clear guidelines for:

• Capital contributions;
• Protect the partners in the event of disagreement or dissolution;
• Profit and loss sharing;
• Rights and obligations;
• What are the procedures to follow in the event of the death or incapacity to operate of one of the parties?
• Limit the possibilities of transfer and control the holding of shares or social units;
• How to prevent or resolve situations of disagreement or deadlock?
• Regulate certain administrative actions (e.g., signing cheques, etc.);
• Minority shareholder protection;
• Valuation of shares or stakes upon a partner’s withdrawal.

Cooperative

A cooperative unites individuals with common socio-economic needs to operate a business. Members are both users and co-owners of the cooperative, which is a separate legal entity.

Advantages are:
– Equal ownership and voting rights for all members, regardless of shares.
– Limited liability for members to their share value.
– Requires a minimum of 12 members, with exceptions for worker cooperatives.