One of the most common questions I get from entrepreneurs at networking events is how to structure their business. Actually, the conversation usually starts with a question about whether or not I “do incorporations” (the answer is yes, btw). It seems most people have an idea that there are advantages to incorporating, even if they don’t understand what the advantages may be.
The short answer is yes, there are some advantages to incorporating, but there are many ways to skin the business structure cat. Before you make up your mind that the corporate form is right for you, you should know what your other options are, and what some of the advantages and disadvantages are.
So, without further ado, here are three of the most common business structures in Ontario:
When you incorporate, you’re birthing a separate “legal person” that has many of the same rights and responsibilities as an actual person. It can enter into contracts, borrow money, sue and be sued, pay taxes, and even has some rights under the Charter of Rights and Freedoms. It is owned by its shareholders, and run by its directors and officers.
The biggest advantage of incorporation is “limited liability” – meaning that if someone has a legal dispute with a corporation that you own, your personal exposure isn’t more than the assets you’ve invested in the company. (This isn’t true 100% of the time – see this article on director & officer liability). Another advantage is that the corporate tax rate is much lower than the individual tax rate. A good accountant can work with your lawyer to set the business up in a way that minimizes your business and personal tax costs.
- It continues to exist even if the shareholders, officers or directors move on or pass away.
- Ownership can be sold or transferred in whole or in part.
- Easy to raise money (capital) by selling shares or options for shares.
- There are clear rules on the roles of the people who control and operate the company.
- Corporations can be shareholders (owners) of other corporations, which can further protect the people who ultimately own the companies from liability.
- Extensive record keeping and annual reporting requirements to the government.
- More involved process to take money out of the corporation to pay yourself.
- Possible disputes between shareholders and management.
- Higher startup costs than other business structures.
Well Suited For:
Industries with more risk of being sued, that are more likely to need outside money to grow, and where hiring employees or contractors to run parts of the business is likely, such as:
- Retail, bars & restaurants
- Construction & landscaping
- Transportation, tourism & adventure
- Tech services and support
A corporation is a very flexible business structure that, if set up correctly in the first place, can grow and change with your business as it evolves. If you’re considering setting up shop as a corporation, give me a call, and we can make sure we get it done right.
The Sole Proprietor
This isn’t much more than you registering a business name, and starting to do business. You and the business are the same person for legal and tax purposes, so anyone who is owed a debt by the business could claim against your house, car, or personal savings to get it paid back.
- Very little startup cost
- Little government regulation
- You have direct control of decision making
- Business losses can be deducted from your personal income
- Your personal assets may be at risk.
- Higher tax rate on business income means there’s less to reinvest in the business.
- Banks and other lenders may be less willing to make loans.
Well suited for:
Low-risk industries, remote/virtual workers, consultants, and services for individuals rather than businesses, such as:
- Social media
- Personal training
- Professional services and other consultants
- Web design
A sole proprietorship is a cheap and easy way to get your business off the ground. It’s not particularly flexible, or well suited for long-term growth, but it’s not difficult to incorporate a business later once you’re ready to grow, hire, rent space, and enter into contracts with suppliers and customers.
A partnership is an agreement, typically in writing, between two or more people (or corporations) to carry on business together for mutual gain. You pool your resources, and share in the profits or losses according to your agreement. No separate legal person is created – so creditors can still look to the partners’ personal assets to satisfy debts owed by the partnership. Partnership income is paid out to the partners, and you’re each taxed at your individual rate.
Limited Liability Partnerships are ones in which the other partners aren’t liable for the debts or claims against one of the partners. Law firms and accounting practices commonly use this form.
Limited Partnerships ones where all partners own the assets of the business, but certain partners limit their liability to the value of their contribution to the partnership. At least one of the partners must be a general partner, with no limited liability.
- Simple to start up.
- Very flexible, and can allow each partner to keep control of their portion of the business
- Few ongoing formalities such as annual meetings
- Business losses can be deducted from your personal income.
- Costs and profits are shared between the partners
- Your personal assets may be at risk
- You are legally and financially responsible for business decisions made by your partner – such as entering in to bad contracts, or breaking them
- Income is taxed at your personal rate
- Possibility of conflict between partners
- Higher start-up cost, as all partners should have independent legal advice in negotiating and drafting the partnership agreement.
Well Suited For:
Diverse groups of professionals working towards a common goal (pooling resources), people cooperating on short-term projects, and projects in exploratory or preliminary phases in:
- Professional services – accounting, architecture, real estate, medicine, incubators/accelerators
- Industrial or real estate development
- Mining projects
- Arts, theatrical and film ventures
- Medical, scientific and technology research
Since a partnership is a private agreement between the partners, it can be adapted to suit just about any relationship. If you’re considering entering in to a partnership, you should have legal advice to make sure that you know what you’re agreeing to, and that your interests are protected. More information on partnership agreements is coming soon.
Hopefully this article helps you to understand what your options are, and gives you an idea of how to get your business off the ground. I’m happy to discuss these options with you, and help you get your business set up for long-term success.