LPP VIRTUAL LAW FIRM

MEMORANDUM
PRIVILEGED AND CONFIDENTIAL

TO:

Senior Business Lawyer

FROM:

LPP Candidate Name, Firm 000

DATE:

September 8, 2015

FILE:

Firm 000 S&S Spices Business Organization - XXXXX

RE:

Potential Business Entities for S&S Spices

Introduction
This memo has been prepared pursuant to your written request dated August 31, 2015. This memo
highlights the features, benefits, and drawbacks of each of the following business entities:
1.

Incorporation
(a)
Federal Corporations
(b)

2.

Partnership
(a)
General Partnerships
(b)

3.

Provincial Corporations

Limited Partnerships

Sole proprietorship

As per your request, I have omitted an analysis of the tax implications related to each of these entities.
Methods of Carrying on a Business
Smith and Sanders (S&S) wish to embark on a business venture together with a view to profit, and both
partners plan to be equally involved in the business. In the future, they are hoping to have more
individuals invest in the company and plan to hire employees. These decisions will inform what business
structure is right for them.

There are many different ways to organize a business. The choice depends on several different factors
and their relative importance. The cost of starting the business and matters of liability will be of
particular importance.
I.
INCORPORATION
A corporation is the most common form of business organization in Canada. A corporation is a legal
entity, separate in law from its owners the shareholders. A corporation can own property, carry on
business, possess rights, and incur liabilities separate from its shareholders.
If a corporation carries on business under a name other than its corporate name, it must register the
business name under the Business Names Act.

(i) Federal vs. Provincial

If a corporation is chosen as the appropriate form of business organization, S&S must consider which
jurisdiction to incorporate under. In Canada, both provincial and federal statutes govern corporations. The
Canadian Business Corporations Act (CBCA) governs corporations incorporated federally. The
Ontario Business Corporations Act (OBCA) governs corporations incorporated in the province of
Ontario. The choice of which statute to incorporate under will be informed by the nature of the business.
A federally incorporated corporation has the right to carry on business and use its name in all provinces.
By contrast, a corporation incorporated under the OBCA can only carry on business in Ontario, unless it
applies to be registered extra-provincially in another province, which may not be granted if, for example,
the name of the Ontario corporation is not acceptable in the province where the extra-provincial
application is filed.
The OBCA and CBCA have varying requirements with respect to filings, directors meetings, naming of
the corporation and more.
If S&S plan on expanding their venture nationally, it would be prudent to incorporate under the CBCA.
(ii) Benefits of Incorporating
Corporations enjoy perpetual existence. Therefore, the entitys existence does not depend on S&S.
As S&S have suggested that they are interested in having investors in the future, a corporation is the
most flexible structure from a financing perspective. Corporations can easily finance their business
through the issuance of debt instruments, or by issuing equity to shareholders. Assuming all securities
regulations are complied with, these shares and debt instruments can be transferred, which would allow
flexibility to investors.
Although the shareholders own the corporation through their shareholdings, they do not own the property
belonging to the corporation, nor are the rights and liabilities of the corporation passed through to the
shareholder. A shareholders liability is limited to the value of the assets they have transferred to the
corporation. Furthermore, the managerial decisions remain with the directors of the corporation, who are
appointed by the shareholders.
(iii) Drawbacks of Incorporating
Establishing a corporation can be costly. These costs will often exceed that of a partnership or a sole
proprietorship. Aside from the government fees associated with creating a corporation, there are
additional legal fees which should be considered.

Further, corporations are more closely regulated than other business structures. For example, the issuance
of securities to prospective investors requires compliance with securities regulation, which can become
costly for the corporation. Additionally, extensive corporate records are required to be kept, including
documentation from shareholder and director meetings and documentation to be filed annually with the
government.
II.
PARTNERSHIPS
When two or more persons, whether individuals or corporations, carry on business together with a view to
profit, the relationship is called a partnership. The members of the partnership are called partners.
The partners carry on the business themselves directly, since the partnership is not a legal entity separate
from its partners. In a partnership, all partners have a duty to one another to be loyal and act in good faith
and cannot compete with the partnership.
A partnership agreement governs the relationship between partners. The partnership agreement should
clearly established the terms of the partnership with regards to issues like decision making among the
partners for the purposes of making business decisions, day to day management, profit sharing, dissolving
the partnership, funding of partnership business and more.
There are essentially two forms of partnerships: general and limited partnerships.
I.

General Partnership

General partnerships are governed by the Partnership Act.

There are three essential elements to a general partnership:
1. a sharing of profits and losses,
2. a joint ownership of the business, and
3. an equal right in the management of the business.
(i) Benefits of a General Partnership
General partnerships are relatively easy to establish and there are few legal requirements. Where there is
more than one owner, there is an increased ability to raise capital. As both S&S plan to plan to be equally
involved in the business, the general partnership model may suit their needs with less expense and
regulations to follow.
(ii) Drawbacks of a General Partnership
Partners are jointly and severally liable for the actions of other partners.
In a general partnership, each partner is individually liable for the debts and obligations of the business, as
well as jointly and severally liable for the actions of the other partners. Therefore, if the business does not
have enough assets to satisfy business debts, creditors can use take the personal assets of the partners to
satisfy the liabilities of the partnership. Further, as the partners are jointly and severally liable with respect
to the partnership, this means that if a third party were to bring a claim against the partners, the third party
can claim against any one of the partners without claiming against all of them. If a claimant is successful,
the amount owing by the partnership can be satisfied by the assets of any or all of the partners.

Furthermore, partnerships are less stable than corporations as they are not separate legal entities from
their owners. Without a written partnership agreement to govern how the partnership will be dissolved,
there is a danger of dissolution if one partner wants to withdrawal from the business or dies during the
partnership.
II.

Limited Partnership

The second type of partnership is a limited partnership. Limited Partnerships are governed by the Limited
Partnership Act.
A limited partnership is an arrangement where a person can contribute financially to the business without
being involved in the affairs of the partnership. As a limited partner, liability to the partnership or its
creditors is limited to the amount invested. Limited partners are sometimes referred to as silent partners,
as they contribute capital, but do not share in the management or liabilities of the partnership. It is a legal
requirement that in order for the liability of a limited partner to remain limited, the limited partner must
take no part in the management of the partnership or act on behalf of the partnership. If a limited partner
does not abide by these restrictions, the limited partner may be deemed to be a general partner.
Every limited partnership must have a general partner, who is responsible for the day to day operations of
the business. Unlike the limited partners, a general partner has unlimited liability.
(i) Benefits of a Limited Partnership
The limited partner is only liable up to the amount of capital contributed to the limited partnership.
Therefore, a limited partnership structure may make it easier to attract investors because (i) the limited
partners have limited liability for the business debts of the limited partnership and (ii)limited partners get
to share in the profits and losses without having to actively participate in the business itself.
(ii) Drawbacks of a Limited Partnership
Unlike a corporation, it is more difficult to finance a limited partnership beyond the resources of the
limited partners. Therefore, if more funding is needed beyond the investment of the limited partners, the
credit of the general partner will likely be required to obtain financing.
Additionally, if a limited partner becomes active in the business, he or she may be deemed to be a general
partner, and therefore attract personal liability. As mentioned above, the general partner is personally
liable to the full extent of his assets for the debts of the partnership.
As S&S plan on evenly contributing to the day to day business operation, a limited partnership may not
be an appropriate business structure.
III.

SOLE PROPRIETORSHIP

The sole proprietorship is the most basic form of carrying on a business and can be used in a wide variety
of circumstances. Essentially, the owner is the individual. It requires the least expenditure of time and
resources to establish.
A sole proprietor may have municipal, provincial, and/or federal licensing requirements, and must comply
with section 2(2) of the Business Names Act. This section states that no individual shall carry on business
or identify his or her business to the public under a name other than his or her own, unless the name is
registered by that individual. The definition of Business includes every trade, occupation, profession,
service or venture carried on with a view to profit.

(i) Benefits of a Sole Proprietorship

The main benefit of a sole proprietorship is that it is relatively simple and inexpensive to establish, and
requires few legal formalities. As the name implies, a sole proprietorship is owned and operated by a
single individual and excludes the participation of other individuals, except as employees. All benefits
flowing from the business, such as income and assets, accrue exclusively to the sole proprietor. A sole
proprietor may employ others and has direct control over the decision making involved in the business.
(ii) Drawbacks of a Sole Proprietorship
As with the general partnership, all liabilities and losses flow to the sole proprietor. Therefore, there is no
limited liability for the sole proprietor, and all business and personal assets may be seized in satisfaction
of the sole proprietors business obligations. However, the liability of a sole proprietor may be limited
through insurance or contract.
Lastly, due to the nature of sole proprietorship, the financing of this business structure can be difficult.
As a sole proprietorship is usually operated by one individual, it is not likely to be an effective
arrangement for S&Ss venture.
Conclusion
Based on the factors outlined above, the incorporation of a business or the formation of a general
partnership best suit the characteristics of S&Ss business structure. Although the corporation would be
the most expensive to form, and there would be ongoing corporate governance costs, it would offer S&S
protection from liability and allow the entity to carry on indefinitely. In contrast, a general partnership
would be less expensive to form, and would have less regulatory requirements, but the liability for the
business would be borne personally by both S&S, on a joint and several basis.