Business Structures

Sole proprietorship- no legal separate existence from owner

Profits and debts are yours- no legal wall between you and business

Easiest and cheapest structure to start

Pros:
You are in full control

Simple and very inexpensive

Few formalities or filings

You receive all profits

Cons:
Hard to take time off

Hard to retain and attract employees

Difficult to raise capital

Personal responsibility for debts and losses

Unlimited personal liability- if something were to go wrong, you could use personal assets to settle business debts, house, car, savings because there is no legal wall

A corporation is designed to protect these things

Business examples: Family owned businesses, dog walker, online seller, hairdresser, tutor, music teacher

Low startup cost, personal service, single person

Partnership

Business where 2 or more people share management and profits

2 main types: General partnership- partners share management and are personally liable for the business

Limited Liability Partnership (LLP)- a partner is not personally on the hook for another partner’s misconduct

You are protected from another partner’s misconduct

Most partnerships are General partnership, however accounting and law firms are LLPs

Pros:
2 people are better than one

More capital available at start-up

High caliber employees can become partners

Cons:
Risk of disagreement and friction

More costly to set up (ex. admin and legal fees)

Partners are still liable for debts- profit is also shared

Best strategy in partnership: To settle a deadlock, write a written partnership to settle hard questions before starting business

A deadlock in business is a paralyzing stalemate where equal decision-makers (such as 50/50 owners or evenly split board directors) cannot reach a consensus or majority vote required to move forward on critical company actions

Limited Liability Partnership

You are protected from another partner’s misconduct

Only limited to regulated professions (law, accounting, medicine)

Corporation

Any very large company we see every day

Legal entity that is separate and distinct from its owners

A corporation has most of the rights and responsibilities of an individual- can own property, sign contracts, and sue or be sued

Essentially a legal ‘person’

Limited liability- Owners (shareholders) are separate from business, so their personal assets are protected

Pros:
Limited liability

Everlasting- survives its founders (shareholders, board)
Credibility

Easier to raise capital through shares and investors

Cons:
Expensive to set up

Paperwork and ongoing filings

Potential double taxation of profits

More regulation and oversight

In Canada, you can incorporate federally (Corporations Canada) or provincially (ex. Ontario)- each has its own fees and renewal rules

To identify difference in structure, ask: Who owns the company? Who is responsible for liabilities? How much money can be raised?