Starting a business can be overwhelming for first time entrepreneurs. A business owner pursue vision and enjoy the freedom of life. One of the first steps of a new business owner is choosing legal structure that best suits the needs of the business. There are primarily two business structures in Canada: Business Name Registration which is either a sole proprietorship or general partnership, and Corporation. Choosing the form of the business will depend on several variables as well as your personal goals and comfort levels. Both options offer advantages and disadvantages. However, there are significant differences between registration and incorporation.
Business Name Registration
Business Name Registration is a simple and inexpensive way to start-up your business. You have the full decision-making authority and all profits or liabilities are yours.
Sole proprietorship
Most small businesses are sole proprietorships because this type of business is the easiest and least expensive way to start a business. As a sole proprietor, you and your business are considered as one, often called a ‘self-employed’. The net business income must be included as part of your personal income and you are fully responsible for all debts and obligations related to your business.
Advantages
- Full decision-making authority
- Inexpensive start-up cost
- Simple business structure
- All of the profits are yours, no salary or dividends need to be paid out
- Simple tax filing
Things to consider
- Responsible for all liabilities
- Difficult to rise capital
- Difficult to exit or sell the company
- Income is taxable at your personal rate
- Limited tax planning opportunities
- Business name is not protected
- Must be renewed every 5 years
General Partnership
Partnerships mostly like Sole Proprietorship structure that forms by two or more owners. Business owners own all the assets of the partnership and personally responsible for any liabilities that the partnership may incur. In most jurisdictions, there are two types of partnership: general and limited. In a general partnership, each partner is jointly liable for the debts of the partnership. In a limited partnership, a person can contribute to the business without being involved in its operations. A limited liability partnership is usually only available to a group of professionals, such as lawyers, accountants or doctors.
Advantages
- Generally easy and inexpensive to establish
- Start-up costs are shared
- Less hassle on business management
- Receive all of the profits directly
Things to consider
- Partners are personally liable
- Income is taxed at the personal level
- Decision-making can be cumbersome
- Hard to exit or sell the company
- Renewal required every 5 years
- Business name is not protected
Incorporation
Corporation is a separate legal entity that distinct the business from its shareholders. Whether you are just planning or already operating a business through sole proprietorship or partnership structure, incorporation is an option worth considering. You can choose to incorporate federally or provincially, and you will not be personally liable for the debts, obligations or acts of the corporation.
Advantages
- Protect your personal assets
- Distinct legal entity and limits the liability
- Corporate rate income tax
- Enhanced tax flexibility
- Better access to capital
- Continuous existence & ownership transferable
- Business name is protected in the jurisdiction
- Overall Flexibility with any change of corporation or individual names
- Able to register operating names that allow to legally conduct other businesses
Things to consider
- Paperwork and recordkeeping need to be updated
- Initial costs are higher than other options available
- Director must be at least 18 years old individual not in bankrupt status
- Business losses cannot deduct against personal income
- Corporate Tax filing required
It is very important to choose the best business structure when starting a business. The structure can be changed after business complete the formed. However, since there are likely to be additional costs in transferring assets, etc. when changing the business structure of an existing business it really is best to critically think about which will best suit your business both now and in the long run in order to save the costs and focus your efforts on building your business.
Whether you’re thinking about registering your sole proprietorship or incorporating a business, Legal Smart is here to help make the process fast, simple and accurate.
