We have already discussed the types of business models and tax considerations for self-employed people. Another important decision to be made before starting a business is to choose a business type. There are four types of business structures available in Canada and this post will look at the attributes of each one of them.
A corporation is created as a separate legal entity wherein the business owner is simply a shareholder of the company. Incorporation mitigates the risks involved when running a business. The liability for a business owner is limited and it offers protection of personal assets from creditors.
Related: Setting up a Corporation
Nevertheless, there are drawbacks to this structure: the business owner (and/or directors) could be liable for certain legal obligations such as money owed to the government or if they had signed a personal guarantee to secure a loan for the business startup/operation. In such a scenario, personal assets are also at risk and the corporate veil cannot be used to escape from legal obligations.
Advantages include the ability to transfer the ownership of the corporation to another company/person, some tax advantages, and easier access to financing. However, an incorporated business requires proper record maintenance and reporting due to stringent regulations and the cost of incorporation is higher compared to the other types that follow.
As the name indicates, under this structure, a business owner seeks out another person or more than one person to form a partnership. This partner can be a spouse, relative, friend, colleague, etc. This partner could play an active role in the operation of the business and supplement their capital investment or choose to be a silent partner who simply shares in the profit and loss of the business but does not participate in the management of it. A signed agreement indicating the terms of the partnership serves as the evidence and reminder about the role of each party.
A partnership is easier to start when compared to a corporation and the limited size can overcome the bureaucracy seen in some corporate entities. In addition, there are tax advantages. One of the drawbacks to a partnership structure is the lack of protection for personal assets. The liability is unlimited and the need for a partner who is committed and on board with business decisions cannot be stressed enough.
This type of structure is the simplest to set up as one person is the owner and responsible for all business decisions. Obvious advantages include the freedom to take the business in any path as deemed fit and keep all profits. In addition, the regulatory requirements are relatively minimal and business losses can be deducted from personal income, thereby offering tax benefits. However, as with a partnership, the liability is unlimited and personal assets are not protected from creditors. Also, obtaining financing could become a problem, if personal credit history is not good.
Cooperatives or Co-op
A cooperative is an association formed by people of a community in order to run a business. This type of membership structure is useful because people can use their collective resources and cooperate to fulfill their common needs. Benefits of a co-op structure include limited liability, right to vote for every member, and profit sharing. Nonetheless, as in a partnership, there are chances of conflict between members derailing the co-op. Also, the need for record maintenance and an involvement from members at all times can become cumbersome.
If you run a small business, what structure do you use? Are there other attributes of the above types that are missing from the post?
About the Author: Clark works in Saskatchewan and has been working to build his (DIY) investment portfolio, structured for an early retirement. He loves reading (and using the lessons learned) about personal finance, technology and minimalism. You can read his other articles here.
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