Business Structures in British Columbia

When starting a business, you get to decide what kind of entity you are going to establish.  This will be influenced by your business objectives, which in turn, will determine issues of liability, taxation, management, governance, and a whole host of other legal and business factors.

Over the years, we have produced numerous articles related to a variety of business structures, advantageous in specific circumstances, and designed to achieve specific results.  More recently, we produced a well-received standalone article on benefit companies.

In the current article, we shall undertake a more comprehensive review of essentially all of the various business and not-for-profit structures available in British Columbia.  Those structures can be summarized as:

• sole proprietorships;
• partnerships;
• limited partnerships;
• limited liability partnerships;
• corporations;
• joint ventures;
• strategic alliances;
• distributorships;
• franchises;
• unlimited liability companies;
• community contribution companies;
• benefit companies; and
• societies, or other “not for profit” entities.

Sole Proprietorship

The sole proprietorship is one of the oldest and simplest forms of business organizations. It comes into existence, whenever an individual starts to carry on business on their own account, without taking the steps necessary to adopt some other form of organization, such as incorporation.

It is important to note, that the sole proprietor is exclusively responsible for performing all contracts and other obligations entered into in the course of business. The sole proprietors’ assets (as well as any assets or value contributed to the business) may be liable to seizure, and are exposed in an action against the business. The sole proprietor is exclusively responsible for all torts (i.e., an act or omission that gives rise to injury or harm) committed by the individual personally, in connection with the business and is vicariously liable for all torts committed by employees in the course of their employment.

Additionally, the sole proprietor cannot be an employee of the business, because one cannot contract with oneself and, for income tax purposes, the income or loss of the business operation is included with the income or loss from other sources, in calculating the sole proprietor’s personal tax liability.

While simplicity is attained, there are many other issues that need to be considered, such as those outlined above.  Beyond the issue of lack of limited liability there is also the difficulty in attracting investors into a sole proprietorship. This structure does not allow for any suitable or secure method or procedure for third party participation, by way of investment.

Partnerships

Partnerships arise in British Columbia under the Partnership Act. Although the organization of a partnership can be simple and inexpensive, there are a number of matters to bear in mind.

All partners may share in the management of the business, unless the partnership agreement that exists, states otherwise. Additionally, and in certain circumstances, the partnership may provide tax advantages, because the business losses can be deducted against the other personal income of the partners.

The major disadvantage of a general partnership, is the liability it imposes on the partners. Each partner is personally liable for the losses of the business, and may also be responsible for the wrongful acts of its fellow partners, if those acts are committed in connection with the partnership business.

Partnerships are generally defined and governed by a well thought out and well drafted Partnership Agreement, setting out the roles and responsibilities of the partners, the business objectives that those partners have, and many other issues, including dispute resolution, partnership management, allocation of profit and loss, and other matters.

Limited Partnerships

Limited partnerships are essentially a hybrid of a partnership and a corporation, and are a creation of statute (i.e., the Partnership Act).  Limited partnerships involve the creation of a partnership between a general partner, usually a corporate entity, which has the responsibility and liability for managing the affairs of the partnership business, and one or more limited partners.  The limited partners of the limited partnership are not engaged in management, but they do contribute capital to the partnership. Both the general and limited partners, acquire units or partnership interests in exchange for sharing in net profit, and net losses of the partnership.

Additionally, this form of business organization permits third party investors, whom obtain the protection of some limitation on liability, while allowing them the income tax advantages of a partnership. This makes the limited partnership like the corporation, in allowing the limited partnership to raise capital for the business.

There are a few limitations with regard to limited partnerships which include third parties, such as conventional lenders, sometimes being reluctant to deal with limited partnerships, and limited partners have no management control, and the general partners have no limited liability.

Moreover, the Partnership Act does not have protections for limited partners, equivalent to the legislative protections for the minority shareholders in a company or corporation. That is to say, that minority oppression remedies that exist under the Business Corporations Act (the “BCBCA”), do not exist under the Partnership Act.

It is also fundamental to recognize, that limited partners who get involved in the management of the limited partnership may be deemed to be general partners and lose their protection of limited liability.

Limited Liability Partnership or LLPs

Another type of partnership is the limited liability partnership or LLP. This is a partnership structure that shields each partner from personal liability for the debts of the partnership, and for the negligence and wrongdoing of the other partners, except to the extent of the partners share in the partnership’s assets.  LLPs have many of the same advantages as limited partnerships, with the added benefit that the members of the LLP can take an active role in the business of the partnership, without exposing themselves to personal liability for the acts of other partners (beyond the value of their investment in the partnership).

Limited liability partnerships distinguish themselves from general partnerships, on the basis that unless otherwise provided in the governing partnership agreement, an LLP partner is expressly absolved of personal liability for partnership obligations. Having said that, an LLP partner remains personally liable for the partners own negligent or wrongful act or omission.

It is also significant to note, that an LLP partner’s interest in the partnership is not exempt from liabilities of the partnership. Additionally, if an LLP partner is a corporation, its directors are jointly and severally liable, with the corporation, for its liabilities as an LLP partner.

Corporations

A corporation, unlike a sole proprietorship or a general partnership, requires specific action to come into legal existence. Moreover, the corporate entity that is formed, has a legal identity and status separate from its shareholders and its directors.

Most businesses, whether large or small, are carried on in the form of the corporation. It is said that a corporation is an artificial being, invisible, intangible and existing only in contemplation of law. That somewhat archaic language, sets out the crucial component of the distinct identity of the corporation, and is the basis upon which limited liability is formed.

In a British Columbia context, there are two primary variations to the standard corporation. The first is a public company, that is a “reporting issuer”, and the second is the closely held company, which generally is understood to mean a company with a small number of shareholders.

In summary form, the important characteristics of a corporation are their potential immortality, their limited liability protections, the transferability of shares, their separate legal entity status, the capital raising abilities of the corporation, certain tax advantages and the rights and remedies for shareholders, both in case law and under the BCBCA.

Beyond these rights and characteristics, there may be certain tax advantages flowing from incorporation. A corporation’s separate legal personality provides it with several tax advantages. Some corporations receive preferential income tax treatment and corporations often provide more flexibility in deferring taxes and allowing the division of business income. On the other hand, a corporation can experience less than optimal tax treatment for business losses, particularly if the business never earns a profit against which losses can be taken.

Joint Ventures

A joint venture is not a distinct form of business organization, nor does the relationship between two or more parties to a joint venture have any precise or specific legal meaning. The term joint venture is used to refer to a wide variety of legal arrangements in which two or more parties combine their expertise, services, investments and other resources for a specific purpose and usually, for a limited time.

A joint venture is created by way of a contract between the parties. The parties should agree to contribute certain resources, in advancement of a particular project.  Further, they should carefully contract in a manner that does not involve identification of the parties as a combined entity allowing either party to act for or on behalf of the other. Additionally, the parties should avoid assuming liability for each other’s debts and obligations.

One significant advantage of the joint venture, is the ability to designate, through contract, different levels of obligations and commitments, between the parties, and to separate business interests, both during the joint venture project and after its completion.

Strategic Alliances

Like joint ventures, strategic alliances have no precise or specific legal meaning. The term is used to describe a wide variety of relationships between business organizations involving a wide range of mutual obligations and formalities. A joint venture can be a strategic alliance, as can something much less involved, such as an agreement to jointly market products in a particular geographic area or for a particular business purpose.  In some industries, strategic alliances are referred to as “teaming agreements”.

Distributorships

Like joint ventures and strategic alliances, distributorships do not create a separate legal entity. Distributorships are formed by way of contract, for the purpose of allowing one business to sell the products or services of another business. These agreements can be very simple arrangements, on a product-by-product basis, or can be highly complex relationships involving all aspects of one business’s products or services.  One of the hallmarks of the well drafted distributorship agreement, is to provide for benchmarking performance or mile stone achievements by the distributor, to ensure entitlement to the ongoing distributor relationship.  One must also be mindful, that in certain jurisdictions, the distributor acquire certain rights that exist outside of what is provided for in the specific distributorship agreement.

Franchises

The British Columbia Franchises Act (the “Act”) and its regulations came into force on February 1, 2017.

The Act applies to the following franchise agreements when a franchisee is operating wholly or partly in British Columbia:

• new franchise agreements entered into on or after February 1, 2017;
• existing franchise agreements that are renewed or extended on or after February 1, 2017; and
• franchise agreements entered into before February 1, 2017 with respect to certain sections of the Act (mostly the “fair dealing” and the “right to associate” provisions, discussed below).

The Act imposes a duty of fair dealing on franchisors and franchisees regarding the performance and enforcement of the franchise agreement, and sets out remedies in the case of a breach. This duty requires that the parties act in good faith and in accordance with reasonable commercial standards.

The Act gives franchisees the right to associate with each other, and prohibits the franchisor from impeding or restricting this right (and provides corresponding remedies). For example, this right gives franchisees the opportunity to associate with each other regarding a class action lawsuit against a franchisor.

Franchisors must provide a prospective franchisee with a franchise disclosure document at least 14 days before the earlier of: (1) entering into a franchise agreement or any other agreement relating to the franchise, or (2) paying any consideration relating to the franchise.

If there are any material changes to the franchise system during the pre-franchise disclosure period, the franchisor must also deliver a statement of material change to a prospective franchisee.

Franchisors may require that a deposit be paid, and a deposit will not trigger the disclosure obligations if it is fully refundable, does not exceed 20% of the initial franchise fee, and is given under an agreement that does not oblige the prospective franchisee to enter into a franchise agreement.

A franchisee may rescind a franchise agreement without penalty or obligation within 60 days after receiving a disclosure document if:

• the franchisor failed to provide the disclosure document or a statement of material change within the required time, or
• the disclosure document’s contents did not meet the Act’s requirements.

If a franchisor simply never provides a disclosure document, a franchisee has two years to rescind the agreement without penalty or obligation.

Unlimited Liability Companies or ULCs.

An unlimited liability company or ULC is a company in which shareholders of the company have unlimited joint and several liability for the obligations of the company or upon dissolution. As a general proposition, ULCs were created by statute, as tax advantaged vehicles for American investment in Canadian ventures. However, the January 2010 changes to the Canada / US income tax treaty introduced a number of restrictions that have limited the cross-border tax planning opportunities where a ULC is utilized. Crucially. the advice of a tax specialist is needed to take advantage of the remaining cross-border ULC tax advantages.

Community Contribution Companies or CCCs

A community contribution company is a hybrid of a traditional business corporation and a not-for-profit entity, aimed at fostering social enterprise and socially beneficial investment in British Columbia. The Act requires a community purpose among its primary aims and further, that these community purposes must be set out in the articles of the company.  Beyond that, the Act imposes requirements regarding a community contribution company’s ability to distribute profits to shareholders, a portion of which are required to be devoted to the community purpose set out in the company’s articles.

By way of related regulation, the ability to declare dividends to shareholders or to pay interest on debentures or other debt at a rate tied to the company’s profits, is limited to not more than 40% of the profits of the CCC.  Finally, community contribution companies are also subject to an “asset lock” on dissolution, which requires 60% of the company’s capital to be put towards the stated “community purpose” on dissolution.

Benefit Companies

As of June 30^th 2020, the BCBCA includes a new type of company called a “Benefit Company”, which is a for profit entity; however, it commits in its articles to conduct its business in a “responsible and sustainable manner” and “to promote one or more public benefits”.  The BCBCA further requires that directors and officers of benefit companies, balance their fiduciary duties with the duty to “act honestly and in good faith with a view to conducting business in a responsible and sustainable manner” and to “promote the public benefits specified in the company’s articles”.

Societies and Not-for-Profit Entities

For the purposes of this article, we shall consider societies and not-for-profit entities at the same time.  Unlike all of the prior entities referenced in this article, societies and not-for-profit entities must not have a “for profit” component or objective to their activities. Unlike community contribution companies and benefit companies, there can be no business purpose, in pursuing the objectives of the society or the not-for-profit entity.

Beyond that and beyond the scope of this article, many societies or not-for-profit entities also pursue separate registered charity status as provided for in the Income Tax Act, and as administered by the Canada Revenue Agency’s Charity Directorate.

Conclusion

In conclusion, we hope that that this article has provided you with a useful general survey of the for profit and not-for-profit entities that can be utilized in a variety of circumstances to provide flexible and accommodating corporate and other structures. We would be happy to speak to you at any time about these matters and to provide you with guidance and direction in establishing one or more of these entities, for your intended purpose.

Those structures can be summarized as:

• sole proprietorships;
• partnerships;
• limited partnerships;
• limited liability partnerships;
• corporations;
• joint ventures;
• strategic alliances;
• distributorships;
• franchises;
• unlimited liability companies;
• community contribution companies;
• benefit companies; and
• societies, or other “not for profit” entities.

Sole Proprietorship

The sole proprietorship is one of the oldest and simplest forms of business organizations. It comes into existence, whenever an individual starts to carry on business on their own account, without taking the steps necessary to adopt some other form of organization, such as incorporation.

It is important to note, that the sole proprietor is exclusively responsible for performing all contracts and other obligations entered into in the course of business. The sole proprietors’ assets (as well as any assets or value contributed to the business) may be liable to seizure, and are exposed in an action against the business. The sole proprietor is exclusively responsible for all torts (i.e., an act or omission that gives rise to injury or harm) committed by the individual personally, in connection with the business and is vicariously liable for all torts committed by employees in the course of their employment.

Additionally, the sole proprietor cannot be an employee of the business, because one cannot contract with oneself and, for income tax purposes, the income or loss of the business operation is included with the income or loss from other sources, in calculating the sole proprietor’s personal tax liability.

While simplicity is attained, there are many other issues that need to be considered, such as those outlined above.  Beyond the issue of lack of limited liability there is also the difficulty in attracting investors into a sole proprietorship. This structure does not allow for any suitable or secure method or procedure for third party participation, by way of investment.

Partnerships

Partnerships arise in British Columbia under the Partnership Act. Although the organization of a partnership can be simple and inexpensive, there are a number of matters to bear in mind.

All partners may share in the management of the business, unless the partnership agreement that exists, states otherwise. Additionally, and in certain circumstances, the partnership may provide tax advantages, because the business losses can be deducted against the other personal income of the partners.

The major disadvantage of a general partnership, is the liability it imposes on the partners. Each partner is personally liable for the losses of the business, and may also be responsible for the wrongful acts of its fellow partners, if those acts are committed in connection with the partnership business.

Partnerships are generally defined and governed by a well thought out and well drafted Partnership Agreement, setting out the roles and responsibilities of the partners, the business objectives that those partners have, and many other issues, including dispute resolution, partnership management, allocation of profit and loss, and other matters.

Limited Partnerships

Limited partnerships are essentially a hybrid of a partnership and a corporation, and are a creation of statute (i.e., the Partnership Act).  Limited partnerships involve the creation of a partnership between a general partner, usually a corporate entity, which has the responsibility and liability for managing the affairs of the partnership business, and one or more limited partners.  The limited partners of the limited partnership are not engaged in management, but they do contribute capital to the partnership. Both the general and limited partners, acquire units or partnership interests in exchange for sharing in net profit, and net losses of the partnership.

Additionally, this form of business organization permits third party investors, whom obtain the protection of some limitation on liability, while allowing them the income tax advantages of a partnership. This makes the limited partnership like the corporation, in allowing the limited partnership to raise capital for the business.

There are a few limitations with regard to limited partnerships which include third parties, such as conventional lenders, sometimes being reluctant to deal with limited partnerships, and limited partners have no management control, and the general partners have no limited liability.

Moreover, the Partnership Act does not have protections for limited partners, equivalent to the legislative protections for the minority shareholders in a company or corporation. That is to say, that minority oppression remedies that exist under the Business Corporations Act (British Columbia) (the “BCBCA”), do not exist under the Partnership Act.

It is also fundamental to recognize, that limited partners who get involved in the management of the limited partnership may be deemed to be general partners and lose their protection of limited liability.

Limited Liability Partnership or LLPs

Another type of partnership is the limited liability partnership or LLP. This is a partnership structure that shields each partner from personal liability for the debts of the partnership, and for the negligence and wrongdoing of the other partners, except to the extent of the partners share in the partnership’s assets.  LLPs have many of the same advantages as limited partnerships, with the added benefit that the members of the LLP can take an active role in the business of the partnership, without exposing themselves to personal liability for the acts of other partners (beyond the value of their investment in the partnership).

Limited liability partnerships distinguish themselves from general partnerships, on the basis that unless otherwise provided in the governing partnership agreement, an LLP partner is expressly absolved of personal liability for partnership obligations. Having said that, an LLP partner remains personally liable for the partners own negligent or wrongful act or omission.

It is also significant to note, that an LLP partner’s interest in the partnership is not exempt from liabilities of the partnership. Additionally, if an LLP partner is a corporation, its directors are jointly and severally liable, with the corporation, for its liabilities as an LLP partner.

Corporations

A corporation, unlike a sole proprietorship or a general partnership, requires specific action to come into legal existence. Moreover, the corporate entity that is formed, has a legal identity and status separate from its shareholders and its directors.

Most businesses, whether large or small, are carried on in the form of the corporation. It is said that a corporation is an artificial being, invisible, intangible and existing only in contemplation of law. That somewhat archaic language, sets out the crucial component of the distinct identity of the corporation, and is the basis upon which limited liability is formed.

In a British Columbia context, there are two primary variations to the standard corporation. The first is a public company, that is a “reporting issuer”, and the second is the closely held company, which generally is understood to mean a company with a small number of shareholders.

In summary form, the important characteristics of a corporation are their potential immortality, their limited liability protections, the transferability of shares, their separate legal entity status, the capital raising abilities of the corporation, certain tax advantages and the rights and remedies for shareholders, both in case law and under the BCBCA.

Beyond these rights and characteristics, there may be certain tax advantages flowing from incorporation. A corporation’s separate legal personality provides it with several tax advantages. Some corporations receive preferential income tax treatment and corporations often provide more flexibility in deferring taxes and allowing the division of business income. On the other hand, a corporation can experience less than optimal tax treatment for business losses, particularly if the business never earns a profit against which losses can be taken.

Joint Ventures

A joint venture is not a distinct form of business organization, nor does the relationship between two or more parties to a joint venture have any precise or specific legal meaning. The term joint venture is used to refer to a wide variety of legal arrangements in which two or more parties combine their expertise, services, investments and other resources for a specific purpose and usually, for a limited time.

A joint venture is created by way of a contract between the parties. The parties should agree to contribute certain resources, in advancement of a particular project.  Further, they should carefully contract in a manner that does not involve identification of the parties as a combined entity allowing either party to act for or on behalf of the other. Additionally, the parties should avoid assuming liability for each other’s debts and obligations.

One significant advantage of the joint venture, is the ability to designate, through contract, different levels of obligations and commitments, between the parties, and to separate business interests, both during the joint venture project and after its completion.

Strategic Alliances

Like joint ventures, strategic alliances have no precise or specific legal meaning. The term is used to describe a wide variety of relationships between business organizations involving a wide range of mutual obligations and formalities. A joint venture can be a strategic alliance, as can something much less involved, such as an agreement to jointly market products in a particular geographic area or for a particular business purpose.  In some industries, strategic alliances are referred to as “teaming agreements”.

Distributorships

Like joint ventures and strategic alliances, distributorships do not create a separate legal entity. Distributorships are formed by way of contract, for the purpose of allowing one business to sell the products or services of another business. These agreements can be very simple arrangements, on a product-by-product basis, or can be highly complex relationships involving all aspects of one business’s products or services.  One of the hallmarks of the well drafted distributorship agreement, is to provide for benchmarking performance or mile stone achievements by the distributor, to ensure entitlement to the ongoing distributor relationship.  One must also be mindful, that in certain jurisdictions, the distributor acquire certain rights that exist outside of what is provided for in the specific distributorship agreement.

Franchises

The British Columbia Franchises Act (the “Act”) and its regulations came into force on February 1, 2017.

The Act applies to the following franchise agreements when a franchisee is operating wholly or partly in British Columbia:

• new franchise agreements entered into on or after February 1, 2017;
• existing franchise agreements that are renewed or extended on or after February 1, 2017; and
• franchise agreements entered into before February 1, 2017 with respect to certain sections of the Act (mostly the “fair dealing” and the “right to associate” provisions, discussed below).

The Act imposes a duty of fair dealing on franchisors and franchisees regarding the performance and enforcement of the franchise agreement, and sets out remedies in the case of a breach. This duty requires that the parties act in good faith and in accordance with reasonable commercial standards.

The Act gives franchisees the right to associate with each other, and prohibits the franchisor from impeding or restricting this right (and provides corresponding remedies). For example, this right gives franchisees the opportunity to associate with each other regarding a class action lawsuit against a franchisor.

Franchisors must provide a prospective franchisee with a franchise disclosure document at least 14 days before the earlier of: (1) entering into a franchise agreement or any other agreement relating to the franchise, or (2) paying any consideration relating to the franchise.

If there are any material changes to the franchise system during the pre-franchise disclosure period, the franchisor must also deliver a statement of material change to a prospective franchisee.

Franchisors may require that a deposit be paid, and a deposit will not trigger the disclosure obligations if it is fully refundable, does not exceed 20% of the initial franchise fee, and is given under an agreement that does not oblige the prospective franchisee to enter into a franchise agreement.

A franchisee may rescind a franchise agreement without penalty or obligation within 60 days after receiving a disclosure document if:

• the franchisor failed to provide the disclosure document or a statement of material change within the required time, or
• the disclosure document’s contents did not meet the Act’s requirements.

If a franchisor simply never provides a disclosure document, a franchisee has two years to rescind the agreement without penalty or obligation.

Unlimited Liability Companies or ULCs.

An unlimited liability company or ULC is a company in which shareholders of the company have unlimited joint and several liability for the obligations of the company or upon dissolution. As a general proposition, ULCs were created by statute, as tax advantaged vehicles for American investment in Canadian ventures. However, the January 2010 changes to the Canada / US income tax treaty introduced a number of restrictions that have limited the cross-border tax planning opportunities where a ULC is utilized. Crucially. the advice of a tax specialist is needed to take advantage of the remaining cross-border ULC tax advantages.

Community Contribution Companies or CCCs

A community contribution company is a hybrid of a traditional business corporation and a not-for-profit entity, aimed at fostering social enterprise and socially beneficial investment in British Columbia. The Act requires a community purpose among its primary aims and further, that these community purposes must be set out in the articles of the company.  Beyond that, the Act imposes requirements regarding a community contribution company’s ability to distribute profits to shareholders, a portion of which are required to be devoted to the community purpose set out in the company’s articles.

By way of related regulation, the ability to declare dividends to shareholders or to pay interest on debentures or other debt at a rate tied to the company’s profits, is limited to not more than 40% of the profits of the CCC.  Finally, community contribution companies are also subject to an “asset lock” on dissolution, which requires 60% of the company’s capital to be put towards the stated “community purpose” on dissolution.

Benefit Companies

As of June 30^th 2020, the BCBCA includes a new type of company called a “Benefit Company”, which is a for profit entity; however, it commits in its articles to conduct its business in a “responsible and sustainable manner” and “to promote one or more public benefits”.  The BCBCA further requires that directors and officers of benefit companies, balance their fiduciary duties with the duty to “act honestly and in good faith with a view to conducting business in a responsible and sustainable manner” and to “promote the public benefits specified in the company’s articles”.

Societies and Not-for-Profit Entities

For the purposes of this article, we shall consider societies and not-for-profit entities at the same time.  Unlike all of the prior entities referenced in this article, societies and not-for-profit entities must not have a “for profit” component or objective to their activities. Unlike community contribution companies and benefit companies, there can be no business purpose, in pursuing the objectives of the society or the not-for-profit entity.

Beyond that and beyond the scope of this article, many societies or not-for-profit entities also pursue separate registered charity status as provided for in the Income Tax Act, and as administered by the Canada Revenue Agency’s Charity Directorate.

Conclusion

In conclusion, we hope that that this article has provided you with a useful general survey of the for profit and not-for-profit entities that can be utilized in a variety of circumstances to provide flexible and accommodating corporate and other structures. We would be happy to speak to you at any time about these matters and to provide you with guidance and direction in establishing one or more of these entities, for your intended purpose.