In our last post we left you with an overview of some of the factors to consider when you set up your business, and now we want to give you some key considerations to contemplate for each so that you are prepared (not overwhelmed) when you decide how you want to proceed. Let’s start off by providing an overview of three of the most common business structures, as well as some advantages and disadvantages of each type.
First, we will look at Sole Proprietorships. This type of structure is best suited for a business that you will be operating on your own. This is often what new businesses will start with, as it allows you to have a name for your business while you grow. Overall, this structure is considered a simpler and less expensive option at first for a new business in which all profits will be going to you directly. On the surface this is great, but if we look a little deeper this also means that you are personally liable for all debts incurred by the business and all its obligations to suppliers or third parties falls on your shoulders. Upfront the minimal cost seems appealing, but as tax season rolls around you may find that your tax rate is not as advantageous as it may be if you were to incorporate. As a result, it is important that you are ready for this responsibility.
As indicated by the name, this structure is what you may use when you are going into business with one or more other people. Under a Partnership, the partners will often split the profits of the business equally but that’s not always how liability is handled. Depending on how you document your Partnership (or fail to), one partner could solely be responsible for the liabilities of the whole business. This structure is useful in that responsibilities of starting a business are shared, however the partners will want to consider how exactly to manage expectations– such as workloads, liabilities and responsibilities. The most common way to manage and document a Partnership is to have a Partnership Agreement, and we will touch base more on this later in the series.
Unlike Sole Proprietorship or Partnerships, a Corporation is considered to be a separate legal entity with the liability of the shareholders being limited to the shares they hold. What does this mean? The individuals or entities that hold shares in the Corporation, called shareholders, are generally not responsible for the debts of the corporation. These shareholders appoint directors and/or officers to make decisions and sign on behalf of the corporation, so choosing the right people for these roles is crucial. The downside of incorporating is the upfront costs and the ongoing reporting requirements for both legal and accounting upkeep. However, the most common advantage noted when considering this structure are the tax planning opportunities, which is why working with a team of advisors- including your lawyer and accountant- gives you the best chance of having the Corporation set up correctly in order to make use of those opportunities.
We hope this has given you a bit more insight on where to start. If you are weighing the options and would like more advice, the Entrust Team would be happy to talk through any additional questions you may have.
As we gear up for the holiday season, we will pause our business series until the new year. Be sure to ‘Subscribe’ by clicking on the “Subscribe” button above and when we return, we will delve into what’s involved in choosing a name for your business.
From everyone on the Entrust Team we want to wish you and yours a very Safe & Happy Holiday Season.
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The information provided in this blog is meant to be just that, information. This information is not intended to replace the advice of a lawyer or to address the law as it pertains to your situation specifically. Be sure to contact a legal professional should you have any questions or concerns.
Photo Credit: Evgeni Taherkasski