Starting Up:What’s the Right Business Structure?
When you’re starting a business, you need to decide on the right legal form or business structure. In the majority of cases you will choose from three options:
- Sole Proprietorship
- Corporation (limited company)
In a sole proprietorship, the proprietor (owner) owns all the assets and is responsible for all the liabilities of the business. All profits are personal profits of the proprietor and are included in the proprietor’s personal tax return and the business is legally the same as the owner.
A sole proprietorship business structure is the simplest business to start up. All you need is a trade name registration, business licenses and tax numbers. This is also the simplest way to operate as there is less regulation and you remain the only decision maker.
A partnership is similar to a sole proprietorship in that the business is one and the same as the owners. The difference is that assets, liabilities and profits are shared among the partners, according to an agreement.
Because there are two or more partners, there is a lot of potential for disagreements if there is no partnership agreement in this business structure. A partnership agreement will legally set out the important issues involved in running the business such as: how decisions will be made, how profits will be shared and how disputes will be resolved.
Partners are jointly and individually liable for the actions of all partners.
Corporation (Limited Company)
Unlike a sole proprietorship or a partnership, a corporation is a separate legal entity, distinct from its shareholders (owners). It is the corporation that owns the assets and is responsible for any liabilities. With some exceptions, the shareholders have no personal legal liability for the actions of the corporation.
Assets are owned and profits earned by the corporation. Profit flows through to the shareholders by salary, bonuses and/or dividends, depending on the shareholders’ types of shares and personal tax situation.
Other Forms of Business Structure
- General Partnership
- Limited Liability Partnership
- Limited Partnership
- Limited Liability Company (LLC)
- Professional Corporation
- Joint Ventures
If you are in the process of choosing a business structure for your Calgary business, we can help.