Choosing the Right Business Structure for You

Choosing a Business Structure

From coops to corporations, there are a number of business structures that you can utilize when structuring your business plan. Finding the business structure that suits you best is the essential to the effective and efficient formation of the kind of company that’s right for you. In Canada, there are four basic business structures and the biggest advantage of selecting one of these is for potential tax breaks and reduced liability. Tax structures depend on the kind of corporation you select and changes in the Canadian Revenue structures.

Sole Proprietor

Having one legal owner makes this the easiest business structure to acquire with the fewest expenses or red tape. In most provinces (except Newfoundland and Labrador) you are required to register with provincial administrations should you wish to conduct business under a name other than your own. This kind of business means you gain all the profits as well as some tax advantages and the low cost makes it perfect for small businesses.

There are inherent drawbacks to sole proprietorship as there is no separation of your own liabilities and those of the business. This means that you are responsible for all debts and your personal and professional assets can all be claimed by debtors. Your personal credit score will count when you are applying for loans and these kinds of business are less likely to qualify for loans.

Partnerships

When you are starting a business with more than one person, you will create a general or limited partnership.

General partnerships mean that all partners can make decisions for the business and that all are equally responsible for debts or damages.

Limited partnerships are ones where some partners (the general partners) make the decisions and accept all liability while limited partners play no role in the running of the business and only contribute capital. Limited partners usually have limited shares in the profits, limited decision-making abilities and also limited liability for debts. All partnerships must be registered with the provincial government (unless you are in Labrador or Newfoundland).

Partnerships are also relatively easy to set up and there is little red tape. Partners provide you with a wider skills base, more capital to invest and less personal liability. The disadvantages of partners is finding ones that you work well with and the fact that you will be responsible for decisions your partners make.

Corporations

While corporations are expensive to set up and are heavily regulated, they offer the owners protection from liability. Ownership can be transferred by selling shares, corporations enjoy tax breaks and its easier for corporations to raise capital.

The disadvantages of creating corporations revolve around the expenses associated with creating a corporation, the increased taxes and the extensive record keeping required. Corporations can be private, public or federal.

Incorporating your Business

When you incorporate your business, you establish it as a separate entity under the law. Incorporating your business is a matter of paying the fee required by your state or province, choosing a name and adding ltd., inc., or corp.

The benefits to incorporation are legion, but the most important one is the separation of the business from its owners. This mitigates your personal responsibility should things go awry. Your personal assets are protected, and the business credit score is independent of its owner’s. See a list of requirements for incorporating your business by province here.

Cooperatives

This kind of corporation provides volunteer members with control. Here members vote on policy and practices to provide goods and services to their communities through a pooling of their individual resources. This carries several advantages including limited liability for individual members, all members have an equal say in how business will be conducted and all members share in the profits.

The disadvantage is that equal say in the way the business is run can mean conflict or long periods for decision making. Extensive record-keeping is required and the success of the business requires regular participation by all the members.

Finding the right business model for you will mean that you can take advantage of tax breaks, limit your personal liability or establish legal parameters to your business relationships.

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