Legalese_05-39

Jeff Green | Sep 29, 2005

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Thinking of starting a business? Part I

by Peter Graham, staffLawyer

A column of general information and opinion on legal topics by the lawyers of Rural Legal Services, Box 359, Sharbot Lake, ON, K0H2P0, 613-279-3252, or 1-888-777-8916. This column is not intended to provide legal advice. You should contact a lawyer to determine your legal rights and obligations.

You may have been lying on the beach this summer, or floating on one of the many beautiful lakes in North Frontenac. The rough and tumble world of business seemed far away. But think again. That chip wagon in the parking lot was making money hand over fist - and if you had a nickel for every ice cream cone sold at the local stand you would be rich!

If your thoughts of going into business for yourself go beyond the daydream stage, you should know about the basic forms of business ownership.

The easiest form of business to start is a sole proprietorship. The business is you. Start doing anything (that is legal, of course) with a view to profit and you are in business. Simplicity is a factor that makes this form of business ownership attractive. However, there are a few drawbacks. Because you are the business, you are personally responsible for the actions and debts of the business. That is, your personal assets may be seized by creditors of the business if you cannot pay the debts. You must also report the net income from the business as income in your personal income tax return.

If you think you may get lonely owning the business yourself you may wish to start a partnership. As in a sole proprietorship there must be a business carried on with a view to profit. In addition, the partners must have an agreement to carry on the business together and share the profits (or the losses if they occur).

A partnership runs very much like a group of sole proprietors in that each partner must report in his personal income tax return his share of partnership profits. However, a partner is personally responsible not only for his own acts and debts but all the acts and debts of his partners made on behalf of the partnership. If the debts of the partnership are more than the partnership can pay, the personal assets of any of the partners may be seized by creditors in collection proceedings. Likewise, if one partner is involved in wrongdoing as part of the partnership business, all partners may be sued. In law, this is referred to as the partners being jointly and severally liable for the obligations of the partnership.

Another way to own a business is to start a corporation. This is done by making an application to either the federal or provincial government for Articles of Incorporation. These Articles are the birth certificate of the corporation. The key feature of this form of business ownership is that it is a legal “person” separate from its owners. Generally, it incurs its own debts and is responsible for its actions without involving the personal assets of the owners. This is referred to as limited liability, which is an advantage of this form of business.

There are many factors to take into consideration before deciding what form of business ownership is best for you. It is recommended that you consult your lawyer for advice before firing up the grease in your own chip wagon or starting the business of your dreams.

Part II