Starting Your Business
Having a set structure for your business, knowing how you want to operate it, and having several contingency plans in place to help you achieve your goals is extremely important. Once you’ve ironed out the kinks of what you hope to achieve with your business, you then need to choose an appropriate structure that’ll be the most effective. You can choose a corporation, a partnership or sole proprietorship. What do these terms mean and how do you make the right decision? After
all, each legal business structure that exists in Canada has its own unique set of advantages and disadvantages that you should know about.
Types of Business Structures in Canada
Sole Proprietorship
A sole proprietorship is essentially the most basic legal business structure that exists in Canada. It entails a single individual owning, operating, and taking on liability for all aspects of the business on their own. Any employees they hire don’t have a financial stake in the company.
Since sole proprietors don’t answer to anyone but themselves, this means that there’s a lot less paperwork involved in starting and registering the business. To work as a sole proprietor, you simply have to conduct business. Entrepreneurs and startup business owners are typically sole proprietors because this status gives them the opportunity to run and expand their business as they see fit rather than having it function as a separate entity.
Advantages:
- You have full control over every aspect of your business
- Inclusion in a smaller tax bracket
- You keep all profits from the business
- The registration process is easy, convenient, and cost-effective
Disadvantages:
- As the business owner, you’re forced to assume sole responsibility for the success of the business
- Personal and professional assets and accounts are combined, which means you suffer the same financial losses as the business
- The daily challenges of managing a business fall on your shoulders alone
Corporation
Incorporating your business is a sign that you’re moving on an upward trajectory towards success and financial gain. At this point, your business is legally a separate entity and you may have even expanded by adding several brick-and-mortar locations and even hired a few employees to run operations on your behalf. Basically, this means that as the owner, neither you nor your shareholders can be held personally accountable for any debts or claims accrued by the business itself. Your personal and professional assets are separate.
Incorporation is a much more complex business model than sole proprietorship and is only suitable for more mature businesses that are working towards or have already achieved their goals of expanding into more diverse markets. There are two types of corporations in Canada: federal and provincial. Federal incorporation involves the ability to operate under the same business entity nationwide. Provincial incorporation involves running operations under a certain business entity in specific provinces. The latter option also involves registering your business on a province-by-province basis depending on where you want to operate.
Advantages:
- It’s a great sign of success and financial stability for your business
- You can legally transfer ownership of the business to whomever you choose
- The company can continue to exist even once the original owner retires, sells the business, or chooses to opt out
- The business is a separate legal entity, which means your personal finances, assets, and accounts remain unconnected
- Incorporated businesses usually get larger tax breaks and it’s much easier to raise capital
Disadvantages:
- Corporations face much more stringent legal rules and regulations
- You need to invest large sums of money in order to incorporate and sustain your business
- All business records must be detailed and organized so that they can promptly be filed with the federal government on an annual basis as requested
- Shareholders can engage in conflicts or disagreements which could hinder operations
- Depending on the business, the government is entitled to request proof of residency and citizenship from some business owners
Limitations of Corporations
Corporations are only truly limited by the amount of capital they’re able to generate on a quarterly basis. Also, because corporations function as a separate legal entity from the business owner(s)’s personal assets, no outside capital is eligible for paying off debts incurred by the business. Only active shareholders can provide the financial aid needed to help run the business and keep it sustainable.
Partnership
A partnership business structure involves a minimum of two proprietors who typically hold equal stakes in the company unless they have made other arrangements. In some cases, the proprietorship could be unbalanced with one person owning a larger share of the business than the other.
A business partnership should only be considered as an absolute last resort if none of the other legal business structures fit within your vision or company standards.
Advantages:
There are a few advantages and disadvantages of entering into a partnership with one or more individuals. First of all, partnerships alleviate a great deal of the pressure involved in running a business from one individual and spreads out the responsibilities as much as you and your partners want. The costs of running the business are also split up amongst the business partners and in some cases, the business can even be classified under a smaller tax bracket depending on how much revenue it’s generating.
Disadvantages:
Some disadvantages are that legally, you and your business are considered joint entities, and this means any debts incurred by the business can still be taken out of you and your partners’ personal assets and accounts. Conflicts regarding how the business should be run could also arise and become problematic, especially if you have individuals who tend to disagree frequently. Lastly, all partners are legally and financially liable for all business decisions, regardless of their personal opinions.
How CBES Can Help You Make the Right Decision
The first step to running a successful small, medium, or large business is choosing the right structure that benefits every aspect of your company. Whether your goal is to simply expand to more locations or increase your bottom line, the experts at Canadian Business and Enterprise Services (CBES) can help you come up with a business model that suits you. Our step by step process is foolproof and designed to meet the unique standards of your business. Contact us today to learn more!
*A free 30 minutes online consultation will be provided for each client.