Island Savings

Determine Your Structure

You have an idea and a plan to make your business profitable. But you'll need to consider what type of business structure you'd like to operate with—a sole proprietorship, a partnership, or a corporation.

 

Sole proprietorships

As the simplest type of business to set up, sole proprietorship has advantages and disadvantages to be aware of. Although all profits would be yours alone, you are also fully responsible for all debts and obligations related to your business. As the sole owner of the business, a creditor can make a claim against your personal or business assets to pay off any debt.

Advantages:

  • Easy and inexpensive to set up
  • Lowest amount of regulatory burden
  • Direct control of decision making
  • Some tax advantages when your business may not be doing so well
  • All profits will go directly to you

Disadvantages:

  • Unlimited liability against you and your personal assets
  • When your business is performing well, income is taxable at your personal rate. This may put you in a higher tax bracket
  • Lack of continuity for your business if you need to be absent
  • Difficulty raising capital on your own

EXPERT TIP

If you plan to operate your business as a proprietorship, partnership or limited company, you'll need to register the name with your provincial Corporate Registry. That way, you aren't using a name already in existence.

Partnerships

A partnership is a good option when you have two or more business people combining their abilities and knowledge and you do not wish to incorporate your business. You can establish the terms of your business with your partner(s) and protect yourself in case of a disagreement or dissolution by drawing up a specific business agreement. As partners, you would share in both the profits and losses of your business according to the terms of your agreement.

When establishing a partnership, you should have a partnership agreement drawn up with the assistance of a lawyer to ensure that you are protecting your interests, clearing establishing terms with regards to issues like profit sharing or dissolving the partnership, and meeting the legal requirements for a limited partnership if applicable.

Advantages:

  • Easy to initiate
  • Equal share in the start-up costs, management, profits and assets with your partner
  • Some tax advantages to partners if your business has struggles

Disadvantages:

  • You and your partners are subjected to unlimited liability against personal assets
  • Hard to find a suitable partner and possible conflict between you and your partner(s) can occur
  • All partners are held financially responsible for business decisions made by another partner with or without prior consent

Corporations

Although incorporations can be more expensive and difficult to set up, an incorporated business is considered to be its own legal entity that is separate from the shareholders. As a shareholder of a corporation, you will not be personally liable for the debts, obligations or acts of the corporation. It is always wise to seek legal advice before incorporating.

Advantages:

  • Limited liability as a corporation is deemed its own legal entity
  • Ownership is transferable
  • Continuous existence
  • Can be easier to raise capital
  • Taxes may be lower for an incorporated business

Disadvantages:

  • A corporation is closely regulated
  • It’s more expensive to incorporate than to create a partnership or sole proprietorship
  • Corporate record keeping and reporting is required

 

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