Tuesday June 2nd, 2015
Often overlooked or disregarded when deciding to start or alter a business, it is important to ponder seriously, and to determine what business structure or form of organization best suits your needs – both for the immediate, and the more distant future as circumstances permit. While the structure of your business will depend in large part on whether you want to run your business yourself, or with a partner, or associates, there are a number of other considerations that should be respected. Given the complexities and the conditions associated with each, the Cornwall & The Counties Community Futures Development Corporation (CFDC) encourages you to conduct some due diligence by reviewing publicly available information; ideally consulting a trusted business advisor such as a lawyer or CPA (Chartered Professional Accountant).
In Canada, there are essentially four (4) types of business structures – sole proprietorships, partnerships, corporations, and cooperatives.
Sole proprietorships are regarded as the most straightforward way to set up a business, typically having fewer start-up costs and less paperwork, more direct control, and minimal need for working capital in most instances. It also means however that as sole proprietor, you are personally responsible (liable) for the debts and obligations related to your business activities.
As a proprietorship, an individual is in a position of unlimited liability, which means that should debt arise, creditors have the right to claim against all of your business and personal assets. This occurs because a sole proprietorship is essentially an extension of its owner and is not viewed as a separate legal entity from its owner.
More complex than a sole proprietorship, a partnership is simply a business arrangement between two or more parties. Often pursued by individuals wanting to carry on a business with a partner but not wanting to incorporate, financial resources of the partners are combined and devoted to the business. It is recommended that an agreement or contract be drawn up between the parties so as to establish terms, including the sharing of profits. Effective in outlining common understanding between the parties, an agreement also serves highly effective in the event of disagreement or dissolution. More clearly said, a partnership agreement protects your interests, specifies the terms of the partnership with regard to issues like profit sharing, and promotes compliance with possible legal requirements of the jurisdiction.
Like a sole proprietorship, a partnership is not a separate legal entity from its owners.
Relatively common, partnerships take the form of general (partners share management, control, and legal liability) or limited (partners have varying management, control, and financial rights and obligations as contractually outlined at the outset).
A Corporation (incorporated at the federal or provincial/territorial level) is a business structure that is a separate legal entity from its owners or shareholders. No personal liability for the debts or obligations of the company are assumed by, or accrue to, the owners (general shareholders) with liability remaining limited to the value of their investments with certain caveats for directors and officers of the corporation.
Given that a corporation is a separate legal entity having its distinct existence unrelated to the lives of its owners or shareholders, a corporation has the potential for more of a continuous or infinite existence than a sole proprietorship or a partnership.
More complex than sole proprietorships and partnerships, corporations can typically be incorporated at the provincial or federal level and can be private(shares or securities are not sold to the public) or public (shares or securities are listed and sold to the public in compliance with applicable securities regulation).
A cooperative is a business structure where an association of members with similar needs have pooled their resources and organized to create a business structure through which they can either obtain or share certain products or services.
In a cooperative, membership is voluntary and members hold equal democratic say, or influence, in the running of the business. A cooperative returns limited interest on investment and distributes its profits to members in relation to the extent of their patronage.
Below, are the more salient advantages and disadvantages commonly cited for each form of business structure.
It is highly recommended that appropriate professional counsel be consulted for the purpose of understanding, properly structuring, registering, and managing your business. Note also that the appropriateness of any form of business or corporate structure can vary with changing circumstances.