I’m starting a business, which business structure should I use?

I’m starting a business, which business structure should I use?

Financeworks.ca Magazine – March 2012 Edition

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Starting a Business: Deciding on a Business Structure

So, you want to start a business? Whether you are going solo or opening up shop with your buddies, the first thing you need to consider is what kind of business structure is appropriate for your situation.

Sole Proprietorship

If you intend to carry on business alone, you may consider one of the oldest and simplest forms of business organization, a sole proprietorship. It comes into existence whenever an individual starts to carry on a business on his or her own. It is suitable for a business with little or no risk of liability or a proprietor who is starting out with little or no assets.

However, there is no limit on the personal liability of the sole proprietor. The sole proprietor’s personal assets may be liable to seizure in an action against the business. As well, the sole proprietor is exclusively responsible for all torts committed by him or her personally in connection with the business, as well vicariously for torts committed by employees in the course of their employment.

Partnership

A partnership may be considered when there are two or more individuals going into business together. There are different types of partnerships: general, limited and limited liability partnership.

A general partnership is when partners pool assets and share liabilities. This works well for lower-risk ventures where the tax benefits outweigh the risk of personal liability for the debts of the business. The downside is that all partners are jointly and severally liable, which means that each partner is not only personally liable for the losses of the business, but possibly for the wrongful acts of his or her fellow partners also.

A limited partnership is when one or more general partners who are responsible and bear the risk for the operation, management, control of a business, goes into partnership with other “passive” partners who merely invest but have no management control. The liability of the “passive” partners is limited to the amount of their contribution to the partnership.

Limited liability partnership, or LLP, is when all individual partners are shielded from liability of the partnership’s debts and the negligence and wrongdoing of the other partners. Many professionals such as accountants and lawyers have been granted authority through their regulatory bodies to carry on the practice of their professions through a LLP. Both limited partnerships and LLPs may have special registration requirements for some jurisdictions.

Corporation

This is the most common type of business structure and may be more expensive to set up and maintain than other types of business structures, but there are quite a few advantages:

  1. Limited Liability – a corporation’s greatest appeal is that through incorporation, a separate, distinct legal entity is created which bears the liability of the business operation. The shareholders (owners) are generally not liable for the risks of the business and their risks are “limited” to their investment in the corporation.
  1. Immortality – a corporation continues to exist even if all of its shareholders pass on.
  1. Transferability of shares – transferring partnership interests can be difficult and cumbersome. However shares in a company are relatively easy to transfer.
  1. Separate legal entity – a corporation can sue and be sued in its own name; enter into contracts as a natural person; and hold property in its own name.
  1. Tax advantages – a corporation’s separate legal personality provides it with certain tax advantages, which in some situations may be the driving force behind the structure.

Joint Venture

A joint venture may be suitable for two or more parties who do not want to be partners but wish to combine their expertise, services, investments and other resources for a limited purpose and usually for a limited time. A joint venture is not a distinct form of business organization, but rather a type of legal arrangement created by contract between parties.

Generally, parties would agree to contribute certain resources and designate different levels of obligations and commitment among the parties for a particular project. Once the project is completed, the joint venture is often dissolved.

Last word of advice: Before you decide on a business structure, it is best to consult a professional in your jurisdiction for legal and tax advice to choose a structure that best suits your needs and those of your particular business.

Vyvyan Tsui, Barrister & Solicitor

TSUI & CAO LAW CORPORATION

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