Identify your business structure

Written by Admin | Oct 13, 2023 9:12:36 PM

As an entrepreneur, you have the opportunity to structure your business in a way that benefits your organization now and into the future. Whatever structure you choose shapes many aspects of your business, from applications for loans, grants and financing to ownership, taxes and day-to-day control.

Which option is the best fit for you now? How about the future?

Sole proprietorship

If you select a sole proprietorship, that means you’re the only person responsible for the business. Your business activity is reported on your personal income tax return and uses your personal credit score for lending. All net profits will be taxed at your personal marginal tax rate.
It’s a straightforward option for many entrepreneurs. However, because there is no legal distinction between you and your business, it places unlimited legal and financial liability to you personally for your organization’s activities, debts and expenses.

Advantages of sole proprietorship	Disadvantages of sole proprietorship
Simplest startup option Low costs to start Owner is in control of all aspects of the business Possibility of tax benefits (joint assets/shared expenses)	Owner holds all liability with limited protections (dependant on insurance) Owner holds all management and day-to-day operational responsibilities Trade name could be incorporated by another business Potential difficulty raising investment capital Possible higher tax rates, depending on how quickly your business grows Not building business credit

Partnership

If you choose a partnership, you’re combining your financial resources with one or more additional owners to run your business. You’ll need a partnership agreement, outlining how decisions are made, how business is conducted, and how profits and losses are shared. Partnerships are relatively straightforward to set up and can limit liability in certain circumstances but have the potential to get complicated when allocating income.

Variations of partnerships include joint ventures, contractual relationships and branches. Go over your options with a business lawyer and discover which type of partnership is right for you and your co-owners.

Advantages of partnership	Disadvantages of partnership
Shared business structure and responsibilities Low costs to start Potential for higher capital investment with more owners Limited obligations after business registration	Owners hold shared liability for other partner’s actions, business losses and debts No security or ownership of trade name Future complications with selling the business and succession planning

Incorporation

If you make your business a corporation, it will be an independent legal entity created under provincial or federal laws. Corporations are owned by individual shareholders and governed by their articles of incorporation (formal documents filed with a government body to legally document the creation of a corporation) and potentially unanimous shareholder agreements (arrangement among shareholders outlining their obligations, privileges and protections).

Your business taxes would be filed separately from your personal taxes. As a corporation, your business would be an independent legal entity, which would limit your legal liabilities. However, incorporation doesn’t necessarily mean you couldn’t experience legal action against you personally. For example, if you’re a mechanic and you incorrectly repair a vehicle, the customer may be able to sue you as the individual who worked on their car—in addition to your company.

Setup and compliance costs are larger for incorporated entities than for sole proprietorships. If you incorporate your business, you can choose how you’d like to be paid as an owner, either through a predetermined salary or dividends. Talk with a tax professional about the best way to pay yourself, especially if you’re hoping to get a personal line of credit or mortgage. A consistent stream of paycheques demonstrates to lenders that you have a stable and secure income.

Your industry and location will inform whether you incorporate provincially versus federally. Provincial incorporations will allow your business name to be protected but only within the province you registered while coast-to-coast protection comes with federal incorporation. If you’re incorporating federally, you will still need to register your corporation provincially.

Talk with tax and legal professionals about the right time to incorporate. Here are some decision-making factors you can work through together:

Startup grants and support services for small businesses are often only available for the first year of incorporation.
Future growth and financing opportunities may be hindered as corporations are treated as completely separate entities.
Your business’ credit will be net new, allowing you to build over time. However, building corporate credit is not the same as building personal credit. Talk with a business advisor about your growth plans and how your corporate credit will be affected.

Discuss options for incorporation with your accounting team and if incorporating earlier will allow you to prepare your corporate credit for lending.

Advantages of incorporation	Disadvantages of incorporation
Shared business structure and responsibilities between shareholders Potential for higher initial capital investment with more owners Limited obligations after business registration	Owners hold shared liability for other partner’s actions, business losses and debts Higher costs to start

The right structure at the right time

Whether you’re starting small or building big, finding the right structure at the right time for your startup is possible. From tax experts to legal professionals and business advisors, there are plenty of resources to help you make the right decision. Legal implications will vary from industry to industry, so we recommend consulting a lawyer to understand the advantages of your unique situation.

Once you identify the best option, dive deep into market research. If you’re looking for more ways to grow your business knowledge and network, subscribe to ATB’s Entrepreneur Centre newsletter—be the first to know about the latest updates, news and events for Albertan small business owners.

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