Do you know Simon and Léa? These two young entrepreneurs have launched Troque tes fringes, a company that allows the exchange of clothing on the Internet. They chose to incorporate their business and benefit from the advantages of the incorporated status. However, Simon and Léa could have chosen other legal forms to operate their start-up.
In fact, in Quebec, entrepreneurs have the possibility of operating their business through various legal vehicles.
Four other legal forms of business are the most commonly used: the sole proprietorship, the partnership, the cooperative and the non-profit organization.
The sole proprietorship
These entrepreneurs could not have decided to register Troque tes fringes as a sole proprietorship with the Registraire du Québec. Although it is the legal form with the least amount of administrative work, a sole proprietorship cannot be managed by more than one person. If you have (a) business partner(s), the sole proprietorship might not be the right legal form for you.
Let’s say, for example, that Lea started Troque tes fringes alone. She would have to register as a sole proprietorship since she offers her services under a name that is not her own.
What consequences would this have had? To begin with, this would have made Lea self-employed, resulting in confusion between her personal assets and those of her business. In fact, there is no legal separation between the business and the owner. If, unfortunately, the business could no longer pay its debts, its creditors could draw on Lea’s patrimony.
In addition, the sole proprietorship status would allow Troque tes fringes to benefit from certain tax credits. The other side of the coin is that operating a sole proprietorship exposes the self-employed worker to many risks. Indeed, since, unlike a corporation, a sole proprietorship does not have its own legal personality, its entrepreneur is responsible for any fault committed in the course of the business activities and resulting in a prejudice. Thus, in the event of bankruptcy, the owner’s personal assets may be seized.
The general partnership
The general partnership is another legal form that Troque tes fringes could have had. A general partnership is made up of partners who are united in a spirit of collaboration. Together, these partners want to operate a common business and share the profits and losses that result.
To do this, each partner will make a contribution to the partnership. For example, if Simon and Lea had decided to make Troque tes fringes a general partnership, Simon’s contribution could have been the provision of the business’ premises and Lea’s could have been her computer expertise. Similar to a sole proprietorship, a general partnership is not a legal person, but it is formed through a partnership agreement and must be registered with the Registraire des entreprises du Québec. However, the partnership has a separate patrimony from that of the partners who make it up and can conclude contracts in its own name. The partners of the partnership remain personally and jointly and severally liable for the obligations contained in the contracts entered into by the partnership in connection with the operation of the joint enterprise.
Furthermore, because of this separate patrimony, if Troque tes fringes had been a general partnership, the creditors of the partnership would have had to exhaust its patrimony before turning to the patrimony of Simon or Lea. It is important to note that the liability of the partners can be limited by the creation of a limited liability partnership, if they have a profession recognized by the Quebec Professional Code.
The cooperative
Having a legal existence distinct from its members, a cooperative is an autonomous grouping of persons or businesses that associate in order to meet the needs of its members in the most efficient way possible and according to the cooperative rules of action (article 4 Cooperatives Act). Its members have a limited liability. Indeed, it is proportional to the value of the subscribed shares. The members of the cooperative own shares in an equal way: the decisions are taken in a democratic way on the principle that one member corresponds to one vote.
There are 5 types of cooperatives :Consumer, Non-profit Community Service, Producer, Cooperatives, Worker, Shareholders Cooperatives.
They have to respect 7 cooperative principles : free and voluntary membership, democratic power, economic member’s participation, autonomy and independence, education, training and information, cooperation between cooperatives and finally the members of the cooperative have to show their commitment to their community.
Cooperatives are incorporated under the Cooperatives Act by the Ministry of Economy and Innovation. Thereafter, it is the organizational meeting that marks the real launch of the incorporated cooperative. It must be held by the founders no later than six months after the date of incorporation.
The Non-Profit Organisation - NPO
The NPO is another legal form that a company can have. Unlike the cooperative, the NPO doesn’t want to make profit. After an incorporation, the NPO will be considered as a legal entity. Like a corporation, the NPO has a board of directors. It manages the organization, but can delegate some powers to the general manager or an executive committee. However, it is important to know that the NPO doesn’t have a share capital. It must be precise that the NPO has an unlimited lifetime because the company survives the departure of its founders.
Conclusion
Simon and Léa wisely chose to incorporate their company, Troque tes fringues, as a joint-stock company, thus benefiting from the advantages of legal separation between their personal assets and those of their business. However, other options could have been considered to suit their specific needs, such as sole proprietorship, partnership, cooperative or NPO. It is essential for any entrepreneur to fully understand the implications of each legal form before making a choice.
