Are you an aspiring entrepreneur unsure which business structure is right for you? It’s important to consider all the options available before registering your business.
From a legal perspective, there are three common types of business structures. Each has different implications for liability, taxation, and succession. These are sole proprietorship, partnership, and corporation. With our help, you’ll determine which structure would work best for your business and get started on the right track.
Business Structure #1: Sole Proprietorship
Starting a sole proprietorship is the simplest way to set up a business. As a sole proprietor, you’re classified as self-employed. This means that you’re fully responsible for all debts and obligations related to your business.
For example, should a creditor file a claim against your business, they’ll have a right against your assets, whether business or personal. This is known as unlimited liability.
In a sole proprietorship, you would perform all the functions required for the successful operation of the business, including:
- Securing capital
- Establishing and operating the business
- Assuming all risks
- Accepting all profits and losses
Advantages
- Low start-up costs
- Greatest freedom from regulation
- Owner in direct control of decision-making
- Minimal working capital required
- Owner receives tax advantages
- Owner receives all profits
Disadvantages
- Unlimited liability
- Lack of continuity in business organization in the absence of an owner
- Difficulty raising capital
- No name protection
Business Structure #2: General Partnership
A general partnership is when two or more owners establish a business together. You and your partner(s) would share the management responsibilities in this structure. Each partner would be personally liable for all debts and obligations incurred. This means that each partner is responsible for and must assume the consequences of the actions of the other partner(s).
A partnership agreement should be created to establish terms and provide protection in the event of a disagreement or dissolution.
Advantages
- Ease of formation
- Low start-up costs
- Additional sources of investment capital
- Possible tax advantages
- Limited regulation
- Broader management base
Disadvantages
- Unlimited liability
- Divided authority
- Difficulty raising additional capital
- Hard to find suitable partners
- Possible development of conflict between partners
- Partners can legally bind each other without prior approval
- Lack of continuity
- No name protection
Business Structure #3: Incorporation
A corporation, or a limited company, is a legal entity separate from its members or shareholders. Companies in BC are incorporated according to the provisions of the Business Corporations Act.
When a company is incorporated, it acquires the powers of an individual, an independent existence. This is separate and distinct from its shareholders, with an unlimited life expectancy. An incorporated company can acquire assets, go into debt, enter into contracts, sue, or be sued. Ownership interests are usually easily exchanged, and shares may be transferred without affecting the corporation’s existence or operation.
Provincial or Federal Incorporation
You have the option to incorporate at a provincial or federal level. Provincial incorporations may be preferred if you intend to conduct business in only one province. If you wish to expand outside the province later, you must obtain an extra-provincial license from every province you want to operate in.
You should consider federal incorporation if you want to conduct business in more than one province or outside the country. Federal incorporation also offers heightened name protection under the Canada Business Corporation Act. This means that the corporate name has a protected status second only to trademark protection.
Advantages
- Limited liability
- Possible tax advantage if you qualify for a small business tax rate
- Specialized management
- Ownership is transferable
- Continuous existence
- Separate legal entity
- Easier to raise capital
- Name protection
Disadvantages
- Closely regulated
- The most expensive form of business to organize
- Charter restrictions
- Extensive record keeping necessary
- Possible double taxation of profits
- Shareholders or directors may be held legally responsible in certain circumstances
- Personal guarantees undermine limited liability advantages
Still Unsure?
Need help determining which business structure is right for you? Make sure to download Small Business BC’s Business Structure Information Sheet.
Or, take SBBC’s How to Choose the Right Business Structure e-course for a more in-depth look at your options. Our e-courses are available for one year after registering, so you can learn at your own pace.
How Small Business BC Can Help Your Business
SBBC is a non-profit resource centre for BC-based small businesses. Whatever your idea of success is, we’re here to provide holistic support and resources at every step of the journey. Check out our range of business webinars, on-demand E-Learning Education, our Talk to an Expert Advisories, or browse our business articles.
