Choosing the right legal form for your company

The pandemic has taken a heavy toll on our economy, and many Quebecers have lost their jobs in the turmoil. If this is your case, you may be thinking of starting your own business. But a call to the Registre des entreprises tells you that, first and foremost, you need to determine the legal form of your company. What's it to be?


What is a legal form?

A company's legal form refers to its organization and structure. In Quebec, the main forms are sole proprietorship, partnership and joint-stock company. A company generally has commercial purposes, which therefore excludes not-for-profit corporations, foundations and other charitable associations.

To determine the best legal form for your project, you'll need to choose the one whose characteristics are best suited to your needs. This is an essential step, which will help you avoid many missteps and their possible financial consequences.


Asking the right questions

To choose wisely, you need to start by asking yourself a number of questions. For example: do you want to start your business alone or with partners? Do you have other sources of income? What are your expected revenues in the short, medium and long term? Will your activities be limited to Quebec or will they extend internationally? Is your business sector regulated? What is your start-up budget? Do you want to protect your assets against the risk of legal action? etc. With these answers in hand, you'll be in a better position to determine the legal form best suited to your needs and objectives.


Going into business without a partner

If your project involves just you, you could opt for a sole proprietorship or a joint-stock company.

Starting a sole proprietorship means becoming self-employed. This is the simplest and least costly form, since there's only one entity: yourself. What's more, if you run the business under your full name (first and last), you don't even have to register with the Registre des Entreprises. However, it's often simpler to have a business number (NEQ) for certain procedures. This is provided by the Registre des entreprises at the time of registration.

With this legal form, you run the business. The income it generates is yours, but so are the responsibilities. If the company is sued or goes bankrupt, you will personally suffer the consequences. You'll be your own boss, but you'll also be the boss of your employees - because yes, you can have employees, even if we're talking about a sole proprietorship!

The other option is the joint-stock company, where you are the sole shareholder and director. Better known as a company or corporation, the joint-stock company is a legal entity.

When a legal entity is created, a new entity is born, rather like a newborn child. We need to differentiate between the legal entity and those who control it (the directors) and those who own it (the shareholders).

This means, for example, that you cannot withdraw money from the company's bank account or use the company vehicle for personal purposes, as if it were your own. If you do, it will be considered by the tax authorities as a salary, dividend or taxable benefit to the shareholder.

A joint-stock company has its own name and assets, as well as the same rights and responsibilities as a natural person. In particular, it must file its own tax returns and is liable for its debts, unless you have agreed to assume them.

Please note: setting up a joint-stock company is more complex and costly than setting up a sole proprietorship. On the other hand, it offers greater flexibility and protection, and would be more appropriate if you want to do a good volume of business.

Going into business with partners

The legal form of a joint-stock company remains the same, whether there is a single shareholder or several. It is also highly flexible, enabling different rights to be conferred on the partners. For example, some may have control, while others will receive a fixed, preferential return on their capital outlay. A shareholders' agreement can also determine the role of each partner in the company, and include buy-sell clauses, etc.

Partnerships also enable several people to run a business together. The best known is the general partnership or S.E.N.C. This is not a legal entity, in the sense that no "children" are born when it is created. It is therefore the partners who personally run the business. Nevertheless, the S.E.N.C. has a distinct patrimony, and creditors must first take recourse against its assets before moving on to the partners' personal assets. In addition, the income of the S.E.N.C. will be taxed in the hands of the partners.


Ask a professional for help

The possibilities are numerous, and to ensure you make an informed choice, don't hesitate to consult a professional. For example, ask a notary specialized in the field to analyze your business project and the state of your finances in order to identify the legal form best suited to your needs and ambitions. He or she can also help you prepare the various documents (articles of incorporation, description of the share capital of a joint-stock company, shareholders' or partners' agreement, etc.).


Do you have any questions?

Visit the "Business" section of the Chambre des notaires website, or call the toll-free service 1 800 NOTAIRE (1 800 668 2473) to speak to a notary. This service is available Monday to Friday, 9 a.m. to 12 p.m., and Monday to Thursday, 1:30 p.m. to 4 p.m.