When you’re starting a new business, you’ll need to decide how it will be structured. There are three common types of businesses—sole proprietorship, partnership, and corporation—and each comes with its own set of advantages and disadvantages.
Here’s a rundown of what you need to know about each one.
In a sole proprietorship, you’re the sole owner of the business. This type of business is straight-forward and easy to launch and there may be fewer administrative requirements compared to a partnership or corporation.
One of the most significant disadvantages of a sole proprietorship is unlimited personal liability, meaning you are fully responsible for any and all debts and obligations of the business. Creditors can make a claim against any assets in your name—your home, vehicle, investments—and family members could also be liable.
Keep in mind the weight of the company will rest on your shoulders alone, and there could be a lack of continuity for your business if you’re unavailable. It’s also worth noting that it can be difficult to raise capital on your own (but not impossible).
A partnership is a non-incorporated business created between two or more people. It’s fairly easy and inexpensive to form this type of business and start-up costs are usually split equally between partners. A legal agreement should be drawn up to outline how profits will be shared.
Similarly, there’s no legal separation between you and your business. Your personal liability is unlimited, but you’re also financially responsible for any business decisions your partner makes—so if a contract is broken or debts are incurred without your knowledge, you’re still on the hook financially.
While you’ll have a partner (or partners) to help you manage the business, it can be challenging to find the right person or people to work with, and conflicts could create problems for the business. But if the partnership is right, your business could flourish!
A corporation is a legal entity separate from its shareholders. Corporations offer flexible structure and an ability to divide ownership with shares, but that makes them more complex, so it’s always a good idea to speak with a lawyer before incorporating. This type of business may also more expensive to set up than others.
Your business can be incorporated at the provincial/territorial or federal level, but either way, corporations are closely regulated. You’ll need to keep extensive records and file documentation annually with the government.
It’s worth noting that conflicts can occur between shareholders and directors, which could impact the business and your involvement in it.
For what to do after you decide on a business structure, read about what else you need to do before you can register your business.
The ACCES Employment Entrepreneurship Connections program is designed for newcomers who plan to start a business in Canada. If you have owned or operated a business outside Canada, this innovative and informative program could help you use that experience in the Canadian market.