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
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.
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
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?
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.
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
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
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.
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.
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
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.
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.
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.