Business Structures
The three main legal structures in Canada for carrying on business are sole proprietorships, partnerships and corporations. Knowing which one is best for you is not always easy.
Sole Proprietorships
A sole proprietorship is the simplest form of business structure. In a sole proprietorship there is only one individual, known as a sole proprietor, who owns the business. All of the assets, debts, obligations and liabilities of the business belong to the sole proprietor which means the sole proprietor has unlimited liability exposure.
Some of the advantages of sole proprietorships (as compared to corporations) include:
- lower start-up costs
- lower accounting costs
- fewer regulatory requirements
- better tax treatment (sometimes)
Some of the disadvantages of sole proprietorships (as compared to corporations) include:
- greater liability exposure (unlimited personal liability)
- worse tax treatment (sometimes)
Partnerships
A partnership is a legal relationship between two or more persons who carry on business in common with the intention of earning a profit.
A partnership is not a separate legal entity. All of the assets, debts, obligations and liabilities of the partnership’s business belong to the partners collectively which means the partners have unlimited liability exposure unless a limited partnership or limited liability partnership is created.
Some of the advantages of a partnership (as compared to a corporation) include:
- lower start-up costs
- lower accounting costs
- better tax treatment (sometimes)
- fewer regulatory requirements
Some disadvantages of partnerships (as compared to corporations) include:
- greater liability exposure (unlimited personal liability)
- worse tax treatment (sometimes)
If you’re looking at starting a partnership in British Columbia then you should also look at limited partnerships and limited liability partnerships which are not discussed here.
Corporations
A corporation is a legal entity that is separate and apart from its owners (called shareholders). The shareholders own the corporation but it is the corporation that owns and carries on the business. This means that all of the assets, debts, obligations and liabilities of the business belong to the corporation (not the shareholders personally).
Some of the advantages of corporations include:
- limited liability
- better tax treatment (sometimes)
- continued existence
- enhanced image and credibility
Some of the disadvantages of corporations include:
- higher start-up costs
- higher accounting costs
- greater regulatory requirements
Why do people incorporate? Taxes and liability are the most common reasons why people decide to incorporate small businesses.
If you’re thinking about incorporating for tax reasons you should get advice from a tax advisor, e.g. an accountant with a tax background, to ensure incorporating makes sense for you at this time.
If you’re thinking about incorporating to limit your personal liability then you need to understand that incorporating will not protect you from all types of liability. You are always liable for your own wrongful acts and omissions (e.g. negligence and fraud). The directors and officers of a corporation may also be exposed to other types of liability imposed by law. If you are incorporating for liability reasons you should talk to a lawyer to get legal advice to better understand your liability exposure. We also recommend that you speak to an insurance advisor about the different types of insurance coverage that may be available to protect you against personal liabilities.