Should My Business Be a Corporation, Partnership or Sole Proprietorship?

Aug 16, 2016

If you’re starting or operating a business, it is important to understand the different types of business structures and what each type means for you as an owner. Operating your own business is an exciting enterprise. The information below combined with the legal advisement of your business lawyer can help ensure that legal complications do not ruin that excitement.

This article will look at three of the most common types of business structures and their advantages and disadvantages.

Types of business structures:

Sole Proprietorship

A sole proprietorship is just one person, you, operating a business without forming a corporation. For tax purposes, you are taxed at personal income tax levels as your income is considered self-employment.

Advantages:
• Low cost to establish
• Tax advantages if the business is not doing well
• Complete control over your company

Disadvantages:
• As a sole proprietor, you’re personally liable for business debts
• Higher tax rate if your business is profitable
• Complete responsibility for your company, including the raising of capital

Partnership

Like a sole proprietorship, a partnership is unincorporated. The primary difference, of course, is that there is two or more parties involved in the business. Like a sole proprietorship, the individual partners are taxed at personal income tax rates.

Advantages:
• Low cost to establish
• Tax advantages if the business is not doing well
• Shared and distributed risk

Disadvantages:
• Unlimited liability: all partners are jointly liable for all debts of the business
• Higher tax rate if your business is profitable
• Business must be operated and decisions must be made jointly

Corporation

When a business is incorporated, it becomes a separate legal entity from you and other shareholders. Forming a corporation can be a complicated process. Your business lawyer’s advice will help guide the step of your incorporation. He or she will help execute incorporation by providing legal and administrative services that give you peace of mind and legal protection.

Advantages:
• Limited liability: owners are not personally liable for debts
• Ownership is transferable
• Easier to raise capital funds 
• Tax advantages, including a lower tax rate

Disadvantages:
• Highest set-up and administrative costs
• Complex business structure, including shareholders and voting shareholders
• More regulations and requirement of annual reports and corporate tax returns

Generally, the more income your business brings in, the more sense it makes to incorporate. You can change your business structure after it begins operating. However, dissolving a corporation can be complicated. It is wise to seek professional advice when determining your business structure. 

The Niagara business lawyers of Chown Cairns business law group represent businesses of all sizes in a wide range of industries. If your business is searching for a new business lawyer or if you are asking the question, “should my business be a corporation”, learn more about our St. Catharines law firms areas of expertise.