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Choosing the Right Business Structure

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2.9 min read871 words

Do you know which business structure you want to choose?

It depends on many factors and there are no simple rules for selecting which will be right for your business.

Some questions to consider include:

  • How many people are involved with the business?
  • Are there outside investors?
  • Do you have any personal assets you wish to keep separate from the business?
  • Do you want to limit your liability?
  • How much profit is the business expected to generate?
  • How much do you wish as a salary?
  • Will you be re-investing profits in the business, or do you want to take all profits as personal salary?
  • What is your budget for registration?
  • Are you prepared to pay the additional accounting fees required by corporations?

SOLE PROPRIETORSHIP, PARTNERSHIP & CORPORATION?

Before registering your business, consider the different legal business structures: Sole Proprietorship, Partnership, and Corporation. Each structure has different and important implications for liability, taxation, and succession. If you are unsure, contact a lawyer or accountant. Please note that sole proprietorship and partnership names have no statutory name protection. If name protection is important to you, you may wish to incorporate your business or to register for a trademark at the Canadian Intellectual Property Office.

SOLE PROPRIETORSHIP

Starting a sole proprietorship is the simplest way to set up a business. The sole proprietor is said to be self-employed. As a sole proprietor you would be fully responsible for all debts and obligations related to your business. A creditor with a claim against a sole proprietor would normally have a right against the sole proprietor’s assets, whether business or personal. This is known as unlimited liability. As a sole proprietor, you perform all the functions required for the successful operation of the business. These include: Securing the capital, Establishing and operating the business, Assuming all risks and Accepting all profits and losses.

ADVANTAGES

  • Low start-up costs
  • Greatest freedom from regulation
  • Owner in direct control of decision making
  • Minimal working capital required
  • Tax advantages to owner
  • All profits to owner

DISADVANTAGES

  • Unlimited liability
  • Lack of continuity in business organization in absence of owner
  • Difficulty in raising capital
  • No name protection
GENERAL PARTNERSHIP

A partnership is an agreement in which you and one or more people combine resources in a business with a view to making a profit. In a General Partnership, you and one or more other owners would share the management of a business, and each partner would be personally liable for all debts and obligations incurred. This means that each partner is responsible for, and must assume, the consequences of the actions of the other partner(s).

In order to establish the terms of the Partnership and to protect yourself in the event of a disagreement or dissolution of a Partnership, a partnership agreement should be drawn up. You would share in the profits according to the terms of the partnership agreement.

ADVANTAGES

  • Ease of formation
  • Low start-up costs
  • Additional sources of investment capital
  • Possible tax advantages
  • Limited regulation
  • Broader management base

DISADVANTAGES

  • Unlimited liability
  • Divided authority
  • Difficulty in raising additional capital
  • Hard to find suitable partners
  • Possible development of conflict between partners
  • Partners can legally bind each other without prior approval
  • Lack of Continuity
INCORPORATION

A corporation, also known as a limited company, is a legal entity that is separate and distinct from its members (shareholders). Companies are incorporated in Ontario according to the provisions of the Business Corporations Act. When a company is incorporated, it acquires all of the powers of an individual, an independent existence – separate and distinct from its shareholders, and an unlimited life expectancy. An Incorporated company can acquire assets, go into debt, enter into contracts, sue or be sued.

Ownership interests in a corporation are usually easily changed. Shares may be transferred without affecting the corporation’s existence or continued operation. The following characteristics distinguish a corporation from a partnership or sole proprietorship: Limited Liability: normally no member can be held personally liable for the debts, obligations or acts of the corporation beyond the amount of share capital the members has subscribed. Each shareholder has limited liability. A creditor with a claim against the assets of the company would normally have no rights against its shareholders, although in certain circumstances shareholders may be held liable. We recommend that you seek professional legal advice. Perpetual Succession: because the corporation is a separate legal entity, its existence does not depend on the continued membership of any of its members.

ADVANTAGES

  • Limited liability
  • Possible tax advantage (if you qualify for a small business tax rate)
  • Specialized management
  • Ownership is transferable
  • Continuous existence
  • Separate legal entity
  • Easier to raise capital
  • Name protection

DISADVANTAGES

  • Closely regulated
  • Most expensive form of business to organize
  • Charter restrictions
  • Extensive record keeping necessary
  • Possible double taxation of profits
  • Shareholders (directors) may be held legally responsible in certain circumstances
  • Personal guarantees undermine limited liability advantages

If you choose a corporation as your legal form of ownership, you can either incorporate your company federally or provincially.If you prefer to use a local lawyer, our Referral Partners are professionals we work with regularly in Durham Region.

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