Vehicles for Operating a Business

• Author: Wayne D. Gray and Gerald D. Courage
• Pages: 89-172

A.

INTRODUCTION

Every

structure requires

a

sound foundation.

For a

business,

much

turns

on the

legal foundation:

the

legal

form

chosen

to

establish

and

operate

the

business.

The

choice

of

business

form

determines issues

such

as the

number

and

composition

of its

owners,

the

residual liability

of

owners

for

liabilities

of the

business,

the

degree

of

separation

between management

and

ownership

of the

business,

the

available

financing

options,

the

transferability

of

interests

in the

business and,

most importantly,

the

after-tax

efficiency

of the

investment.

The

choice

of

business vehicle

is

critical

to the

overall success

of the

venture.

While

initial

formation

is the

optimal time

to

carefully

choose

a

par-

ticular

business vehicle,

it is far

from

the

only time

to

consider

the

issue.

As

a

business

or

investment evolves,

it is

necessary

to

revisit

the

issue

of

whether

the

current business vehicle

is the

optimal choice

or

some

Wayne

D.

Gray

is

corporate-commercial partner with McMillan Binch

LLP,

and

Gerald

D.

Courage

is tax

partner with Miller Thomson LLP.

The

authors

wish

to

acknowledge

the

assistance

of the

following

in the

preparation

of

this

article: Simon Chester (corporate)

and

Mark Young (corporate)

of

McMillan

Binch

LLP; James Hutchinson (tax)

and

Robert

Hayhoe

(tax)

of

Miller Thom-

son

LLP; Charles

S.

Reagh (Nova Scotia corporate law)

of

Stewart McKelvey

Sterling

Scales,

Halifax;

and

Wade

S.

Leathers (U.S. tax)

of

Sachnoff

&

Weaver,

Ltd.,

Chicago.

The

authors remain responsible

for any

errors

or

omissions.

89

Vehicles

for

Operating

a

Business

Wayne

D.

Gray

and

Gerald

D.

Courage

90

WAYNE

D.

GRAY

AND

GERALD

D.

COURAGE

other legal structure should

be

devised.

Thus,

one

factor

always

to

weigh

is

reversibility:

the

ease

and

efficiency

of

converting

or

migrating

from

one

chosen business vehicle

to

another.

Advising

on, or

assisting

in, the

formation

of a

business

is not

only

one of the

most fundamental,

but

also

one of the

most

frequent,

roles

that corporate-commercial lawyers play.

For the

fiscal

period ended

March

31,

2003, there were 48,919 incorporations under

the

Ontario

Business Corporations Act1 and 8,212 incorporations under the Canada

Business Corporations Act2 emanating from Ontario, for a total of 57,131

new

Ontario-based business

incorporations.3

These

figures

do not

include

the

many Ontario

businesses

incorporated under other legisla-

tion such

as the

Ontario

Corporations

Act,4

the

Canada

Corporations

Act,5

or

the

laws

of

other provinces

or

states.

Nor

does

it

include

the

many

more Ontario

businesses

formed

as

proprietorships, divisions, partner-

ships,

joint ventures, co-ownership arrangements,

or

business trusts.

Complete statistics

on

business formation

in

Ontario

are not

available.6

What

follows

maps

the

remaining structure

of

this article. Section

B

sets

out the

various legal

forms

that

may to be

used

to

create

and

carry

on a

business. Section

C

outlines

the

principal commercial

law

charac-

teristics

of

each

of

these legal

forms.

Section

D

summarizes

the

primary

Canadian

tax

considerations that influence

the

choice

of

business vehi-

cle.

Section

E

provides

a

brief

retrospective look

at the

recent evolution

in the law and

practice

of

structuring business

and

investment vehicles,

and

finishes with

a

call

for

reform

of the

laws governing non-corporate

business

vehicles.

Finally,

the

Appendix

to

this

article

contains

a

bullet-

point summary

of the

main advantages

and

disadvantages

of the

prin-

cipal

types

of

business vehicle: proprietorships; divisions; general

partnerships; limited partnerships; limited liability partnerships; joint

ventures; co-ownership arrangements; real estate investment trusts;

resource royalty trusts; business income trusts; business corporations;

professional

corporations; unlimited companies; non-profit corpora-

tions;

and

branches

of

foreign

corporations.

1

2

R.S.C.

1985,

c.

C-44,

as am.

[CBCA].

3 For a

more complete analysis

of

Canadian incorporation statistics,

see

W.D.

Gray,

"Corporations

as

Winners Under

CBCA

Reform"

(2003)

39

Can. Bus. L.J.

4

at

33-35

[Corporations

as

Winners].

4

R.S.O.

1990,

c.

C-38,

as am. (in

particular, Part

III

thereof).

5

R.S.C.

1970,

c.

C-32,

as am. (in

particular, Part

II

thereof).

6

Not all

proprietorships, general partnerships,

joint

ventures,

or

co-ownerships

are

required

to

register upon

formation.

R.S.O. 1990, c. B.16, as am. [OBCA].

Vehicles

for

Operating

a

Business

91

B.

MENU

OF

LEGAL

FORMS

TO

CARRY

ON

BUSINESS

The

current menu

of

vehicles

to

carry

on

business

divides,

in the

first

instance, between corporate

and

non-corporate vehicles. Non-corporate

vehicles,

in

turn, divide into those with

one

owner

and

those that have

multiple

owners.

The

sole proprietorship

or

division applies where

there

is one

owner

and is the

simplest

form

of

business vehicle.

If

there

is

more than

one

owner

of a

non-corporate vehicle,

the

choices

in

Cana-

da

divide into various

forms

of

partnership,

a

legal joint venture,

a co-

ownership arrangement,

or a

business trust.

There

are now

three

different

types

of

domestic

partnerships

in

Ontario. These consist

of the

general partnership,

the

limited partner-

ship

(LP),

and the

limited liability partnership

(LLP)

— the

last

is

used

almost exclusively

by

professional service

firms.

Finally,

if the

client

emanates

from

or is

conducting business

in the

United States, under

all

state laws

a

hybrid vehicle known

as the

limited liability company

(LLC)

is

available.

Although technically partnerships, joint ventures, co-ownership

arrangements,

and

business trusts involve multiple owners, they need

not be

independent

or

unrelated entities.

It is not

unusual,

for

example,

to see a

special

purpose

vehicle created

for the

express purpose

of

act-

ing as

general partner

of an LP or as a

trustee

of a

business

trust where

some

or all of the

limited partners

or

beneficiaries

are

affiliates.

With

respect

to

corporate vehicles, these divide,

in the

first

instance,

between business corporations

and

not-for-profit

corporations. Non-

profit

corporations

may

carry

on

what look like business operations.

They

may

even generate

profits.

Their competitors

may

include busi-

ness corporations.

A

non-profit corporation

can be

formed

either

provincially under

the

Ontario

Corporations

Act,7

federally

under

the

Canada

Corporations

Act8

or, in

either case, under special statute.

If,

after

considering

the

available non-corporate

forms,

it is

decided

to

form

a

business corporation,

the

next issue becomes

the

choice

of

incorporation statute. Here,

the

usual starting point

for an

Ontario prac-

titioner

is to

consider

the

comparative advantages

and

disadvantages

of

the

CBCA

and the

OBCA

from

a

corporate

law

standpoint.

In

some

7

Supra

note

4.

8

Supra

note

5.