| How to pick
a business structure that works |
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| To run a business, you have to chose a legal structure .
It's a decision that affects all kinds of things you do, including banking,
paying taxes and obtaining licenses. |
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| The three most common business forms are a sole
proprietorship, partnerships and corporations although there are other options,
such as trusts, joint ventures and limited partnerships. |
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| You should weigh a number of factors when considering how to
structure your business or to change its structure. These include the amount of
money you plan to make, the amount of risk you can bear, and the type of
business you are plan to run. |
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| Sole proprietorship. This is simply you: You own your
business outright in your name. You can operate it under your own name or make
up one and register it with the province you plan to do run it in. |
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| Find out where to register by calling a provincial government
information line or your local member of Parliament. If you have not already
registered the name, someone else may already have laid claim to it and you
will not be able to use it. There is a small fee for this government
service. |
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| As a sole proprietor, your business income is regarded as
your personal income. It will be reported on your tax return and you will pay
tax based on personal tax rates. If you have a loss from your business it can
be used to reduce other taxable income. |
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| Among the advantages, this type of business is very simple
to start. Your banking arrangements would consist of a separate account - to
keep your records straight - in the name of your company. |
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| The major disadvantage is legal liability for any debts or
expenses incurred. It is important to have adequate insurance protection in
case you cause harm to someone and they sue you. See your general insurance
agent for this type of coverage. |
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| While circumstances vary, the general rule in Canada is that
this structure works well if your taxable income is less than about $60,000 a
year and your business does not carry a significant risk of being sued. |
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| Partnership. This is essentially a group of sole
proprietors coming together under one name to practice their business. Each
partnership is able to have a unique structure. Partners can take different
shares of the profits or losses. Some can contribute money to run the business
while others do not - it depends on the agreement. |
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| As with a sole proprietorship, each partner is liable for all
the obligations of the business. You should never enter into a partnership
without a legal agreement, which is usually called a partnership
agreement. |
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| It will put in writing the terms and conditions related to
the partnership, including who can sign cheques, who can buy assets and who can
commit to liabilities. |
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| There's another parallel with a sole proprietorship: income
attributed to each partner is treated as personal income and tax is paid based
on personal tax rates. |
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| Banks usually require all partners to be responsible for any
loans. So if a partner has no assets, you will end up paying for any
deficiency. |
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| There are the same risks of being sued personally as with a
sole proprietorship. |
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| Incorporation. A corporation is a separate legal
entity. You need to fill out the appropriate documents and pay fees to your
province to obtain a provincial corporation - or to the federal government to
get a federal one. |
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| As a separate legal entity, a corporation must file corporate
tax returns based on the income generated by the business. Bank accounts will
be set up in the name of the corporation. |
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| One advantage is that as a shareholder, you cannot usually be
sued for actions of the company. A corporation requires officers, a president,
a secretary and directors, who are responsible to the shareholders. |
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| In most cases, you as the owner would be appointed a director
by the shareholders and would assume the title of president. Officers and
directors have major responsibilities and can be sued if they do not carry out
these duties in an effective manner. |
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| In Canada if you earn more than $60,000, you should probably
consider incorporating because your combined individual and corporate tax rate
could be lower. Money earned can only come to you as salary or dividends, which
are taxable as personal income. |
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| Always consult with your accountant before making any
decisions on the legal structure to use. Once you have figured it out, your
lawyer should put it in place. |
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| Published August 31, 1998 |
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