How to Choose the Right Legal Structure for your Business

How to Choose the Right Legal Structure for your Business

One of the most common questions I get asked as a lawyer is "Should I incorporate?" And I hate to say it, but it depends!

In Canada, there are a number of ways to structure your business, but the three most common are as a sole proprietor, a partnership or as a company. 

Let's dive a little deeper and see which might be the best fit for your business!

Sole proprietor

This is the simplest and most common form of business ownership. If you're operating a business, but haven't taken any other legal steps yet, except to perhaps register your business name surprise! You're operating as a sole proprietor, and it's totally legally legit.

As a sole proprietor, you're flying solo. You get to keep all your profits (hooray!) but you're also responsible for all your debts.There is also no difference legally between you and your business. In the eyes of the law, you and your business are the same legal entity, and you have unlimited liability. This means you are personally liable for any debts or liabilities in your business. So, keeping that in mind if you are in a particularly risky business, like operating a fitness studio or in the food+beverage industry, or if you are worried about protecting your personal assets (house, car, etc.) you might want to consider incorporating. More on this later...

Partnership

A partnership is exactly what it sounds like: You've teamed up with at least one other person to start a business with an intent to profit. You and your partner share in the profits and losses, and are each equally responsible for debts incurred by each other on behalf of the business (unless you have a partnership agreement that says otherwise). Sitting down with your partner and discussing how your business will be funded, how work is divided, how decisions will be made and what happens if one of the partners wants to leave the business are all really important conversations to have prior to teaming up. Then put that $hit in writing! I promise it’s so much easier to have these discussions at the beginning when everyone is getting along, rather than when things go sideways But, if you're currently in a partnership and don't have a partnership agreement in place, the next best time to do this is now!

Corporation

Once you incorporate, a separate legal entity is formed which is totally separate from you personally, even if you are the only owner.  There are many different tax and legal reasons why you might decide to incorporate, but one of the main benefits is limited liability: the debts and liabilities remains separate (for the most part) from its owners. There are also certain tax advantages as well once you reach a certain income threshold.  Incorporating your business is something to consider if you are looking to get a bank loan or searching for investors since each will (likely) require your business to be incorporated before they want to work with you. Before making the decision, it's a great idea to speak to your accountant and your lawyer to see if incorporating is the right decisions for you and structure it with the flexibility to support you as you grow!

When you're thinking about your business structure, its totally OK (and common) to start as a sole proprietor and then incorporate when it makes sense to. As always, having the right team behind you can help you navigate this along the way. 

 

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