Business Ownership Structures
When venturing into a new business, entrepreneurs have a ton of decisions to make. They are formulating their business plans, studying the markets, and much more. One of the first and most important decisions to make when founding a business is which legal form the business will take. This decision will lay the foundation of your business and dictate other important steps in the process such as securing funding and financing and tax planning. The type of business structure will also determine the company’s legal responsibilities for registration and maintenance.
Before incorporating or registering a business, it is important that the owners take a close look at the advantages and disadvantages of each structure and how their characteristics fit with their business goals.
The three main business entity types are the following:
● This is the simplest type of the business structure. It is not incorporated, but instead is owned by only one individual.
● The owner of a sole proprietorship makes all the decisions for the business. He or she also benefits from all of the profits and is personally responsible for all of the losses. The individual has no separate legal status from the business, and that can put his or her personal property and assets at risk.
● Sole proprietors pay personal income tax on the net income generated by the business and pay taxes on business income.
● A partnership forms as a relationship between two or more individuals or other entities that partner up to pursue a business venture.
● Each partner contributes cash, labor, skills, or other types of property to the partnership. Each partner is, in turn, entitled to a share of the profits or losses of the business proportionally with their contributions.
● The form of distribution of profit and losses is usually set up in a partnership agreement.
● The partnership itself does not have tax liabilities nor does it file annual tax returns (though it is required to file a partnership information return with the Canada Revenue Agency). However, each partner includes a share of the partnership income or loss on his or her own tax return.
● A corporation is a legal entity separate from its shareholders.
● It is the form mostly utilized for raising of capital from third-party investors.
● Shareholders fund the corporation by transferring cash, property, or services in exchange for shares. Shares reflect the percentage of the corporation that each shareholder owns.
● The corporation is set up by filing articles of incorporation with the appropriate level of government.
● Shareholders benefit from limited liability in that their maximum loss is the amount they invested into the corporation. A corporation is an excellent way to manage risk when starting a new business venture.
An experienced business lawyer will be able to assist you throughout the process and guide you on the legal issues new business ventures need to keep in mind. If you have any questions about electing the business structure that best fits your business goals or about the formation and registration process, feel free to visit us online at Beganyi Professional Corporation or call us at 647-977-7749 to schedule an initial consultation.