When starting a business, it is important to understand what type of business entity is best for you. Three common business entities in Nova Scotia are: (1) Sole Proprietorships, (2) General Partnerships, and (3) Corporations.
Sole Proprietorship (“SP”)
A SP is the simplest and most common business entity. Think of it as an individual in business who hasn’t done anything “above and beyond” to structure their business – they are in business by default as a result of selling a product or service to customers. Therefore, a SP is inexpensive to create and to shut down. Another benefit of an SP is that the individual running the SP can deduct financial losses of the SP from their other areas of income. A drawback of a SP is that the personal liability of the individual is unlimited (unless protected under insurance or other contracts) and that the business ceases upon the death of the individual, thus complicating estate planning.
General Partnership (“GP”)
A GP is defined as the relationship that exists between two or more people carrying on a business together, with the aim of making a profit. A GP can be created by a written partnership agreement, or a GP can implicitly exist by two or more individuals behaving like they are in a GP (i.e. meeting the above criteria). The partners must register the name of the GP with the Nova Scotia Registry of Joint Stock Companies. Some important aspects of a GP are that the partners are still personally liable for the GP, the GP income is taxed as income of the partners themselves (so the losses can be used to offset the amount of income of individual partners to reduce tax), partners cannot be employees of their partnership, and each partner has the duty to act in the best interests of each other and the business.
Corporations
A corporation is a business entity that is explicitly created (i.e. through the incorporation process) with a legal personality that is separate from its owners. This means that an entirely separate legal entity is created when the incorporation process is complete. The main benefit of this is that the owners (i.e. the shareholders) have limited personal liability with the business. Moreover, the company will continue to exist even on the death of an owner. Additionally, corporations are typically taxed more favorably than an SP or GP and are also eligible for government grants.
If you have questions about which business entity is best for you, contact a lawyer to discuss your options in further detail.
Disclaimer: This blog post is intended to provide general information only. The law is constantly changing and requires nuanced analysis. Therefore, nothing in this blog post should be considered legal advice or opinion. In order to obtain a legal opinion or advice on a specific matter, make an appointment to speak with a lawyer in your area.