Alberta Business Structures

This article is designed to give you a brief overview of common business structures in Alberta and is not intended to be legal advice. Should you need more information, feel free to contact the writer.

You are now wearing your entrepreneurial hat and looking to structure your business in a way that makes sense from several key perspectives.

When determining what kind of business best suits you, the writer invites you to consider the following:

  1. What are the tax implications of the potential business structure you are interested in? Who will be taxed: the individual(s) or the corporation?
  2. What kind of liability flows from the business structures you are considering? Will you be personally liable in the event that something goes sideways, or will you have the benefit of hiding behind the corporate curtain, so to speak?
  3. Are you eager to engage in a more complex business structure, or do you prefer to keep it simple?

How you answer the above may lead you, as an individual, to choose to engage as:

  1. A sole proprietor; or
  2. A corporation

When working with a partner or a group, how you answer the above questions may lead you to engage as:

  1. A partnership; or
  2. A corporation

IN ALBERTA, WE SEE 3 BASIC BUSINESS FORMATS 

  1. Sole Proprietorship

The sole proprietorship is the simplest form of business association, involving only one individual doing business on their own behalf and liable to the full extent of their personal assets for the debts and obligations incurred.

Advantages

  • Good format for the new entrepreneur, as the relative lack of regulation and bookkeeping allows you to focus on growing your business.
  • The sole proprietor may have employees, but does not have partners or shareholders to share in the profits or losses of the business.

Disadvantages

  • You are solely liable for the debts and obligations of your business (unlimited liability).
  • Personal and business income are combined for tax purposes, meaning business income is taxed at your personal tax rate.
  • Be mindful of the Partnership Act:
    • 110: if a sole proprietor operates a trading, manufacturing, contracting or mining business under a name other than her or his own name, the sole proprietor must register that trade name under the Partnership Act.
    • 111: you must file a declaration with registrar once you cease to act under that name.
    • 112: you are liable to a fine if you do not register the name. 
  1. Partnership (2+ persons)

A partnership refers to a relationship between two or more persons carrying on business in common with a view to profit. The Alberta Partnership Act sets out the rules for partners relative to each other.

The division of the business is assumed to be in equal shares unless otherwise stated in the partnership agreement governing the business relationship. The partnership agreement often sets out the percentage share of the business of each partner, including how income, expenses, and tasks shall be allocated amongst or between partners.

Partnerships are governed by special provisions in Subdivision j of Division B of Part I of the ITA.

Income of a partner is computed as if the partnership was a separate person resident in Canada. The tax year is the fiscal period of the partnership. Elections in relation to tax treatment in the computation of income with respect to several matters must be made at the partnership level and, therefore, must be treated in the same way by all partners. Each taxable capital gain and allowable capital loss from the disposition of property owned by the partnership and the amount of any income or loss of the partnership from sources such as business or property will be calculated for each fiscal period of the partnership. However, this income is not taxed at the partnership level but is allocated to the partners according to the terms of the partnership agreement.

Advantages

  • Relative ease of formation and dissolution (fewer formalities than with a corporation).
  • Flexibility in designing the internal management structure.
  • The ability to flow through losses and claim them against personal income.
  • No double taxation of income.

Disadvantages

  • Unlimited liability for each partner, jointly or severally, for all debts and obligations.
  • As partners are considered agents of each other, each of the partners creates liability for the other.
  • No access to capital gains exemption or small business deduction normally available to certain Canadian corporations.
  1. Corporation (one or more persons)

Both partnerships and sole proprietorships can incorporate to become a corporation. Corporations have distinct legal personality, have the same abilities as a natural personal, and can sue and be sued.

Advantages

  • Shareholders have limited liability and are not liable for the debts or obligations of the corporation.
  • Corporations are generally taxed at lower rates than individuals.
  • Shareholders have access to $750,000 lifetime capital gains exemption when disposing of shares in a qualifying Canadian corporation.
  • Losses belong to the corporate entity and there are more eligible tax write-offs to a corporation.
  • Income splitting may still be available in specific cases (consult with your tax accountant).
  • Corporations can live on indefinitely, provided you stay current with your corporate registry filings.
  • Raising money through equity financing provides options other than incurring debt obligations (which you may be required to personally guarantee).
  • You can pay yourself in salary or in dividends, and defer payment to minimize your income tax liability.
  • Corporations have access to the small business tax deduction on active business income.

Disadvantages

  • Arguably the most complex business structure.
  • Greater reporting and regulatory requirements.
  • Yearly annual returns must be completed and filed at corporate registry.
  • Personal liability may still apply in cases of environmental contamination, non-payment of employees, and fraud.

This article is designed to give you a brief overview of common business structures in Alberta and is not intended to be legal advice. Should you need more information, feel free to contact the writer.