What Business Structure Is Best for Your Organization?

Are you planning to get your own business up and running? It’s important to figure out the best structure for the needs of your business. There are four different choices in Canada: sole proprietorship, corporation, co-operative and partnership.

Business Structuring Examples

Sole Proprietorship

When you open this type of business, you’re the only owner. That gives you all of the equity, but you also have to pay for any obligations and debts personally if the business goes under. That means that your personal assets are at risk, not just the business’ assets, in the awful event that your business tanks.

Advantages

  • You get all the profits

  • Minimal government regulation

  • You make the decisions

  • Registering is simple and inexpensive

  • Use business losses to help your personal income tax burden go down

  • Use the lower tax bracket when your business has an off year

  • Start the business with minimal working capital

Drawbacks

  • You have all the liability

  • Big profits mean a higher income tax bracket

  • If something happens to you, what happens to your business?

  • Who will invest in your sole proprietorship if you need working capital?

 

Corporation

You can incorporate a business either with the federal or provincial government. When you do this, you create a separate legal entity from you and your partners. When you own a share in a corporation, you do not have any personal liability for debts the corporation might incur or decisions the corporation makes.

Advantages

  • Your liability for debts and corporate decisions has limits

  • You can transfer your stake in the corporation to someone else

  • The corporation keeps on going as an entity, even if owners pass away

  • Corporations often have an easier time raising equity

  • Corporate profits can be taxed at a lower rate than personal profits

Drawbacks

  • Corporations face tighter government regulations

  • Corporations cost more to establish than partnerships or sole proprietorships

  • You have to keep more records, including yearly filings with the government

  • Shareholders and directors can fight over the direction of the corporation

 

Co-operative

A collection of members joins to form a co-operative, either for profit or not for profit. Of the four types in this article, this is the least common, but co-operatives can work when a group of individuals or entities wants to put their resources in common to provide needs that everyone has, such as delivery or sale of services or products or employment.

Advantages

  • You and your fellow members own and control the co-operative

  • Each member gets one vote in the operation

  • You have limits on your liability for debts and actions

  • You share equally in the profits.

Drawbacks

  • Co-operatives can take a long time to make decisions

  • If some members don’t participate, the health of the business can suffer

  • Conflicts can develop easily among the members

  • You have to keep thorough records

  • With equal membership, there can be less incentive for some members to put more capital into the business

 

Partnership

This refers to a business that two or more people set up – without incorporating it. You put your money into a pool with your business partners, and that pool funds the business. You and your partners would draw up a legal agreement that indicates how you will split up the profits. If you set up a general partnership, each partner has joint liability for any debts that the business accrues. A limited partnership allows investors to contribute to a business without having to take part in the operations. Professionals such as doctors, attorneys and accountants can set up a limited liability partnership.

The key to a successful partnership is the agreement that you put together before opening your doors for the first time. You need your terms down in writing so that you don’t have problems with arguments later on. The fees you pay a lawyer today to put your agreement together will save you headaches (and potentially higher legal fees) down the road.

Advantages

  • You can form one easily and without spending a lot

  • You and your partners bear the financial start-up burden together

  • Losing money? Include partnership shares in your personal tax return and save money

  • Everyone shares in the profits and assets equally – and in the decision-making process.

Drawbacks

  • If your partner makes a bad decision, you still have a share in the responsibility

  • Your personal assets are still attached if your business goes under

  • Finding the right partner(s) can be hard

  • You and your partners could end up bickering

In summary, before forming and starting any type of business it is highly recommended that you consult with an accountant to ensure the best business structure is set up accordingly with your business objectives. Every successful business starts on the correct footing.