Deciding On A Business Structure

Business Structures

 

An important part of the business process is to determine what type of business organization best suits your needs. The most common business structures include: sole proprietorship, a partnership, or incorporation. The following provides a brief overview of each type of organization and their respective advantages and disadvantages.

 

Sole Proprietorship

 

A sole proprietorship is a form of business organization that only has one owner. As a sole proprietor you are fully responsible for the debts and obligations of your business. Conversely, as a sole proprietor all profits after tax accrue to you and you alone.

Advantages

 

  • Low start-up costs.

  • Lowest amount of regulatory oversight.

  • Ability to make quick and independent business decisions.

  • You enjoy all the profits of the business.

  • Possible tax advantages if your business does not do well.

 

Disadvantages

 

  • Unlimited personal liability

  • Responsible for all aspects of the business

  • Possible tax disadvantages as business income is taxed at your personal rate.

  • Limited access to capital.

 

Partnerships

 

Partnerships are a form of business organization where the business has two or more owners who bear the legal responsibilities of the business and share in its profits. Note that any persons carrying on business with a view of profit can be considered a partnership, even if they have not entered into a formal partnership agreement.  However, given the nature of shared benefits and responsibilities in a partnership, it is important to draw up specific partnership agreements which detail the expectations and obligations of the partners.

 

General Partnerships

 

  • If a partnership is not also a “limited partnership” or a “limited liability partnership” under the Partnership Act, then it can simply be described as a “general partnership”.

 

Advantages

 

  • Start-up is relatively simple and the costs can be shared amongst the partners.

  • All partners share in the profits and decision making of the business.

 

Disadvantages

 

  • Unlimited liability placing personal assets at risk.

  • Financial responsibility for your partners actions (related to the business).

  • Shared rights and powers can give rise to conflict between partners.

 

Limited Partnerships

 

Definition

 

Unlike a general partnership where all partners have unlimited liability for debts and obligations of the partnership, in a limited partnership one or more partners (“general partner(s)”) are tasked with running the business of the partnership and have unlimited liability for its debts and obligations, while the other partner(s) (“limited partner(s)”) are not permitted to participate in the running of the business of the partnership, but have limited liability for its debts and obligations. We say that the limited partners have “limited liability” because only the money or assets that they contributed to the partnership is at risk, as they do not have any personal liability for the partnership (unless they have participated in the running of the business of the partnership).

 

Significance

 

A limited partnership is typically used when one or more partners wish to invest passively and are willing to give up their right to participate in the running of the business of the partnership, in exchange for limited liability.  Meanwhile, the general partner(s) will typically have the same power and rights as would be expected in an ordinary partnership. Note that a limited partnership can only be formed by filing a certificate of limited partnership with the BC Corporate Registry, in accordance with the Partnership Act.

Joint Ventures

 

A joint venture is a structure where multiple business entities (sole proprietorships, partnerships, corporations, etc) work together for a common business purpose, typically aimed at a specific project or task. This can take the form of a partnership, along with its benefits and obligations, or it can be an equity joint venture where a separate entity is incorporated and each party holds shares in the newly formed corporation, or it can be a contractual relationship.

 

Corporation

 

A corporation is a form of business organization that creates a separate legal entity from its owners, also known as shareholders. The defining feature of a corporation is that its debts and obligations are the responsibility of the corporation itself; not of its shareholders. Contracts and agreements are signed in the name of the corporation. This provides a significant degree of protection against exposing personal assets of shareholders to risk.

Advantages

 

  • Separate legal entity / Limited liability

  • Easier to raise capital

  • Transferable ownership through shares

  • Continuous existence (example: in the event of the owner’s death the corporation lives on)

  • Potential tax benefits

 

Disadvantages

 

  • Corporations are subject to greater regulation

  • Creation and maintenance of a corporation involves additional expenses

  • Dissolution of a corporation can be complicated

  • Increased bureaucracy (example: Record keeping, director / shareholder meetings, annual
    documentation)

 

Provincial or Federal?

 

Corporations can be incorporated at either the provincial or federal level. In deciding whether to incorporate federally or provincially, consider:

 

  • Federal incorporation gives you the right to use your corporate name throughout Canada, whereas incorporation in a province only ensures the right to use the corporate name in that province.

  • Federal corporations may have more cumbersome and expensive incorporation and reporting requirements than British Columbia corporations.

 

Both federal and provincial incorporations can carry on business throughout Canada, provided that they first register in teach province in which they wish to carry on business. In the case of a provincial corporation, it may need to carry on business under an assumed name in other provinces, if another corporation with the same or a similar name is already registered in the relevant province.

Contact Us to learn more about structuring your business.