Choosing a Legal Structure for Your Business - « back to Articles
It is essential to select the form of organization most appropriate to your business.
The Most Common Three Forms
The three most common ways to organize your business are:
Many business owners will operate their first firms as a sole proprietors.
These are unincorporated businesses owned by one person. They are the easiest and least expensive way of starting a business. If the business uses a name other than your own personal name you must register with the Manitoba - Provincial Companies Branch Registrar and pay a $15.00 reserving fee as well as a $30.00 registration fee.
The sole proprietor is entitled to all the profits of their firm. These profits become personal earnings and you will be taxed on them at an individuals tax rate.
In a sole proprietorship you and your business are effectively one. This makes you personally responsible for any debts or claims against your business. The business, effectively, is an extension of you the proprietor and so it cannot take advantage of as many tax planning possibilities as are available to incorporated businesses. A business downturn can affect your personal finances severely.
Partnerships involve two or more persons or legal entities that carry on a common business for profit. Like the sole proprietor it is inexpensive to register with your Provincial Registrar utilizing the same fees and forms.
Partnerships present a way to attract and keep good managers interested in the continued growth and expansion or the business. It also provides a way to attract new equity into the venture.
A partnership may include several types of partners.
These may include:
Active, silent, and ostensible partners all are equally liable for the debts and obligations of the partnership, only the limited partner is protected from further obligations.
- an active partner has both financial and working interests in the firm
- a silent partner has only financial interest
- an ostensible partner has no financial interest but lends a name or credibility to the firm
- a limited partner contributes capital to the partnership but assumes no liability beyond the sum contributed
A Partnership places joint and several liability upon all the partners for any misdeeds committed in the normal course of business. Joint and several liability means that all partners are liable as a group and each partner is fully liable as an individual from misdeeds committed by any partner.
A legal agreement should be the foundation of any partnership. This agreement should provide details on all aspects of how the partnership is to work.
Essential elements are:
- contributions of each partner
- division of tasks and duties
- sharing of profits and losses
- new partner introduction
- retiring or deceased partners
- disagreement resolution
- partnership dissolution
A Corporation is a separate legal entity; your business no longer is "you". Corporations can be public or private, depending on whether they offer shares to the general public.
Incorporating your business has some advantages over a sole proprietorship. These advantages may include:
There are, of course, several drawbacks to incorporation. The corporate form of organization is the most expensive type to setup. You must incorporate federally, or in each province which you plan to operate.
- limited liability; the shareholders are not personally responsible for the financial obligations of the corporation. Shareholders cannot lose more than the amount they invested in the company.
- larger groups of potential investors can help to ensure that the business has a ready supply of capital
- the corporation enjoys an unlimited life
- improved ease of ownership transfer (a shareholder simply sells shares)
- introduction of new expertise by separating the function of ownership from that of management
- tax planning opportunities unavailable to unincorporated businesses
- opportunity to split income among family members; spouse and children may be able to become dividend earning shareholders, fee earning officers or directors of the company.
Corporations are more closely regulated by governments than are unincorporated firms, particularly from the standpoint of maintaining financial records, shareholders' ledgers and making annual filings.
It is worthwhile to consult a lawyer and accountant before you start the incorporation process; these professional advisers can raise important legal and tax issues for your consideration.