Business Law for the Entrepreneur – Part 1
If you are thinking of starting a new business, or buying an existing business, and you do not know where to start, you are not alone. The business world can be a frightening place, especially when first starting out. There are a number of issues that need to be dealt, which can seem extremely overwhelming.
Over the coming months, this “Business Law for the Entrepreneur” blog series will take you through these issues, one by one, and provide some clarity to what is important, from the legal perspective, when starting a business venture.
As the first post of this series, it makes sense to address one of the first issues you might encounter. When buying or starting a business, the first decision to be made is what form of business ownership is appropriate for you.
Both federally, and provincially, there are various forms of ownership, the most common three are:
1. Sole Proprietorship – A sole proprietorship is the most basic form of business organization, is
relatively inexpensive to set up and requires few legal procedures. It exists
when an individual carries on business for his or her own account without
the participation of other individuals.
- Advantages: All benefits flowing from the business, such as income and assets, accrue exclusively to the sole proprietor. This business structure is very inexpensive to set up.
- Disadvantages: The foremost disadvantage of a sole proprietorships is that there is no limited liability. All obligations including losses, and liabilities associated with the business are the sole proprietor’s responsibility. This means that all of the sole proprietor’s business and personal assets may be seized in satisfaction of the sole proprietor’s business liabilities. In addition to the potential liability exposure, income would be taxable at your personal rate and, if your business is profitable, this may put you in a higher tax bracket.
2. Partnership – When two or more persons, whether individuals or corporations, carry on business together with a view to profit, the relationship is called a partnership, and the members of the partnership are called partners.
- Advantages: A partnership is like a sole proprietorship in that it is relatively inexpensive to set up, there are few legal regulations required to create it, and the partners carry on the business directly themselves. We recommend a Partnership agreement be executed.
- Disadvantages: A disadvantage is that the liability of the partners for the debts of the business is unlimited. Generally, each partner is jointly and severally liable for the partnership’s debts. Personal assets are exposed to creditors to satisfy these debts.
3. Corporation – Incorporating a company is the most common form of ownership. When you incorporate your business, it is considered to be a legal entity that is separate from the shareholders.
- Advantages: As a shareholder of a corporation, you will not be personally liable for the debts, obligations or acts of the corporation. Also, it may be easier to raise capital and there are possible tax advantage as taxes may be lower for an incorporated business.
- Disadvantages: There are significant costs related to the creation of the corporation and ongoing accounting expenses each year. Corporate losses cannot be utilized personally. Therefore, the timing of your incorporation should be discussed with both your lawyer and your accountant.
This is not an exhaustive list, and each ownership is different, with its advantages and disadvantages. It is important when deciding which form of ownership fits your business that you consider all relevant aspects, especially from a tax and financial perspective.
We encourage you to seek out the proper advice to assist you with your new venture. Getting your business started with the appropriate ownership structure will ensure your business starts off with the right form, and grows in the right direction.
If you have any questions about the issues in this blog or any general questions about starting or buying a business, feel free to contact me directly.
STAY TUNED: Up next in this Series: The Major Decision: Shares or Assets?
Disclaimer: This article is provided as an information resource and is not intended to replace advice from a qualified legal professional and should not be relied upon to make decisions. In all cases, contact your legal professional for advice on any matter referenced in this document before making decisions. Any use of this document does not constitute a lawyer-client relationship.