Starting a Business: Your Business Structure

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The structure of your business will play an essential role in determining your responsibilities as the business owner. Your business structure will depend on what type of financing you’ve secured, your risk for liability claims, and a wide variety of other factors. There are three types of business structure we will look at sole proprietorship, partnership, and corporation.

Sole proprietorships are exactly what they sound like; the business is owned by you, and you alone. While these businesses may operate on a different name than yours, there is no separate legal existence between you and the business; you are the business. The main advantage of this structure is its low cost to set up; because you and the business are not separate legal entities, you don’t even have to register the business name so long as your name appears in the business name (for example, John Doe’s Food Emporium). Due to the simple nature of such an arrangement, there are no administrative costs associated with this particular structure. You can also write off business expenses against your own income. The main concern is that you are liable for all of your business debts; if your business is being sued, you are being sued. In addition, these businesses are taxed at personal rates, which often means higher taxes than a corporation would see.

Partnerships are similar to sole proprietorships, but there are two or more partners running the business. The advantages are quite similar; low cost to set up, low to no administrative costs and the ability to write off business expenses against the income of the partners. Compared to a sole proprietorship, you’re also likely to have more startup cash because all the partners should be invested in the company. The disadvantages, including liability, are similar, but there are other problems that come with partnerships; should disagreements that can’t be resolved occur, or should one of the partners die, the partnership is dissolved. A partnership agreement is key to the success of such an arrangement; consult a small business lawyer to design the agreement. FindLaw maintains a list of small business lawyers in Manitoba.

Corporation is the most complex way of structuring your business, but it does come with significant advantages. When your business is a corporation, it limits your personal liability for damages and money owed by your business Tax rates for corporations tend to be much lower than the personal tax rate, and there are other tax advantages Compass Accounting can help you find. The disadvantage to this structure is its complexity; they are expensive to set up, and ongoing administration must be done diligently, which carries its own costs.

The type of product or service you sell, your cash flow, and how attractive you want to be to potential investors will all affect the type of structure you should use for your business. When you’re not sure about how you should structure, don’t hesitate to speak to accountants, lawyers and other professionals to guide you; it’s an important decision.