Whether you already own your business, are thinking of starting a business from scratch, or buying an existing business, choosing the right business structure can have a major impact on the future success of your enterprise – as well as your personal tax and estate planning.
Your decision should take into account a range of factors, including the nature of your business and where it’s located, the number of people involved, taxation considerations, your potential exposure to liability and the company’s financial requirements.
Sole proprietorships: A sole proprietorship is the simplest form of business organization and is often the most inexpensive to set up. For small enterprises you, as the business owner, have direct control over business decisions and receive all the profits. However, you are legally responsible for the debts and obligations of the business. This means that both your business and personal assets may be subject to the claims of creditors.
If you operate a sole proprietorship, you must file a personal tax return to report your business income. You would include the income, or losses, from your business on your personal tax return as part of your overall income for the year. Your net business income is taxed as personal income so there are limited tax-planning opportunities.
Partnerships: These can be relatively easy to set up and often have low start-up costs. A key advantage of having partners is that they generally bring additional sources of investment capital and provide a broader management base, but finding suitable partners can be a challenge.
This kind of business structure can also mean a division of authority and/or conflict between partners. A written partnership agreement can help minimize potential conflict.
In many cases, it sets out the terms of business, protects the interests of individual partners in the event of disagreement or dissolution of the business and generally defines how the partners will share the business profits.
If you are considering investing in a partnership, you should also review the tax and legal implications carefully with your advisor.
Instead of your partnership paying tax on its income and filing a partnership tax return, the partnership’s income and/or loss will flow through to the individual partners who then report their share of the partnership’s net income or loss on their personal tax returns.
Corporations: These are a very popular business structure. A corporation is a separate legal entity from its shareholders, but has all the legal characteristics of an individual. It can own property, incur legal liability, lend, borrow and carry on business. Corporations also file an annual corporate tax return.
If you’re thinking of starting or investing in a corporation, there can be a number of advantages. It can provide greater business continuity as shares can be bought and sold without affecting the company’s continued operation. It is also easier to raise investment capital for a corporation and you may find that the size and resources of an incorporated business make it easier to attract specialized management expertise.
In addition, as an owner-manager and a shareholder, your liability is generally limited to your shareholding so your personal assets are protected from the company’s creditors unless you have provided personal guarantees for loans to the corporation.
Kirbey Lockhart is an investment advisor with RBC Dominion Securities. This article is provided for information purposes only. Consult with a professional advisor before implementing a strategy.