INNOVATION May-June 2015

i ns igh t Incorporation vs. Sole Proprietorship Financial Benefits and Liability Considerations Benjamin Kent, Marsh Canada Limited

The benefits of being your own boss can be extremely appealing with many APEGBC members beginning to leave the company side and venture out on their own. In such circumstances , Marsh Canada believes all APEGBC members should be aware of the rela- tive advantages and disadvantages of sole proprietorship/partner- ship vs. incorporation, particularly with regard to their liability. Sole Proprietorship/Partnerships: Benefits: 1) Ease of Setup - You can begin immediately as there are few restrictions and minimal forms/administration to worry about. You only need to follow the procedures in place and register at your local provincial/federal office. 2) Control of Profits - As a sole proprietor, all of the assets and profits associated with your business are yours to keep. In the case of a partnership, assets and profits would be split in accordance with your partnership agreement. Risks: 1) Unlimited Legal Liability: Under this form of organization, any business debts or obligations could be charged or offset against your income or personal assets — even including your retirement savings. This can be a major concern, especially since a claim can occur years after an insurance policy has lapsed. Although this risk can be addressed for a set period of time through extended reporting period coverage, the solution is usually not permanent. 2) Continuity and Asset Transfer: As a sole proprietor/ partnership, it can be difficult to quantify the value of your brand and sell your business. This situation can make tax and succession planning difficult as the business matures. 1) Limited Liability: Protection of the shareholders’ personal assets from the liabilities and obligations of the business. 2) Easier Transfer of Ownership: The shares of an incorporated entity can be sold partially, or in full, to third-parties. 3) Public Perception: There is sometimes a general public perception that corporations are more stable to transact business with than sole proprietors/partnerships. Risks: 1) Startup Costs and Administration: Corporations undoubtedly involve more work in completing administrative tasks such as keeping minutes of shareholders meetings, complying with various tax filings, Incorporation: Benefits:

and staying ready for potential regulatory scrutiny. They can also be more expensive to startup and administer than a sole proprietorship/partnership as the services of an accountant and lawyer will likely be needed on an ongoing basis for the life of the business. 2) Potential Conflicts Between Shareholders/Directors/Officers and Other Stakeholders of the Business: Should the business be incorporated, there will likely be more stakeholders than just the individuals who started the business and transact the business operations. It is important to note that the organizational structure of a business can be changed over time as the business evolves. While engineers or geoscientists in business for themselves will likely start out as a sole proprietors/partnerships, it is sometimes necessary (and is highly recommended) to become an incorporated entity. The biggest driver behind this move to incorporation is the desire to help limit liability — particularly in the case of helping to protect personal assets from potential claims which can arise when Professional Liability Insurance is no longer purchased (for example in retirement). Through the APEGBC Professional Liability Insurance Program, brokered by Marsh Canada, program members have access to 60 minutes of free legal consulting from Dolden Wallace LLP on a number of issues concerning engineers and geoscientists, such as those addressed above. For advice regarding any legal matter, please contact your legal advisor. If you have any questions regarding Professional Liability insurance or the APEGBC Insurance Program, please contact your local Marsh Canada licensed insurance broker:

Benjamin Kent Client Executive Marsh Canada Limited – Vancouver 604 692 4838 benjamin.kent@marsh.com Rob Selnes Vice President Marsh Canada Limited – Vancouver 604 443 3535 rob.selnes@marsh.com

The opinions contained in this article are those of Marsh and not necessarily those of APEGBC.This article is not intended to be taken as advice regarding any individual situation and should not be relied upon as such. Any statements concerning actuarial, tax, accounting, or legal matters are based solely on our experience as insurance brokers and risk consultants and are not to be relied upon as actuarial, accounting, tax, or legal advice, for which you should consult your own professional advisors. v

2 8

M AY/J U N E 2 015

i n n o v a t i o n