Legal Business Structure: What’s the Right One For You?
When you’re starting a business, you need to decide on the right legal form or business structure. In the majority of cases, you will choose from three options:
- Sole proprietorship
Types of Business Structures
In a sole proprietorship, the proprietor (owner) owns all the assets and is responsible for all the liabilities of the business. All profits are personal profits of the proprietor and are included in the proprietor’s personal tax return and the business is legally the same as the owner.
A sole proprietorship business structure is the simplest business to start up. All you need is a trade name registration, business licenses, and tax numbers. This is also the simplest way to operate as there is less regulation and you are the only decision maker.
A partnership is similar to a sole proprietorship in that the business is one and the same as the owners. The difference is that assets, liabilities, and profits are shared among the partners, according to an agreement.
Because there are two or more partners, there is a lot of potential for disagreements if there is no partnership agreement in this business structure. A partnership agreement will legally set out the important issues involved in running the business, such as how decisions will be made, profits will be shared, and disputes will be resolved.
Partners are jointly and individually liable for the actions of all partners.
Corporation (Limited Company)
Unlike a sole proprietorship or a partnership, a corporation is a separate legal entity, distinct from its shareholders (owners). It is the corporation that owns the assets and is responsible for any liabilities.
With some exceptions, the shareholders have no personal legal liability for the actions of the corporation.
Assets are owned and profits earned by the corporation. Profit flows through to the shareholders by salary, bonuses, and/or dividends, depending on the shareholders’ types of shares and personal tax situation.
Other Legal Forms of Business
A partnership is created when 2 or more individuals, or 2 or more corporations, do business together as partners. All partners share in the profits and the risks or debts of the business.
Limited liability partnership (LLP)
A limited liability partnership consists of partners in one or more eligible professions, such as accounting or law.
This type of partnership is similar to a regular partnership, except there is liability protection. A partner in a limited liability partnership is not generally liable for the negligence, wrongdoing, or misconduct of a partner, employee or agent.
Partners in a limited liability partnership may be individual practitioners or professional corporations.
A limited partnership consists of one or more general partners, and one or more limited partners.
Each type of partner has different rights and responsibilities. For example, a general partner is usually liable for the debts of the business, while a limited partner is usually liable only for the amount they have contributed to the business
A Professional Corporation is an entity that provides professional services by regulated member(s) of a profession who are governed by a professional body. The member is an employee of the Professional Corporation, which carries on the business of the professional practice.
A major benefit of a Professional corporation is the potential tax savings to the regulated members of the eligible profession.
A joint venture is not necessarily a legal entity, such as a corporation. The parties working within the venture maintain their separate legal identifies and usually work toward a specific objective. The only way to bring any structure or accountability to this project is to make a joint venture agreement.
If you are in the process of choosing a business structure for your Calgary business, we can help.