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Business Structures,

CHOOSING THE RIGHT BUSINESS STRUCTURE

Have you thought about starting a business, or wondered what it would be like to be your own boss? Many people think about business ownership but they don’t always know how to go about it, what questions to ask, or what the risks are with different business structures.

There are three different types of businesses structures to consider when setting up your business—sole proprietorships, partnerships, or corporations—and each comes with its own costs and benefits.

Sole Proprietorships

These are the easiest form of business to set up because anyone can operate a business as a sole proprietor. You can have employees, own equipment and (typically) name your business whatever you want. The benefit of this structure is there is no extra tax filing to do and all of the income generated from the business comes back to you as the single owner - the downside of a single tax filing is that, when you reach a certain level of business income, you are likely to end up paying a higher tax rate as a sole proprietor than you would if you incorporated.

Many people think the simplicity of a sole proprietorship is a great idea, however, it is not without risks. In the eyes of the law, you and your sole proprietorship are one and the same,  and all of the risk and responsibility falls on you personally.  If an employee causes damage to a client’s property or someone sues you and your insurance does not cover the loss, all of your assets are exposed to liability. This means personal bank accounts, investments, houses and recreational property could all be seized to cover a debt associated with the business, as there is no separation between personal and business assets.

Partnerships

A partnership is similar to a sole proprietorship, but involves two or more people or corporations coming together with the intention of making a profit from their venture. A benefit of a partnership is it shares some of the responsibility for the business among the partners.  A partnership is often a good way of proceeding if you and your partner have different but necessary skills to help your venture succeed, or where one partner is putting in money and the other partner is putting in “sweat equity”. 

When looking at a partnership you need to choose your partners carefully, as it is very much like a marriage.  Partners owe one another high legal duties of loyalty.  Typically partners share equally in the profits of the business and also in the losses of the business.  As with a sole proprietorship, your business is not a separate entity and responsibility and risk falls back on the partners. This means that you can be personally liable for a bad business decision made by your partner.  So, while there are benefits, there are also many risks. 

Corporations

To provide more protection to personal assets, many people use a corporation. Incorporating creates a distinct legal identity for your business. Separating your business from yourself can help protect you and your personal assets. The owners of a corporation are shareholders who vote for people to be the directors of the company.  The directors are the decision makers of the company and have the ability to enter into contracts on behalf of the company.

In BC, a company can be as small as one shareholder and one director, and both these roles can be filled by the same person.  However, selling shares and adding shareholders to your company can be a good way of raising money to grow your business.

Corporations have a number of benefits: they are easily scalable, they can last forever and they can easily be sold to other people.  Corporations are also taxed at a different rate than sole proprietors and partnerships, and can allow for income splitting between spouses.

There are some administrative costs involved in running your business as a corporation - you have to file separate taxes every year for your corporation, and, in addition to the actual incorporating requirements, there are annual filing obligations required to keep your Company in good standing with the BC Corporate Registry.

There is a lot to consider when you go into business, and we are here to help answer your questions.  If you have always thought about being an entrepreneur give us a call: we will work with you and your accountants to help you decide which form of business structure is best for you.  Getting the right legal and accounting advice before you take the leap can be the difference between your business being a failure or a success.

If you have any questions about what business structure is right for you, or about corporate law in general, please contact us at 250-434-2333 or corporate@forwardlaw.ca.

This article is provided for general information only and does not constitute legal advice or opinion. For legal advice relating to business structures, or corporate law generally, please contact us for an appointment. This article is current as of its original date of publication.



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