Which business structure works best? Employee, Independent Contractor, Partner, Shareholder, etc.

Jan 04

Which business structure works best? Employee, Independent Contractor, Partner, Shareholder, etc.

Please note that the information provided herein is not legal advice and is provided for informational and educational purposes only. If you need legal advice with respect to how to legally structure your business relationship, you should seek professional assistance (e.g. make a post on Dynamic Lawyers). We have Toronto, Ottawa, Hamilton, Mississauga, Brampton, and other Ontario business lawyers registered on the website who can answer your questions or help you with your business structure. I should know – I’m one of them and you can contact me directly (michael@carabashlaw.com).

So you’re talking with someone about doing business. What’s the best structure? You could have an employee-employer relationship. How about a client-independent contractor relationship? Should you be a partner, a limited partner, a limited liability partner, a general partner? Maybe you should be a shareholder, director, or officer of a corporation? How about being a joint venturer? Which structure is best for you?

It all depends on what’s important to you at the time you want to do business. If you want to try to reduce your exposure to putting your personal assets at risk of being seized or collected in a lawsuit, for example, a corporation or a limited partnership or a joint venture (using corporations or a limited partnership) may be called for.

If you want to minimize your taxes, partnerships, limited partnerships, and corporations have different advantages and disadvantages. Remember: partnerships and limited partnerships are not separate legal entities for tax purposes. The income and expenses are passed along (that’s why they’re considered flow through entities) to the partners according to the agreement reached between them and applicable income tax rules. You can read up on my previous blog about income tax and limited partnerships here.

In terms of ease of creation, by far, a simple general partnership is the easiest to create and maintain whereas a limited partnership or joint venture involving corporations or limited partnerships involve more paperwork and legal / accounting diligence to establish and maintain.

What about management and control? Well, this can be taken care of through a partnership agreement, limited partnership agreement, shareholder agreement (for a corporation), or joint venture agreement. Will it be done through a committee, a vote, will one party have ultimate and unfettered control?

If you have a client-independent contractor relationship, the contract will govern that relationship. You should read up on my previous blogs about independent contractor agreements here, here, here and here.

The bottom line is that you need to look at various factors to determine what business structure is best for you. If you want a simple structure, then maybe an employee, independent contractor, or partnership agreement is best.

If you’re looking to be able to take advantage of the small business tax rate on active business income for a Canadian Controlled Private Corporation, then perhaps a corporation is best. It might also make sense if you’re planning to ultimately sell your shares and take advantage of the $375,000 lifetime capital gains exemption.

If you’re looking to raise equity investment, then perhaps a limited partnership or a corporation is best.

At the end of the day, you should seek legal advice: spending an ounce of prevention today to avoid a pound of pain tomorrow is always best. Also, a lawyer will help protect your right and advance your interests (something you may not be able to do or may not be able to do as well as a lawyer can). So what are you waiting for: make a post on Dynamic Lawyers or contact me directly.