When starting a business, one of the first decisions an owner must make is what structure to use. Your friends and colleagues tell you that you should incorporate to save tax and add legitimacy to your business. In this article, we’ll look at the differences between business structures and discuss the advantages and disadvantages of using a corporation, sole proprietorship, or partnership. By the end, you should be able to decide what business structure to use.
What is sole proprietorship?
As the title suggests, you are the sole owner of your business. This means you take on all responsibilities, profits and debts of your company. It is the most common type of small business because there is no requirement to register the business with the government (notwithstanding the GST/HST rules and payroll accounts), and proprietors can use their own name in the business (or register a “trade name” if they wish).
Benefits of a sole proprietorship
- It’s simple and quick to register.
- You enjoy full control over decision making, no need for board or shareholder approvals
- Deduct business losses from personal income, helping you remain in a lower personal income tax bracket
- Low start-up costs
What is an incorporation?
You have the option to incorporate under provincial law or federal law. Companies incorporated under provincial law can operate in any province or territory provided they register as extra-provincial incorporations. Companies must also register extra-provincially in each province or territory where they operate.
Regardless of whether you incorporate under provincial law or federal law, incorporating means that your business operates as its own legal entity, separate from you as an individual. Let’s look at some of the advantages of incorporating your business.
Benefits of an incorporation
- Limited liability means your exposure to any retribution should your business not do well is limited
- The ability to transfer ownership if you sell your business
- Raising capital from investors and financial institutions is easier
- There are a number of possible tax advantages that can be explored
- Be better prepared for legacy and estate planning as your business theoretically exists forever
What is a partnership?
A partnership is an agreement between two or more parties (corporations, sole proprietors, or a combination) to be in business together. The agreement doesn’t need to be written (although we always recommend agreements be formalized in writing), thus it is quite easy to enter and exit a partnership. Since partnerships are simply agreements and not separate legal entities, the partners (corporations and/or sole proprietors) carry the liability of the partnership’s operations.
There are three types of partnership in Canada, but whether you can legally set up any kind of partnership other than a general partnership depends on what province or territory your business will operate in and what kind of business you’re in. A partnership company is operated by two or more parties.
In a general partnership, partners are responsible for all aspects of the business, including the debts of the partnership.
A limited partnership (LP) can have general and limited partners. Generally speaking, there’s a limit on the liability of a limited partner, while the general partner’s liabilities are not limited.
A limited liability partnership (LLP) is has no general partners and all partners have limited liability.
Get Professional Advice
Whatever business structure you decide, the most important thing to know is starting a business is an incredible opportunity to make your dreams a reality. There’s definitely more to running a business than paperwork, but it’s nice to know you’ve set yourself up for success from a legal perspective.
Talk to a Surrey tax specialist to ensure that the proper structure is in place for your business. If you would like to discuss this with us further, please reach out Richard Kosick and Co. in Surrey. We love chatting with entrepreneurs and we’d love to hear your story.