Business Structures,
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.

I work with my clients to help them understand which option is the best for them. There are three different types of businesses structures we discuss when setting up a business: sole proprietorships, partnerships and corporations.

1.       Sole Proprietorships are the easiest 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. Many people think this is a great idea, however, it is not without risks. As a sole proprietor all of the risk and liability also falls on you as the owner. 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.

2.       A Partnership is another common business structure. It 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.  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. 

3.       To provide more protection to personal assets, many people use a Corporation which separates the business from their individual assets.  The owners of a corporation are the 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 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 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.


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