Congratulations! You’ve decided to start your own business. One of the first major decisions you’ll need to make is what type of business organization to use for the business: sole proprietorship, general partnership, or corporation. To help you decide, here’s a brief overview of the advantages and disadvantages of each structure.
1. Sole Proprietorship
A sole proprietorship is:
- an unincorporated business
- owned by one person
The government considers the owner and business as one and the same legal entity. All revenues and expenses belong to the owner and all profit and loss must be reported on the owner’s personal income tax return.
- Generally the simplest and easiest to set up with minimal start-up requirements.
- As the sole owner, you are in direct control of all decision making.
- Possible difficulty in raising capital for your business.
- As a sole proprietor, you are fully responsible for all debts and obligations related to your business. A creditor with a claim against a sole proprietor would normally have a right against all of the owners’ assets, whether business or personal. This is known as unlimited liability.
A sole proprietor is not required to register the business name under the Provincial Business Names Act, if you are operating your business in your exact legal name, for example, John Smith. However, if you choose to conduct your business under a name other than your exact legal name, for example, John Smith Consulting, you must register with the provincial Ministry of Government Services. You can register online at www.serviceontario.ca.
2. General Partnership
A general partnership:
- is an agreement between two or more people
- the partners combine their resources in a business with a goal of making a profit
All partners share in the management of the business and each is personally liable for all debts and obligations of the business. This means that each partner is responsible for and must assume all consequences of the action of the other partner(s).
- Relatively easy to set up.
- Similar to sole proprietorships, start up costs are low.
- Because there is more than one person bringing investment into the business, the additional sources of financial support are a bonus.
- Also, with more than one person bringing professional and technical resources, the management base is broader.
- Unlimited liability for all partners.
- Possible lack of continuity in the absence of one of the partners.
- Capital divided authority. This is the right of each partner to use business resources (money and/or credit) without the authority of the other.
- In addition, there is always the risk of conflict between partners.
In order to establish the terms of the business and to protect the partners in the event of disagreement or business termination, a partnership agreement should be drawn up, usually with the help of a lawyer.
Similar to a sole proprietorship, the business name must be registered with the provincial Ministry of Government Services. This can be completed online at www.serviceontario.ca
A corporation is:
- a separate legal entity that can enter into contracts and own property separately and distinctly from its owners who are the shareholders.
- Corporate name protection and some tax advantages when filing the corporate tax return.
- The shareholders of the corporation have limited liability for the debts, obligations or acts of the corporation.
- Registration fees or filing fees of a corporation are more costly than a sole proprietorship or general partnership.
- There is more paperwork in operating a corporation.
- As well, in some instances, directors and officers can be liable for their involvement with the corporation.
A corporation can be formed at either the provincial or federal level. At the provincial level, the corporation will be located in the Province of Ontario, however can sell worldwide. Incorporating at the federal level means the corporation will have locations in more than one province and can sell worldwide.
We invite you to make an appointment with a business consultant in our Halton Small Business Centre. We’ll do our best to answer your questions about business ownership. And if we aren’t able to answer all of your questions, we’ll connect you with a local lawyer and accountant, through our “Access to Professionals” program. This volunteer program provides you with the opportunity to have your specific concerns addressed by a professional at no cost to you. It’s just another way that Halton’s Small Business Centre supports you and your business. Learn more at www.halton.ca/business. We look forward to hearing from you!