How To Choose The Right Business Structure For Your Startup

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How To Choose The Right Business Structure For Your Startup

The early days of starting a business are exciting and promising. You start from scratch with limited resources to build the foundations of the company. The decisions taken in this stage play a crucial role in determining the future of the company. One such decision that needs a lot of thought and planning is the business structure that you wish to select for your startup. There are three basic business structures available in Canada.

Sole Proprietorship

This is the simplest and most often used business structure. As the name suggests, a single person is the sole owner of the company. You single-handedly establish the company, arrange for the funds, operate the business, analyse and solve any risks, and accept the profit or loss. It is the best option for testing your product in the market. You can start off as a single founder and then move up to the other models if the business expands.

Advantages:

  • Low startup costs
  • Freedom in decision-making
  • Complete control over the financial aspects of the firm
  • Less taxation as compared to the other business structures

Disadvantages:

  • Difficulty in securing capital
  • Lack of continuity in the owner’s absence
  • Unlimited liability

Partnership

A partnership is an agreement between two or more individuals to set up and work on a business. The company assets, investments, revenue, and decision-making powers are shared among the partners by a mutual discussion on the right kind of partnership for the company. Lawyers are hired to draft and officiate the agreement. There are different partnership forms:

General Partnership: Here, all the partners have equal rights in the business. Everything from the investments, management rights, and the revenue generated is split equally between all the partners. The tax is not issued on the company as a whole. Instead, the partners who reap the profits must pay the taxes on an individual basis. Thus, it offers good tax benefits.

Limited Partnership: In this form of partnership, the rights of each partner depend on their share in the capital investment. At least one partner ends up in a general partnership position, owning all the rights to the management of the company. The limited partners enjoy the profits and do not contribute to the company’s decisions.

Limited Liability Partnership: Limited liability partnerships combine both general and limited partnerships. They retain the tax advantages of general partnerships while reducing some personal liabilities from the limited partnership.

Advantages:

  • Ease of formation
  • Additional sources for capital generation
  • Good benefits for tax

Disadvantages:

  • Divided authority
  • Unlimited liability
  • Possible conflicts between the partners which can affect the functioning of the business.

Corporation

A corporation, also known as a limited company, is a company with distinct owners and members (the shareholders). Companies are incorporated as per the provisions in the Business Corporations Act. Once that is done, the company gains an independent existence by acquiring the powers of all individuals. Any decision regarding asset distribution, risk analysis, or operational governance is then solely the company’s responsibility.

Advantages:

  • Limited liability
  • A continuous existence of the company regardless of its owners
  • Easy ownership transfers
  • Easy to raise capital

Disadvantages:

  • A possibility of increased taxation
  • Expensive to manage
  • Bound by a lot of regulations

It is cost-effective and commercially prudent to decide on any one of these structures before registering and venturing into a business. Lawyers offer a free consultation to start-ups regarding such decisions and help in the documentation of the entire process. You can contact us here for a free consultation with a lawyer and other legal advice.