There are multiple ways in which to structure a business, and there are pros and cons to each business structure of which you may not have been aware. The most common business structures are: Sole Proprietorships, Partnerships, and Corporations.
A sole proprietorship doesn’t require anything more than registering the business name, under the Business Names Registration Act. The owner and the business are the same legal person for legal and tax purposes. The owner carries on all aspects of the business and is personally liable for the actions and debts of the business (unlimited liability). If the owner dies, the sole proprietorship will cease to operate (there is no perpetual existence).
- Simple and easy to set up
- Small upfront cost
- Owner has direct control
- Income of the sole proprietorship is income of the owner – therefore limiting tax planning options
- Personal assets of individual are at risk due to unlimited liability
A sole proprietorship is a cost effective way to get your business off the ground. You are able to move from a sole proprietorship to a different business structure once the level of your business warrants it.
Partnerships are governed by The Partnership Act. Partnerships are formed by an agreement between two or more people to carry out business together “with a view of profit”. The partners pool their resources together and accordingly share in the profit or loss of the venture. There is no perpetual existence of the partnership, as the partnership is dissolved once the partners separate.
The partners face unlimited liability and are jointly and severally liable for the debts of the partnership. This type of structure requires a significant amount of trust between partners, as they are liable for the decisions and debts of the other partners. Some of the risk, however, can be modified through a written agreement between partners.
- Can be simple and easy to set up
- Small upfront cost
- Unlimited liability – partners are liable for the debts of other partners
- Income of the partner is taxed at the individual tax rate
- Significant trust needed between partners
- Each partner is legally responsible for the business decisions made by other partners
It should be noted that there are Limited Liability Partnerships, which are restricted to professionals (lawyers, doctors, dentists, etc.). As the name implies, the partners are not personally liable for a partnership obligation due to the fact they are a partner. In other words, the partners do not face unlimited liability for their partner’s actions.
Corporations and their existence are governed by The Business Corporations Act. Corporations are creatures of law and a product of our legal system. Incorporation is the creation of a new legal person, separate in law from its shareholders. Corporations have many of the same rights as natural persons, including: own property, make decisions, enter into contracts, can sue and can be sued.
The most significant benefit of this business structure is the limited liability it affords the shareholders of the Corporation. The shareholders and directors are separated or protected from liability which may arise against the Corporation (there are some exceptions to this principle).
- Preferred tax rates
- Flexibly in distributing earnings – salary vs. dividends
- Facilitates investment
- Ownership stake in the Corporation can be sold or transferred
- Perpetual existence
- Up front cost to incorporate – higher startup cost than other business structures
- Possible disputes between shareholders and management
- More time involved in the up keep of the corporation – single bank account vs multiple personal and corporate bank accounts
- More administrative costs (tax filings, annual returns, financial statements, etc.)
There are three distinct roles within the Corporation, being shareholders, directors and officers. One individual can act as all three.
Shareholders of a Corporation are the “owners” of the corporation and are entitled to the rights given to them by the shares they hold. The shareholders rights (in total) must include:
- The right to vote at any shareholder meeting;
- The right to receive dividends declared by the Corporation; and
- The right to receive the remaining property of the Corporation upon dissolution.
Additionally, the shareholders of the Corporation elect the Board of Directors.
The directors are elected or appointed by the shareholders of the Corporation. They are responsible for the long term view and global vision of the Corporation. As a group the directors constitute the Board, and they hire senior officers of the Corporation.
The officers implement and execute the directions and goals set by the Board of Directors. In essence, they are responsible for the day to day operations of the Corporation.
Should you require assistance in picking the appropriate business structure for your venture, please feel free to contact Mackenzie Tulloch. Stay tuned for Part 2 of this series where he will focus on various aspects within the corporation, including, by-laws, resolutions, unanimous shareholder agreements and participation agreements.
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