Choosing the Right Business Structure: Sole Proprietorship? Partnership? or Corporation?
Are you starting your own business?
Are you unsure of how to best structure your business to fit your needs?
The three most common business structures are:
- a sole proprietorship;
- a partnership; and
- a corporation.
In this post, we set out the basic features of each structure and why it might work for you.
If you’re starting a business alone, a sole proprietorship might be the right option for you. Sole proprietorships are easy and inexpensive to set up. You only need to register your business name provincially, which is a relatively simple and inexpensive process. As a sole proprietor, you will retain direct control over all decision making and profits will go to you directly. However, equally, as the sole proprietor you remain fully responsible for all of the business’s debts and obligations. This means a creditor can make a claim against you personally for any debt owed by the business. There are also tax consequences to be mindful of when operating a sole proprietorship. The income from your business would be taxable at your personal rate. Therefore, if your business is profitable, you could be subject to a higher tax rate.
If you’re starting a business with a partner, then a general partnership might be the most suitable structure for you. Establishing a partnership allows you and your partner to dictate the terms of your business through a partnership agreement. A good partnership agreement will, among other things:
- set out how any disputes that arise will be resolved;
- outline how profits are to be shared; and
- establish how financial resources will be raised and used in the business.
Unless you establish a limited liability partnership, you and your partner will be personally liable for any debts of your company. A limited liability partnership structure can be used to protect certain partners from personal liability should they agree to not take part in the control or management of the business. There are many advantages to choosing a partnership business structure, including that they are relatively easy to start, and the start-up costs are shared among partners. Further, you can stipulate that each partner holds equal share of management decisions and profits. However, similar to a sole proprietorship, the partners remain personally liable if the business isn’t able to pay its debts. Choosing the right person to enter into a partnership with is crucial as you will also be held financially liable for your partner’s business decisions.
Another common business structure used is the corporation. You can incorporate your business provincially or federally, depending on where you expect to do business. When you incorporate your business you are effectively creating a separate legal entity from yourself. This is attractive for many reasons, the most obvious being that, you, as a shareholder, are not personally liable for the debs of the corporation. As a corporation, ownership of the business is transferable. A corporation will enjoy a continuous existence should anything happen to one of the shareholders. There are also possible tax advantages as corporate rates tend to be lower than individual rates. There are also disadvantages of incorporating, including that the process itself is more expensive than forming a sole proprietorship or partnership, and corporations are more strictly regulated. Extensive corporate records have to be kept and certain documents are required to be filed annually.
Do you have questions about what type of business structure would best suit your needs? Do you want to get the ball rolling on incorporating your business? Contact Katelyn Dempsey at Aluvion Law today.