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.

Remember, if you need a lawyer to review, draft, revise, negotiate or resolve a dispute concerning an independent contractor | consulting agreement, make a post on Dynamic Lawyers or contact me directly at michael@carabashlaw.com.

In case you’re a Client and looking to engage the services of an Independent Contractor in Ontario, look no further:

Independent Contractor Agreement (Client) – No Satement of Work

This Agreement can be used by a Client who wants to engage the services of an Independent Contractor (e.g. a consultant, a professional, a general worker, etc.) without creating an employment relationship. The “Client” means that this Independent Contractor Agreement favours the Client – for example, through notice, termination, standards of care, and restrictive covenants, etc. The “No Statement of Work” means that the services to be performed by the Independent Contractor are dealt with in the actual agreement and not in a Schedule (attached and incorporated into the agreement as a “Statement of Work”). There will be different versions of this agreement which favour both the Client and the Independent Contractor and which may include Schedules. Schedules aren’t absolutely necessary. They’re just one way of having an agreement instead of writing things out in the actual agreement, you simply modify the Schedule. Here’s the sample Video Guide that comes with this Independent Contractor Agreement (Client) – No Statement of Work:

Now, if you happen to be looking for an Independent Contractor | Consulting Agreement with a Statement of Work, then you’re in luck. Just go here and scroll down and, voila! The “Statement of Work” means that there is a schedule in this particular Independent Contractor Agreement to describe the services (instead of writing everything out in the actual agreement, it’s included in a Schedule). Here’s the sample Video Guide that comes with this Independent Contractor Agreement (Client) – With Statement of Work:

All of Dynamic Lawyers‘ legal forms are lawyer-prepared, simple to read, easy to customize, and only a fraction of the price a lawyer would charge. Also, each legal form comes with a FREE VIDEO GUIDE (watch a useful example of how this legal form can be customized), a FREE DL GUIDE (read helpful information about this legal form), and another FREE DL GUIDE that sheds valuable insight into how legal forms can be challenged. What are you waiting for? Best of all, if you DO need a lawyer and need some legal advice, simply make a post and get FREE quotes from Ontario lawyers focusing on the area of law you require!

Note: this information and these sample video guides are NOT legal advice and are provided for informational purposes only. If you need an Ontario lawyer, go to Dynamic Lawyers and make a post.