How to pick a business structure that works
  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.
 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.
 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.
  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.
 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.
 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.
  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.
 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.
 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.
 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.
 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.
  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.
 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.
 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.
 There are the same risks of being sued personally as with a sole proprietorship.
 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.
 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.
 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.
 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.
  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.
 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.
 Published August 31, 1998
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