The Advantages of Going From a

Sole Proprietorship to a Limited

Partnership
As a business, a sole proprietorship is easy to create
and maintain. However, in a sole proprietorship, the
business owner is solely responsible for all decisions
and business liabilities. Two forms of partner exist in a
limited partnership. A general partner is similar to a
partner in an ordinary partnership. A limited partner is
one that is not financially liable for the debts of the
business beyond the risk of losing initial investment. A
limited partnership must have at least one general
partner who remains personally liable.

FINANCE
Using the limited partnership format allows a business
owner to gain additional funding from the new partners
without the credit risk or interest expense of taking out
a loan. The limited partnership may make it
considerably easier to attract new partners as they can
put money into the business without having unlimited
risk if the business falls into financial difficulties.

EXPERTISE
As well as gaining financing from a new partner, a
business owner can benefit from the partner's
professional knowledge and contacts. This is
particularly useful when the new partner would not be
willing to share this information unless she was able to
share in the benefits that it brought to the company.
For example, if the person was highly regarded in the
industry, it is unlikely she would be willing to work for a
sole proprietor business as an employee for a salary
that the sole proprietor could afford

ASSISTANCE
Until 2001, limited partners could not play an active
role in the running of the company, meaning they were
effectively silent partners. The 2001 Uniform Limited
Partnership Act removed this restriction. This means
the limited partner can help manage the company in
addition to providing information and skills. This can be
particularly useful if a sole proprietor is an expert in his
product or service but lacks experience in running and
increasing a business.

SINGLE PROJECT
The limited partnership arrangement is often suitable
for cases where the new partner only wishes to be
involved with the sole proprietor on a single project.
This could include construction projects or movies. The
format allows those with money to invest in a project
without exposing themselves to excessive risk.

Advantages of Sole Proprietorships

The main advantages of starting as a sole proprietor

are the ease of set-up and the benefit of pass-through
taxation. In most states, sole proprietors can start
operating a business immediately, without having to
file formation paperwork with the state business
registrar. As long as the business operates under the
name of the owner and is not in a regulated industry,
the sole proprietor can simply decide to engage in
business activities with no formalities. The IRS treats
the business as an alter ego of the owner. Business
income and expenses are part of the owner's individual
earnings and are taxed at his individual tax rate when
he reports the amounts on his personal tax return.

Disadvantages of Sole Proprietorships

The main disadvantage of operating a business as a
sole proprietorship is the owner's personal
responsibility for business obligations and debts.
Business creditors can satisfy judgments out of the
personal assets of the owner, including his house and
personal bank accounts. If the business has high
liability exposure such as a food service business
a personal injury judgment can devastate an owner's
personal finances.

Advantages of Incorporation
A corporation is an independent legal entity that exists
apart from its shareholders. The advantage of this
independent status is that owners of a corporation
have limited liability for business debts. Business
creditors cannot typically go after the personal assets
of shareholders. Only their investment in the business
is at risk. Another advantage of incorporation is the
corporation's ability to raise money by selling shares of
stock and its perpetual existence, even if the
ownership of the company changes. This enables
shareholders to pass their interest in the company to
their beneficiaries and makes it easier to sell their
interest in the company to a third party.

Disadvantages of Incorporation
The major disadvantages of incorporation are cost and
complexity. A corporation is a sophisticated business
entity that is highly regulated by state and federal law.
The incorporation process requires drafting a legal
document articles of incorporation that complies
with the requirements of a state corporation statute. It
can also cost hundreds of dollars to bring a corporation
into existence. Further, the corporation must be
managed according to the requirements of state and
federal law, which can be complex. Finally, a
corporation is subject to double taxation under federal
law. A corporation pays income tax on its taxable

income and shareholders pay an additional tax on that

money when it is distributed as dividends

Sole proprietorship
With this type of business organization, you are the
sole owner, and fully responsible for all debts and
obligations related to your business. All profits are
yours to keep. Because you are personally liable, a
creditor can make a claim against your personal assets
as well as your business assets in order to satisfy any
debts.

Advantages:

Easy and inexpensive to register

Regulatory burden is generally light

You have direct control of decision making

Minimal working capital required for start-up

Some tax advantages if your business is not

doing well (for example, deducting your losses
from your personal income, and a lower tax
bracket when profits are low)

the business according to any legal agreement you

have drawn up.
In a general partnership, each partner is jointly
liable for the debts of the partnership. In a limited
partnership, a person can contribute to the business
without being involved in its operations. A limited
liability partnership is usually only available to a
group of professionals, such as lawyers, accountants or
doctors.
When establishing a partnership, you should have a
partnership agreement in place. This is important
because it establishes the terms of the partnership and
can help you avoid disputes later on. Hiring a lawyer or
other legal professional to help you draw up a
partnership agreement will save you time and protect
your interests.

Advantages:

Fairly easy and inexpensive to form a

partnership

Start-up costs are shared equally with you and

your partner(s)

Equal share in the management, profits and

assets

Tax advantage if income from the

partnership is low or loses money (you and
your partner(s) include your shares of the
partnership in your individual tax returns)

All profits go to you directly

Disadvantages:

Unlimited liability (if you have business debts,

claims can be made against your personal
assets to pay them off)

Disadvantages:

There is no legal difference between you and

your business

Unlimited liability (if you have business debts,

personal assets can be used to pay off the
debt)

Can be difficult to find a suitable partner

2.Partnership

Possible development of conflict between you

and your partner(s)

A partnership is a non-incorporated business that is

created between two or more people. In a partnership,
your financial resources are combined with those of
your business partner(s), and put into the business. You
and your partner(s) would then share in the profits of

You are held financially responsible for business

decisions made by your partner(s); for
example, contracts that are broken

Legal issues for small business

Income is taxable at your personal rate and, if

your business is profitable, this could put you
in a higher tax bracket

Lack of continuity for your business if you are

unavailable

Can be difficult to raise capital on your own

Do you really need a lawyer when you start

your small business? Find out how legal
counsel could benefit your business.

3.Corporation
Another type of business structure is a corporation.
Incorporation can be done at the federal or
provincial/territorial level. When you incorporate your
business, it is considered to be a legal entity that is
separate from its shareholders. As a shareholder of a
corporation, you will not be personally liable for the
debts, obligations or acts of the corporation. It is
always wise to seek legal advice before incorporating.

Advantages:

Limited liability

Ownership is transferable

Continuous existence

Separate legal entity

Easier to raise capital than it might be with

other business structures

Possible tax advantage as taxes may be lower

for an incorporated business

Disadvantages:

A corporation is closely regulated

More expensive to set up a corporation than

other business forms

Extensive corporate records required, including

documentation filed annually with the
government

Possible conflict between shareholders and

directors

You may be required to prove residency or

citizenship of directors

Advantages and Disadvantages of Proprietorship

Starting a proprietorship is the simplest way to set up a
business. A sole proprietor is fully responsible for all debts and
obligations related to his or her business. A creditor with a
claim against a sole proprietor would normally have a right
against all of his or her assets, whether business or personal.
This is known as unlimited liability.

In a proprietorship, one person performs all the functions

required for the successful operation of the business. The
proprietor secures the capital, establishes and operates the
business, assumes all risks, accepts all profits and losses, and
pays all taxes. The proprietor is said to be self-employed.
Advantages:

Low start-up costs

Greatest freedom from regulation

Owner in direct control of decision making

Minimal working capital required

Tax advantages to owner

All profits to owner

Disadvantages:

Unlimited liability

Lack of continuity in business organization in

absence of owner

Difficulty in raising capital

no name protection

Advantages and Disadvantages of Partnership

A partnership is an agreement in which two or more persons
combine their resources in a business with a view to making a
profit. In order to establish the terms of the partnership and to
protect partners in the event of a disagreement or dissolution
of a partnership, a partnership agreement should be drawn
up. Standard form partnership agreements can also be
purchased at most stationery stores. Partners share in the
profits according to the terms of the agreement.
In a General Partnership, two or more owners share the
management of a business, and each is personally liable for
all the debts and obligations of the business. This means that
each partner is responsible for, and must assume the
consequences of the actions of the other partner(s).
A second type of partnership is a Limited Partnership which
involves limited partners who combine only capital. They are
not involved in managing the business and cannot be liable
for more than the amount of capital they have contributed.
This is known as limited liability.
A limited partnership also involves general partners, who are
involved in management. They are fully liable for the debts
and obligations of the business, but may be entitled to a
greater share of the profits.
Advantages:

Ease of formation

Low start-up costs

Additional sources of investment capital

Possible tax advantages

Limited regulation

Broader management base

Disadvantages:

Unlimited liability

Divided authority

Difficulty in raising additional capital

Hard to find suitable partners

Possible development of conflict between partners

Partners can legally bind each other without prior

approval
Lack of continuity
no name protection

Advantages and Disadvantages of Incorporating

A corporation, also known as a Limited Company, is a legal
entity which is separate and distinct from its members
(shareholders). Each shareholder has limited liability. A
creditor with a claim against the assets of the company would
normally have no rights against its shareholders, although in
certain circumstances shareholders may be held liable. It is
recommended that legal advice be sought.
Ownership interests in a corporation are usually easily
changed. Shares may be transferred without affecting the
corporations existence or continued operation.
The following characteristics distinguish it from a partnership
or proprietorship:
Limited liability - normally no member can be held personally
liable for the debts, obligations or acts of the corporation
beyond the amount of share capital the members has
subscribed; and
Perpetual succession - because the corporation is a separate
legal entity, its existence does not depend on the continued
membership of any of its members.
Advantages

Limited liability

Possible tax advantage (if you qualify for a small

business tax rate)

Specialized management

Ownership is transferable

Continuous existence

Separate legal entity

Easier to raise capital

Disadvantages

Closely regulated

Most expensive form of business to organize

Charter restrictions

Extensive record keeping necessary

Possible double taxation of profits

Shareholders (directors) may be held legally

responsible in certain circumstances

Personal guarantees undermine limited liability

advantage

Registering a Proprietorship or Partnership

Proprietorships and Partnerships are regulated by the
Provincial Government under the Partnership Act.
Which businesses must register? If you choose to carry on
a business under a name other than your own, you generally
need to register.
For trading, manufacturing and mining, the Partnership Act
requires you to register a General Partnership with the
Registrar of Companies. Contact the Registrar if you require
clarification.
A BC Limited Partnership is not formed under the Partnership
Act until a certificate has been filed with the registrar of
companies. This certificate must be signed by each person,
and state who is to be a general partner when the partnership
is formed. A Notice of Registered Office must accompany the
certificate.
A limited partnership formed outside of the province may
carry on business in B.C. if registered under the Partnership
Act.
Third parties often require registration for use of a company
name.
Examples include opening a bank account, registering a motor
vehicle, opening a day care and bidding on some government
contracts.
Partnership Act This Act provides for the formation of a Sole
Proprietorship, General Partnership or a Limited Partnership
for people going into business. It does not enable entry into
the marketplace or provide licensing. The Partnership Act also
governs the registration of these businesses. It states that the
Registrar shall not register a business name that is already a
name by which a corporation is registered in British Columbia
or a name that so nearly resembles that name that, in the
opinion of the Registrar, it is likely to confuse or mislead. The
Act also says that a name shall not be approved if the
Registrar disapproves of the name.
In a proprietorship, one person performs all the functions
required for the successful operation of the business. The
proprietor secures the capital, establishes and operates the
business, assumes all risks, accepts all profits and losses, and
pays all taxes. The proprietor is said to be self-employed. In a
partnership, two or more people or corporations combine their
talents and resources to conduct business.Responsibility for
all aspects of the business is usually shared among the
partners, regardless of the amount of capital contributed by
each individual. Each partner is also responsible for debt
incurred by another of the partners.
A limited partnership is a special type of partnership in which
there may be one or more general partners and one or more
limited partners. Limited partners cannot be held responsible
for the liabilities of the partnership beyond the amount which
they have committed to invest. Limited partnerships are
normally established by a formal agreement between all of
the partners.
Registration Process To register a proprietorship or a
partnership you will need to obtain a Name Approval Request
Form along with a Statement of Registration
of General Partnership or Sole Proprietorship form. (link to
forms below)
Complete the Name Approval Request Form first and either
mail it to the Registrar of Companies in Victoria, or take it to
your local Government Agent. (Fee: $30.00 - may be more
elsewhere)

When this form is returned to you with one of your choices

reserved (usually within two to three weeks - or one day if
completed at the Business Service Society), complete the
Statement of Registration of General Partnership or Sole
Proprietorship form and submit it within 56 days of the Name
Reservation Date.(Fee: $40.00 or $165.00 for Limited
Partnerships - may be more elswhere - can be done online
at www.onestopbc.ca) The registrar will not begin the process
until the fees have been paid. For both forms of partnership,
registrations consist of filing the registration form signed by
all partners.

The Act also says that a business name shall not be approved
if the registrar disapproves of the name. Under the
Partnership Act, the registrar does not have the power to
order a change of a name once it has been registered.

Why does the business name have to be approved?The

approval process prevents the use of names which are so
similar to corporate name as to confuse or mislead people,
and provides a record which allows the public to determine
which individuals are behind the name.

It is also important not to confuse a business name/trade

name (either a proprietor/general parnership or a corporation)
with a trade-mark. A trade-mark is a word, symbol, or design,
or combination of these, used to distinguish the wares or
services fom those of others in the marketplace. Only the
registration of a trade-mark gives its owner exclusive
rights of use.

It is important to know that business names registered as sole

proprietor / general partnership do not have the same
protection as corporate names. A corporation may be
registered under the same name as a business - but a
business name won't be accepted if it can be confused with a
corporate name.