Starting a business in Alberta involves more than developing a product, finding customers, and choosing a name. One of the first important legal decisions is determining how the business will be structured.

For many Alberta entrepreneurs, the choice comes down to three common structures: a sole proprietorship, partnership, or corporation.

Each structure has different implications for ownership, liability, decision-making, financing, taxation, succession, and the future sale of the business. The structure that works for a small owner-operated business may not be appropriate for a company expecting outside investors, multiple owners, significant contractual obligations, or rapid growth.

Understanding these differences before launching can help business owners avoid costly restructuring later.

What Is a Sole Proprietorship?

A sole proprietorship is generally the simplest structure for an individual carrying on business.

The business is owned and operated by one person and, unlike a corporation, it does not create a separate legal entity between the owner and the business.

This simplicity can make a sole proprietorship attractive to consultants, independent professionals, tradespeople, freelancers, and entrepreneurs testing a new business concept.

However, simplicity also comes with an important legal consequence: the owner and the business are generally the same legal person.

If the business incurs debts or becomes subject to a legal claim, the proprietor may be personally responsible.

Advantages of a Sole Proprietorship

Depending on the circumstances, advantages can include:

• relatively simple establishment and administration;
• direct control over business decisions;
• fewer corporate formalities;
• straightforward ownership; and
• an appropriate structure for certain smaller or lower-risk businesses.

Potential Disadvantages

The limitations can become increasingly important as a business grows:

• the owner may face personal exposure to business liabilities;
• bringing additional owners into the business can be more difficult;
• raising equity capital is generally more limited;
• ownership continuity can be more challenging, as the business is tied to the person of the founder; and
• the structure may become unsuitable as contracts, employees, assets, and liabilities increase.

A sole proprietorship may therefore be an effective starting point for some entrepreneurs, but business owners should periodically reassess whether it continues to fit their circumstances.

What Is a Partnership?

A partnership generally arises where two or more persons carry on business together with a view to profit.

Partnerships can be useful when individuals want to combine expertise, capital, industry relationships, or other resources.

But entering into business together without carefully defining the relationship can create significant risks.

Questions should be addressed at the outset, including:

• Who owns what percentage of the business?
• How are profits and losses allocated?
• Who contributes money or property?
• Who has authority to enter contracts?
• How are major decisions approved?
• What happens when the partners disagree?
• Can a partner leave the business?
• What happens if a partner dies or becomes unable to participate?
• Can a partner sell their interest?
• How will the business be valued if the relationship ends?

A properly drafted partnership agreement can establish rules governing these issues before a dispute occurs.

The Risk of Informal Partnerships

One common mistake is assuming that because the business partners are friends, relatives, or trusted colleagues, a detailed agreement is unnecessary.

In practice, successful businesses often create circumstances that were not anticipated at the beginning.

One partner may want to expand while another wants to maintain the status quo. One may contribute considerably more time than expected. Another may want to leave. Personal circumstances can change.

Documenting the relationship early can therefore be an important form of risk management.

What Is a Corporation?

An Alberta corporation is legally separate from its shareholders.

Once incorporated, the corporation becomes its own legal person. It can generally own property, enter contracts, borrow money, incur obligations, sue and be sued independently of its shareholders.

This separation is one of the major reasons entrepreneurs consider incorporation.

Limited Liability

Shareholders generally benefit from limited liability in relation to the corporation’s obligations.

However, incorporation should not be understood as eliminating every possibility of personal liability.

Business owners may still become personally responsible in certain circumstances, including where they provide personal guarantees for corporate borrowing or other obligations. In Alberta, directors can also have statutory responsibilities and potential liabilities in particular circumstances involving matters such as, unpaid payroll remittances and sales taxes, unpaid employee wages, occupational health and safety violations, environmental breaches, improper dividends or distributions, or fraudulent conducts by such directors.

The specific facts matter.

Why Businesses Choose to Incorporate

Incorporation may offer advantages for businesses that are growing or becoming more complex.

Potential considerations include:

Separation Between Business and Owner

The corporation is a separate legal entity, which can provide an important distinction between corporate obligations and the personal affairs of shareholders.

Multiple Owners

Corporations can issue shares to multiple shareholders and establish different share rights through an appropriate corporate structure.

Raising Capital

A corporate structure can make it easier to accommodate investors and issue equity.

Business Continuity

Because the corporation exists independently of its individual shareholders, changes in ownership do not necessarily end the business.

Succession and Sale

A corporation can provide additional options when planning a future ownership transition or sale.

Commercial Credibility

Some lenders, investors, suppliers, landlords, and larger customers may prefer dealing with an incorporated business.

Incorporation Also Creates Responsibilities

A corporation requires ongoing legal and administrative maintenance.

Alberta corporations have continuing obligations that can include maintaining appropriate corporate records, recording changes involving directors or corporate information, documenting shareholder and director decisions, and filing annual returns.

Failing to file required annual returns can eventually result in an Alberta corporation being dissolved.

Incorporation should therefore be viewed as the beginning of an ongoing corporate governance process rather than simply a one-time registration.

Sole Proprietorship vs. Partnership vs. Corporation

There is no structure that is automatically best for every Alberta business.

A small owner-operated consulting business may have very different requirements from a Calgary technology company with three founders planning to raise capital.

Similarly, two professionals starting a business together have issues that a single owner does not.

When evaluating the appropriate structure, consider questions such as:

How many owners will there be?

A single owner may have different options from a business involving several founders.

What liability could the business face?

Consider contractual obligations, employees, leases, borrowing, customers, professional risks, and other potential liabilities.

Will the business require financing?

Banks and private lenders may have particular requirements. Owners may also be asked for personal guarantees.

Will investors be introduced?

If outside investment is anticipated, the ownership structure should be considered from the beginning.

How will decisions be made?

Businesses with multiple owners should establish clear governance mechanisms.

What happens if an owner wants to leave?

Exit arrangements are frequently overlooked when businesses are established.

Is the business expected to be sold eventually?

Future transaction planning can influence decisions made years before a sale.

What are the tax implications?

Legal and tax structuring often overlap. Business owners should obtain appropriate tax and accounting advice alongside legal advice when determining how to structure a business.

Incorporating Does Not Replace a Shareholders’ Agreement

Another common misconception is that incorporation documents resolve all issues between business partners. They do not necessarily do so.

Where a corporation has multiple shareholders, a properly structured shareholders’ agreement can address matters such as:

• management and voting;
• restrictions on share transfers;
• additional financing;
• shareholder departures;
• death or disability;
• dispute resolution;
• buy-sell arrangements;
• confidentiality;
• non-solicitation or other appropriate restrictions; and
• mechanisms for resolving deadlocks.

Thinking about these matters while everyone is aligned is generally preferable to negotiating them after a dispute has developed.

Your Business Structure Can Change

Choosing one structure today does not necessarily mean the business must use that structure forever.

A sole proprietorship may later incorporate. A corporation may undergo a reorganization. New shareholders may join. Existing owners may leave.

The important point is to recognize when the business has outgrown its original legal structure.

Growth, new partners, major financing, significant contracts, acquisitions, expansion into another jurisdiction, or preparations for sale are all appropriate times to review the structure.

Starting a Business in Alberta or Elsewhere in Canada?

Choosing the right structure at the beginning can help establish a stronger legal foundation for future growth.

Evergreen Solicitors advises Canadian entrepreneurs and businesses on business formation, incorporation, corporate governance, shareholder arrangements, commercial agreements, financing, reorganizations, and business transactions.

Before selecting a sole proprietorship, partnership, or corporation, consider obtaining legal advice based on your particular business objectives.

Speak with an Alberta business lawyer at Evergreen Solicitors before establishing or restructuring your business.

This article provides general information only and does not constitute legal advice. Legal requirements and the appropriate structure depend on the circumstances of each business.