Choosing the legal form of business in Quebec | Complete Guide

For various reasons, you may wonder about legal business forms in Quebec… The following lines are for you whether you’re an aspiring entrepreneur or simply curious.

Find relevant information on today’s legal structures, from sole proprietorships to partnerships.

Did you know that our province currently has 14 different corporate legal structures? All have their tax rationale, advantages and disadvantages, and specific requirements. Here’s a portrait of each of them:

1. Individual operating a sole proprietorship

Self-employed (or “autonomous”) is the most common term to define this prevalent legal form of enterprise among Quebec’s VSEs and SMEs. It is unique in that it is undivided from its owner. In other words, the self-employed worker is responsible for their business’s financial and tax obligations and responsibilities.

Benefits

• Easy to create and set up
• Simplified taxation
• Flexibility
• Various government grants
• Possibility of using your own name to designate your company

Disadvantages

– Unlimited personal liability (you are personally liable for the company’s debts)

– Personal financial risks due to unlimited personal liability (direct impact of economic decisions, etc.)

– Limited access to tax benefits

– Limited to certain industries that may require a specific legal form

– Lack of resources if unable to work

Specific Requirements for Sole Proprietorships in Quebec

Sole proprietorships are notably popular in Quebec. However, there are essential requirements to be aware of. First, you must obtain a business number (NEQ) from the Registraire des Entreprises. What ist the purpose of this NEQ? Ensure that tax and financial authorities can identify you during transactions or communications.

You may also need to register for GST and QST tax files. As a sole proprietorship, you must charge taxes on your products and services as soon as your annual revenue reaches $30,000.

In any case, preparing tax returns is obligatory. They are vital proof of your income and determine the tax payable at the fiscal year’s end. Furthermore, once you reach a specific income threshold, you must make provisional tax payments throughout the year.

Finally, there are several other requirements for sole proprietorships:

– Maintaining your accounting records

– Contributing to Employment Insurance and the Quebec Pension Plan (RRQ).

– Managing a business account.

– Making retirement contributions (RRSP and other plans).

2. The Corporation

A corporation is a legal entity designed for profit-making, distinct from its owner(s). It can enter into contracts, incur debts, take legal actions, and more on behalf of the company. But is it suitable for your business project? To answer that, let’s explore different types of corporations: Here they are:

2.1 Corporation (Inc.)

A distinct legal entity, corporations are also known as legal persons. It stands out here: it holds specific rights and obligations, determined by the Business Corporations Act. Profits are distributed among shareholders. Here are some clues to help you decide whether or not to consider it when choosing a legal form for your company.

Advantages

– Limited liability

– Enhanced credibility with authorities, potential clients, and investors.

– Growth flexibility

– Access to capital

– Share transferability of actions

Disadvantages

– Complex management

– High administrative burden

– Initial costs to form the company

– Limited control

– Potential double taxation

– Increased regulation

Specific requirements

– Registration with the Registrar des Entreprises, creation and NEQ

– Record-keeping

– Annual financial and tax reports

– Board of Directors elected by shareholders

– Shareholders’ rights

2.2 General partnership (GP)

Unlike corporations, a GP emphasizes each partner’s active participation and responsibility. Under a collective name, two or more people can operate such a partnership. This is why we see professional firms such as lawyers, notaries and dentists displaying a banner composed of the name of each partner.

Like other companies, it is an entity in its own right. Since it has its own registered office and name, it can also take legal action (be sued or sue another entity). Here’s a portrait to help you distinguish it from other similar legal structures:

Advantages

• Stability stemming from trusted relationships within the partnership (family businesses, long-standing relationships)
• Equitable participation for close collaboration and harmonious relations
• Flexibility in the distribution of responsibilities and benefits
• Complementary expertise provided by associates from different backgrounds

Disadvantages

• Administrative complexity due in particular to tax compliance
• Unlimited liability of partners for company debts and obligations
• Potential disagreements over decisions to be made jointly regarding the management and growth of the business
• Complex transfer of ownership
• Limited access to capital
• Instability (e.g. a partner who dies)

Specific requirements

• Creating a partnership agreement + NEQ
• Collective business name
• Registers and accounting
• Withdrawal or termination procedures.
• Associates’ consent to share transfer

2.3 Limited partnerships (LP)

This legal form of business in Quebec – recognized by the acronym SEC – comprises general and limited partners. The latter are required to contribute to the company’s common funds. Like the GP, it must propose a familiar name to the partners (e.g. Leblond, Leroux, Lebrun Société en commandite).

Who administers and represents this type of company? General partners. They provide the expertise needed to keep the organization running. And the limited partners provide the capital in the form of money or goods. In addition, this contribution determines their liability for the company’s debts. Let’s take a look at its advantages, disadvantages and specific requirements:

Advantages

• Limited liability for limited partners (based on the value of their sponsorship)
• External investment, allowing limited partners to invest without being involved in management
• Management and expertise provided by general partners (active partners)
• Flexible management structure: operational decisions can be made without calling on sponsors

Disadvantages

• Legal complexity
• Unlimited liability of limited partners for obligations such as corporate debts
• Difficulty attracting sponsors
• Potential for conflict between limited and general partners, who may sometimes disagree on the ideal management of the company.

Specific requirements

• Creating a partnership contract. called a Limited Partnership Agreement
• Establishing a board of directors.
• Having at least one general and limited partner.
• Adhering to naming rules.
• Company registration
• Special procedures for contract amendments

2.4 Joint ventures

As its name suggests, a joint venture is made up of partners acting in their own name on behalf of all. This legal form is not considered a legal entity. In other words, it has no legal personality.

In Quebec, if you’re an unregistered limited partnership or SENC, you’re automatically considered an undeclared partnership.

Advantages

• Adaptability
• Easy to terminate
• Individual control
• Flexibility
• No minimum capital required to generate profits
• Administrative and accounting simplicity

Disadvantages

• Unlimited liability
• No separate legal personality
• No specific tax recognition
• Complex relationships – risk of conflict
• Difficulty in obtaining financing

Specific requirements

• Creating a partnership agreement
• Partners’ contributions
• Clear common objectives
• Profit and loss sharing

3. Other business types in Quebec

If you’re curious about other legal business forms in Quebec, here are some with their unique advantages:

Cooperatives

A cooperative comprises companies or individuals with a common economic, social or cultural interest.

The associations

Here, the aim is to make a profit. The association, incorporated or contractual, is created by a group of people, often with a more social mission.

The trust

A trust is not only a legal structure (with its own legal personality) but also an arrangement whereby a person entrusts the management of their assets to a third party. Profits are made for both parties.

Group of people

In Quebec, the groupement de personnes (group of persons) is a rather broad legal status. Any gathering (except associations) of two or more people with a common goal, whether profit-making or not, is a group of people.

Co-ownership Syndicate

The Co-ownership Syndicate is set up in buildings requiring the administration of common areas. We’re thinking of a condo, for example. Considered a legal entity, this union is governed by the Civil Code of Québec.

Non-profit organizations (NPOs)

NPOs must carry out their activities for social, educational, religious or other purposes. Also, no profits may be distributed among its members, and it must set up a Board of Directors whose members are elected by the organization’s members.

Registered charity (OBE)

First, the OBE must be registered as a public or private foundation or charitable organization under the Income Tax Act. In Quebec, the OBE may be a corporation, a trust or an unincorporated association.

Choosing the right legal structure depends on a number of current and foreseeable business criteria. These elements vary significantly from one entity to another! That’s why choosing the proper legal form requires careful thought, even if it means calling a professional to guide you in the right direction. Here are the main elements you’ll need to consider in your process:

• Industry and field of activity
• Company size and potential growth
• Local or international regulations if import/export
• Personal liability
• Partners and investors
• Level of administrative complexity

First, take a look at our competitors. If the primary legal forms are limited to sole proprietorship, this will give you a good indication of the ideal choice. It’s not always that clear, however. This activity can confuse you on many levels. Here, it’s essential to dig deeper and sometimes even opt for the advice of a professional, such as a seasoned accountant or legal advisor.

In any case, ensure you’re 100% convinced of the outcome of your process. Since as explained above, it’s sometimes difficult to get out of a type of business once it’s up and running.