Deciding On The Structure Of Your Business? Things You Need To Know
In a sole proprietorship, an individual is the sole owner of the business and is personally responsible for all the debts, obligations and liabilities related to the business. All the benefits and the profits from the operation of the business are considered to be those of the sole proprietor.
- Direct control of decision-making
- Inexpensive to form
- Relatively low start-up costs
- All profits go to the sole proprietor
- Unlimited personal liability of the proprietor (creditors can seek recourse against the personal assets of the sole proprietor to pay off any business debts)
- Treated as self-employed for income tax purposes, which generally means higher tax rates
- Difficulty raising capital or attracting investment
- Difficult to provide employee incentives (no shares to issue, no option plan etc.)
- Most established government grants or assistance programs are geared towards corporations
A partnership is a business structure where an individual carries on a business with one or more partners. The partners combine their financial resources into the business. An agreement between the partners can establish the terms of the business and protect each partner in case of a disagreement or dissolution of the company. As a partner, each individual shares in the profits and losses of the business according to the terms of the agreement.
When establishing a general partnership, the partners should have a partnership agreement drawn up with the assistance of a lawyer to ensure that their interests are protected and that issues like profit sharing, business responsibilities and dissolving the partnership are clearly established.
- Inexpensive to form
- Sharing of the management, assets and profits of the business (depending on terms of partnership agreement)
- Unlimited liability (if the partnership has business debts, personal assets would be used to pay off the debt)
- Joint and several liability – individuals can be held financially responsible for the business decisions made by their partner
- Partners are self-employed for tax purposes, which means income is taxed at personal rates
- Negotiations of partnership agreement can be expensive
An incorporated business is a legal entity that is considered to be separate from the shareholders (owners). Incorporation can be done at the federal or provincial level. A shareholder of a corporation is generally not personally liable for the debts, obligations or acts of the corporation. A corporation may carry on business, incur liabilities and own property and the profit or loss from these activities belongs to the corporation rather than the shareholders or directors. The income of the corporation is taxed at a rate that is applicable to the corporation (which are generally lower than personal income tax rates). It is always important to seek legal advice before incorporating.
- Limited liability of shareholders
- Transferability of ownership
- Continuality of existence if wished (companies do not die)
- Separate legal entity from the incorporators
- More attractive to investors and easier to raise capital
- Possible tax advantages through combinations of lower corporate income tax rates and dividend strategies
- Ability to provide equity incentives to employees (shares and/or stock options)
- Many government grants and programs are made accessible
- Generally more expensive to incorporate (compared to carrying on as a partnership or sole proprietorship)
- Corporate record keeping is required and the company has annual filing obligations
- Potential for control issues if multiple shareholders
- Corporations are required to file a separate tax return from the owner(s)
- Subject to corporate legislation, there is a need for legal advice
- Negotiation of shareholder agreements can be expensive but shareholder agreements are a key component in protecting a company with high growth potential
Choosing the right name for the corporation is an important decision for most start-ups. The name should be distinctive to differentiate a corporation from its competitors. It should provide information about the product or services offered and a good name will help to attract potential customers and build the company’s brand.
Note: a business or corporate name is not the same thing as a trademark and does not provide the same protection. In many cases, a business or corporate name can also be used as a trademark, but it is important to seek legal advice on the distinction. It is also advisable to confirm you are not infringing on someone else’s rights and to seek protection for your trademarks through registration.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.