Forms of Business Ownership

"The type of business you decide to start is what your business does.

The form of business you create is the business' legal structure."

Forms of Business Ownership

In Canada, the main forms of business ownership are the sole proprietorship, partnership, and corporation.

Each form of business ownership has its own liabilities and responsibilities, and effects many aspects of your business' operation including attracting potential clients, supplier relations and filing taxes. It's important that the form of business you create is suitable for the type of business you operate and you may want to seek professional advice (from an accountant or lawyer) to help you decide.

Sole Proprietorship

• Owned and operated by one Individual (Proprietor) and is considered to be an extension of the Proprietor
• Business losses can be offset against owners other income (with exceptions). An accountant should be consulted
• Easiest form of business to set up and involves the least amount of government and legal formalities
• The Owner solely controls the business
• A Sole Proprietor can employ others in the business, but can not employ him/herself
• Personal tax rate may be lower thant the rate for corporations, particularly in the early days
• If only a persons name is being used, with no additions, registration is not required
• Proprietor is personally responsible for all liabilities and obligations of the business
• Can be hard to raise capital
• Customers/creditors may perceive the business to be unsophisticated and not firmly established
• Sale of the business may involve disclosing the owners personal tax return
• Unless the owner pays into Unemployment Insurance elsewhere, owner is not eligible to collect UI if the business fails
• If the business fails, the proprietors assets (personal assets) can beseized

Create a Sole Proprietorship

Partnerships

• The most common type of Partnership, is a General Partnership, defined as a business arrangement betweentwo or more persons who share the profits, liabilities and management of the business
• Each partner reports and pays income tax on his or her personal income tax return
• Partners share in the decision making and risks of conflict exist
• A written Partnership Agreement is a MUST - your Lawyer can assist you with this
• A Limited Partnership is comprised of general partners and one or more limited partners whose liability is depending upon their contribution to thepartnership. A Lawyer or Accountant should be consulted before forming one of these.

Create a Partnership

Incorporation

A corporation is a legal entity that has its own personality which is distinct from its owners and the individuals who manage and run its affairs and business. The creation of a corporation occurs following the proper filing of Articles of Incorporation with the relevant government or authority. Every corporation is comprised of shareholders, directors and officers. There are many reasons why you should consider incorporating your business, such as:

• Theoretically, in an incorporated business, the shareholders have very limited liability for the debts, obligations and acts of the corporation and other shareholders. Liability is usually limited to the amount they have invested.
• A corporation is not dependent on the life of its shareholders, directors and officers and will not be affected by changes in its members since the corporation is considered a different person.
• A corporation may offer greater potential sources of capital than other business forms. Corporations can issue shares to raise capital, which attracts investors.
• Incorporating your business can mean lower income tax rates and carrying forward losses of previous years to offset profits in subsequent years.
• A corporation can own property, carry on business, incur liabilities, sue and be sued
• Raising money is usually easier and some suppliers prefer to deal with corporations
• Incorporation will help your business gain credibility and prestige.
• Some suppliers prefer to deal with corporations rather than sole proprietors
• A corporation can own property

Incorporating your business can also have some disadvantages:

• The initial start up cost is expensive compared with other business models
• A corporation is required to maintain records, hold meetings, elect directors and provide shareholders with certain information.
• Income generated by a corporation is taxed at both a corporate level and a shareholder level.
• Selling ones interest in a corporation may be difficult and require consent of the Board of Directors

Create an Incorporation