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Sole Proprietorship to Corporation

There are three main vehicles through which to operate a business: a sole proprietorship, a partnership and a corporation. Establishing a sole proprietorship is relatively cost-effective and accordingly, an individual may choose to start to operate their business as a sole proprietorship and continue to do so until such time as the potential tax and liability considerations encourage them to make the move to separate from their business, through the incorporation process.

At that time, however, the sole proprietor has collected and accrued business assets which are necessary for the business to continue to operate through a corporation. Such business assets may include, but are not limited to: equipment, inventory, supplies, customer lists and/or goodwill. Those business assets need to be transferred to the corporation. That transfer is a taxable event which if not structured correctly, can incur unforeseen tax liability. 

With appropriate tax advice from a chartered professional accountant or lawyer who practices tax, this transfer of the business assets of the sole proprietorship to a corporation may be able to occur on a tax-deferred basis under Section 85 of the Income Tax Act (Canada) (the “Act”). 

A transfer on a tax-deferred basis under the Act requires recognition of the cost paid by the sole proprietor for the assets being transferred, consideration to the individual (which must included shares of the corporation) and legal documentation including but not limited to a legal agreement setting out the terms upon which the transfer from the sole proprietorship to the corporation will occur. 

This legal documentation is essential to definitively assert the value being transferred from the sole proprietorship to the corporation and provide evidence to support the intention of the parties should the transfer be challenged by a taxing authority.

We at KMB Law work directly with your tax accountant or tax lawyer and are experienced at drafting the appropriate legal documentation required to effect a transfer from a sole proprietorship to a corporation, in a cost effective manner than enhances value for you, the client. Should you have any questions regarding this or any aspect of your business, please do not hesitate to get in touch – we are here to help.

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This article is provided for general information purposes and should not be considered a legal opinion. Clients are advised to obtain legal advice based on their specific situations.

If you have questions, please reach out

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