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How to Choose A Business Structure

  • October 22, 2014
  • Written by

One of the first and most important decisions you'll make when deciding to start a business is determining what structure to use and whether you need to have it registered provincially and/or federally. There are three main choices that apply in most circumstances (excluding cooperatives and non-profits):

  • Sole Proprietor
  • Partnership
  • Corporation

Their applicability to your situation along with their advantages and disadvantages are discussed below. The information should be used as a guide to help you get started, but should not be considered as a replacement to appropriate legal and accounting advice.

Sole Proprietor:
If you plan to be self-employed and not hire direct employees then this is the simplest route to go. You can operate under your own name or register a business name, obtain any necessary licenses, and you're in business.

This choice is best for businesses that have very little liability, modest income, and require little capital to operate. It's often appropriate for consultants, individual trades people, and freelance creative professionals. However, if you run into legal or financial problems then be aware that your personal assets are at stake.

Partnership:
A partnership is a good business structure if you want to carry on a business with a partner and you do not wish to incorporate your business. With a partnership, you would combine your financial resources with your partner into the business. You can establish the terms of your business with your partner and protect yourself in case of a disagreement or dissolution by drawing up a specific business agreement. As a partner, you would share in the profits of your business according to the terms of your agreement.

You may also be interested in a limited liability partnership in the business. This means that you would not take part in the control or management of the business, but would be liable for debts to a specified extent only.

Corporation:
If you offer a product or service that could end up harming somebody (physically or financially), has large earnings potential, and requires significant capital to operate then it's best to incorporate. A corporation is a separate legal entity apart from yourself and protects your personal assets in the event things go awry. It is more expensive to run a corporation than a sole proprietorship since you may need the assistance of a lawyer to file the initial articles of incorporation and an accountant to process your tax return every year. You can incorporate either provincially or nationally depending on where you plan to do business.

A corporation has many advantages when it comes to saving taxes when revenue exceeds about $75,000 per year. Up until this point, there are not many tax advantages to being incorporated compared to being a sole proprietor or partnership. Assuming you don't have any employees/partners and your business doesn't require a lot capital or liability, then you can always start as a sole proprietor and convert to a corporation later.