Corporate law

Sole proprietorship

The businessperson acting under their own name or with a registered name is the simplest method used to carry on a business. The owner of the business operates their business as a sole proprietorship, without any corporate structure separating their personal assets from those of the business.

The sole proprietorship is the easiest of the alternative structures to set up. The only formalities necessary are the registration process to be completed in compliance with the Act respecting the legal publicity of enterprises¹ (Publicity Act), if the owner desires to operate under a name that does not include that person’s surname and given name. Apart from the absence of other formalities, the lack of a governing structure permits the sole proprietor to make quick decisions and adjust to different circumstances.

With such a structure, the owner will both directly benefit from all profits and absorb any losses stemming from the business operations. As a result, the owner will have to file a single income tax return for them self and for the business and any losses incurred by the business may be deducted from other income. The individual owner will be taxed at the progressive tax rates applicable to individuals under the various income tax laws rather than the rates applicable to corporations, which are lower in most cases. This form of organization does not permit revenue-deferring techniques. However, should this structure become non-cost effective from a tax point of view, the assets of the business can be transferred to a partnership or to a corporation on a tax-free basis.

One of the disadvantages of this method of carrying on business is that the owner will be directly liable for the obligations and liabilities of the business, in that creditors will have access to the owner’s personal assets should the business encounter any financial difficulties. Also, since the owner operates their business alone, the availability of financing may be limited.

Finally, there are no dissolution requirements necessary for this type of business since all the owner has to do is discontinue the business operations and, if necessary, dispose of their assets.

II. Partnership

A partnership is created by a contract of partnership in which the parties, namely the partners, in a spirit of cooperation, agree to carry on an activity, to contribute thereto by combining property, knowledge or activities and to share any resulting pecuniary profits.

The essential elements of any partnership are therefore the obligation of each of the partners to contribute to the partnership by way of money, property, knowledge or activity and the obligation to share the profits.

Although a written contract is not necessary to evidence the creation of a partnership, such a contract should help the partners to clearly establish their respective rights and obligations and provide the rules for the management of the partnership in order to minimize the possibility of future disagreements.

There are three kinds of partnerships: (a) general partnership, (b) limited partnership and (c) undeclared partnership.

A general or limited partnership is formed under a name that is common to the partners. Such a partnership is required to file a registration declaration under the Publicity Act, failing which it will be deemed to be an undeclared partnership and subject to the rights of third persons in good faith.²

The registration declaration of a partnership must set out the information prescribed under the Publicity Act, including the name and domicile of each partner together with a statement that no person other than the persons named therein is a member of the partnership as well as the object of the partnership. Recent amendments to the Publicity Act were passed to improve the transparency of enterprises so that additional information is to be provided to the registry maintained under the Publicity Act. Such additional information relates to natural persons that are the ultimate beneficiaries of registrants. Please see section III below for more information as to the concept of ultimate beneficiary and information to be disclosed pursuant to the Publicity Act.

If the registration declaration of a partnership is incomplete, inaccurate or irregular or if, although a change has been made in the partnership, no amending declaration has been made under the Publicity Act, the partners are liable towards third persons for the resulting obligations of the partnership; however special partners in a limited partnership who are not otherwise liable for the obligations of the partnership, as discussed below, will not be liable as a result thereof.³

General or limited partnerships must indicate their juridical form in their name or after their name when carrying on business. Failing such indication in any act performed by the partnership, a court, in ruling in an action of a third person in good faith, may decide that the partnership and its partners are liable, in respect of that act, in the same manner as an undeclared partnership and its partners.⁴

A partnership is dissolved by the causes of dissolution provided for in the partnership agreement, by the accomplishment of its object or the impossibility of accomplishing it, or by consent of all the partners. It may also be dissolved by the court for a legitimate cause. The partnership must then be liquidated in accordance with the law.⁵

a) General partnerships

In a general partnership, a partner has the right to participate in the profits of the partnership, but also has the obligation to share the partnership’s losses. Any stipulation in the partnership agreement whereby a partner is excluded from participation in the profits will be without effect. Furthermore, any stipulation whereby a partner is exempt from the obligation to share in the losses may not be set up against third persons.⁶ Unless stipulated differently in the partnership agreement, each partner’s share in the assets, profits and losses of the partnership will be equal.⁷

The partners may enter into such agreements between themselves as they consider appropriate with regard to their respective powers in the management of the affairs of the partnership.⁸ The partners may appoint one or more persons (fellow partner(s), third person(s), or both) to manage the affairs of the partnership. The manager, notwithstanding the objection of the partners, may perform any act within the manager’s powers, provided the manager does not act fraudulently. The powers of management may not be revoked without a serious reason during the existence of the partnership, except where they were conferred by an act subsequent to the partnership agreement, in which case they may be revoked in the same manner as a simple mandate.⁹ If they fail to appoint a manager, the partners are deemed to have conferred the management powers on one another.¹⁰ Every partner has the right to participate in the collective decisions regarding the partnership, and no partner may be prevented from exercising that right by the partnership agreement. Unless otherwise stipulated in the partnership agreement, decisions are taken by the vote of a majority of the partners, regardless of the value of their interest in the partnership. However, decisions to amend the partnership agreement have to be adopted by a unanimous vote.¹¹

Notwithstanding any stipulation to the contrary, any partner may inform them self of the affairs of the partnership and consult its books and records, even if such partner is excluded from management.¹²

From a liability perspective, any act performed by a partner in such partner’s own name in respect of the common activities of the partnership or the property used by the partnership will bind the other partners, although without prejudice to the right of such other partners¹³ to object to the act before it is performed. Therefore, each partner is a mandatary of the partnership in respect of third persons in good faith¹⁴ and binds the partnership for every act performed in its name in the ordinary course of business. No stipulation to the contrary may be set up against third persons in good faith. In respect of third persons, the partners are jointly liable for the obligations contracted by the partnership, but they are solidarily liable if the obligations have been contracted for the service or operation of an enterprise of the partnership.¹⁵ Being solidarily liable means that each partner may be forced to pay to the creditors of the partnership the total amount of debts incurred by the partnership for these purposes. That partner may afterwards recover from the other partners their respective portion of the debt. The creditors must, however, realize against the property of the partnership before instituting proceedings for payment against any one of the partners. If proceedings are instituted, the property of the partner is not applied to the payment of creditors of the partnership until after their own creditors are paid.¹⁶ It is to be noted that a partnership may sue and be sued in a civil action under the name it declares.

General partnerships are especially attractive from a fiscal point of view since the partners can generally deduct in the computation of their personal income the losses incurred by the partnership. The profits of the partnership are, however, allocated to each partner and taxed in the partner’s hands in accordance with the tax treatment applicable to the partner. Although the partnership itself does not file an income tax return, it must, in certain cases, file a partnership information return, which includes financial statements for the fiscal year.

b) Limited partnerships

A limited partnership is a partnership consisting of one or more general partners who are the sole persons authorized to administer and bind the partnership, and of one or more special partners (also known as limited partners) who are bound to furnish a contribution to the common stock of the partnership.

General partners have the powers, rights and obligations of the partners of a general partnership, but they are bound to render an account of their administration to the special partners.¹⁷

A special partner may only give an advisory opinion with regard to the management of the partnership. A special partner may not negotiate any business on behalf of the partnership or act as mandatary or agent of the partnership or allow such special partner’s name to be used in any act of the partnership; otherwise such special partner will be liable in the same manner as a general partner for the obligations of the partnership resulting from such acts and, according to the importance and number of such acts, such special partner may be liable in the same manner as a general partner for all the obligations of the partnership.¹⁸

Most of the advantages and disadvantages applicable to general partnerships will apply to limited partnerships.  A notable exception from a liability point of view is that the limited partners’ liability will be limited to their investments in the partnership. From a tax point of view, the partner must include in their own income, the profits allocated to them in accordance with the partnership agreement. According to what is commonly referred to as the “at-risk rules,” the losses of the partnership can be deducted from the partner’s income only to the extent of the partner’s actual contribution to the partnership.

General partners are solidarily liable for the debts of the limited partnership in respect of third persons, in case of an insufficiency of the property of the partnership; however, special partners are liable for such debts up to the agreed amount of their respective contributions, notwithstanding any transfer of their shares in the common stock of the partnership. Any stipulation whereby a special partner is bound to secure or assume the debt of the partnership beyond the agreed amount of their contribution is without effect.¹⁹ However, a special partner whose name appears in the firm name of the partnership will be liable for the obligations of the partnership in the same manner as a general partner, unless their status as a special partner is clearly indicated.²⁰ Profits will be shared among the partners in proportion to their contribution, unless otherwise agreed.

From a financing point of view, it is interesting to note that a limited partnership is the only form of partnership legally entitled to make a distribution of securities to the public to establish or increase its common stock, and to issue negotiable instruments. All other forms of partnership may not do so, on pain of nullity of the contracts entered into or of the securities or instruments issued and of the obligation to compensate for any injury such action causes to third persons in good faith. Furthermore, in case of contravention, the partners will be solidarily liable for the obligations of the partnership.

C) Undeclared partnerships

An undeclared partnership may be established simply from a series of facts indicating the intention of the partners to form such a partnership.

In this type of structure, partners are not solidarily liable for debts contracted in carrying on their business unless the debts have been contracted for the use or operation of a common enterprise. The partners are liable towards the creditors of the partnership, each for an equal share, even if their shares in the undeclared partnership are unequal.²¹ Each partner contracts in such partner’s own name and is alone liable towards third persons.  Where, however, to the knowledge of third persons, the partners act in their capacity as partners, each partner is liable towards such third persons for the obligations resulting from acts performed in that capacity by any of the other partners.²²

If the partners do not have a special agreement dealing with the relationship among them, the rules of the general partnership will apply, with the appropriate modifications.²³

The tax treatment applicable to the general partnership and its partners is also applicable to the undeclared partnership.

III. Corporation

A corporation may be incorporated under the laws of Canada or under the laws of one of the provinces or territories of Canada. Federally incorporated corporations are governed by the Canada Business Corporations Act,²⁴ (CBCA) while corporations incorporated under the laws of Quebec are governed by the Business Corporations Act²⁵ (Quebec Corporations Act).

The Quebec Corporations Act came into force on February 14, 2011, and replaces the former Quebec Companies Act. Companies that were incorporated, continued or amalgamated under the former Companies Act are now governed by the Quebec Corporations Act, without any special action having been required on their part. Under the Quebec Corporations Act, such companies are no longer referred to as companies, but as business corporations.

The purpose of the Quebec Corporations Act was to modernize and substantially amend the legal framework applicable to corporations in Quebec. Many of the Quebec Corporations Act’s provisions are inspired by the CBCA and legislation in several other Canadian provinces, while others are entirely new law. Major innovations introduced by the Quebec Corporations Act include provisions that (i) establish a general framework outlining the duties and responsibilities of directors and officers, in particular regarding governance, (ii) add flexibility to the rules relating to the maintenance of share capital, (iii) enhance the rights and recourses of shareholders, particularly minority shareholders, (iv) simplify the internal functioning of corporations and (v) set out rules governing changes to a corporation’s legal structure. As a result of the numerous changes introduced in the Quebec Corporations Act, Quebec businesses are now provided with a legal framework that enhances their ability to grow and to compete.

Although inspired by the CBCA, the Quebec Corporations Act differs from the CBCA in that the Quebec Corporations Act does not provide for a residency requirement for directors of corporations incorporated under the Quebec Corporations Act, while the CBCA requires that at least 25% of a corporation’s directors be Canadian residents. Practically speaking, this entails that a corporation incorporated under the Quebec Corporations Act might have a board of directors comprised entirely of foreign directors. Another of the significant differences between the Quebec Corporations Act and the CBCA is that the Quebec Corporations Act allows for the issuance of shares whether or not those have been paid in full. Shares not paid in full are subject to calls for payment and may be confiscated in the event that a shareholder defaults on its obligation to make a required payment. This increased flexibility allows shareholders to fund the corporation over time, without the need of actually going through the process of a share issuance every time that the corporation has capital needs, especially when such capital needs will arise as a result of a long-term project of the corporation.

Entities incorporated under the Quebec Corporations Act require an extra-provincial license in order to do business in another province. On the other hand, entities incorporated under federal legislation may carry on their business anywhere in Canada without having to obtain such a license.

It is important to note that the Publicity Act applies to all incorporated entities doing business in Quebec, regardless of whether they are federally or provincially incorporated. Such entities must file declarations stating information such as their names and those of their shareholders and directors as well as on the nature of their business and number of employees. Any change in the stated information requires the filing of an amending declaration. Similar to the recent changes we have seen to the CBCA, recent amendments to the Publicity Act were passed to improve the transparency of enterprises so that additional information is to be provided to the registry maintained under the Publicity Act. Such additional information relates to natural persons that are the ultimate beneficiaries of registrants.

The Publicity Act now contains a definition of the concept of “ultimate beneficiary”, which includes, inter alia, (i) holding, directly or indirectly, of shares to which are attached 25% or more of the voting rights attached to all shares of the registrant carrying the right to vote, (ii) holding, directly or indirectly, of shares to which is attached 25% of more of the fair market value of all issued and outstanding shares of the registrant, (iii) having a direct or indirect influence on the affairs of the registrant which, if exercised, would constitute effective control of the affairs of the registrant, (iv) being the general partner of a partnership, or (v) being a trustee of a trust. In addition, where several natural persons have agreed, directly or indirectly, to jointly exercise their voting rights attached to shares of a registrant (which agreement could take the form of a shareholders agreement) and that such persons jointly hold 25% or more of the voting rights attached to all shares of the registrant carrying the right to vote, each such natural person is deemed to be an “ultimate beneficiary”.

As of March 31, 2023, all entities that are required to be or that have voluntarily registered under the Publicity Act will be required to disclose the natural persons that are their ultimate beneficiaries, subject to narrow exceptions. The information to be provided in respect of ultimate beneficiaries includes their name(s); exact date of birth; home address and professional domicile, where applicable; details on the type of control exercised by each of them or the percentage of shares or units they hold or of which they are the beneficiaries; and date on which they became or ceased to be ultimate beneficiaries. The majority of the information disclosed regarding ultimate beneficiaries will be available to the public on the Quebec Enterprise Registrar’s (REQ) website. However, the ultimate beneficiaries’ date of birth and certain information on minors who are ultimate beneficiaries will not be available to the public. Finally, registrants have to provide the REQ with a copy of identification for each director listed in the REQ, along with the date of birth (day, month and year) of all natural persons whose names are to be disclosed to the REQ (which includes officers of corporations).

Please consult our specialists for tailored advice on the Quebec Corporations Act or before making a decision on incorporating a corporation under the Quebec Corporations Act or under the CBCA. Our publication entitled “Doing Business in Canada” also provides additional information regarding incorporation, registration and other relevant information regarding the establishment of a business in Quebec. Our specialists are also available to assist with the determination of persons that are ultimate
beneficiaries of an entity and related information to be disclosed to the REQ.