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Choosing a Form of Ownership for Your Business: What You Need to Know

Mar 4 2021 by

Choosing your business’s structure or form of ownership is one of the most important decisions you will make as an entrepreneur. Unfortunately, many entrepreneurs gloss over this decision, which is understandable when you are focused on developing your core business, but not strategic. Understanding the options available and the advantages and disadvantages of each can help your business find success now and in the long-term. A Toronto business lawyer can help you choose the right structure for your business, giving you the flexibility and capacity for growth that you need.

Sole Proprietorship

A sole proprietorship is an unincorporated business owned by a single person. It is the most basic and perhaps the most common type of business entity, probably because it is the easiest and least expensive business to set up. While a sole proprietorship helps entrepreneurs get their businesses off the ground quickly, many don’t realize the limitations and hazards associated with this form of business. 

In the eyes of the law, a sole proprietorship is indistinguishable from the business owner. As a result, all business income must be included in your personal income for tax purposes and will be taxed at your personal tax rate rather than the more favorable corporate tax rate. You should also be aware of the following additional limitations: 

  • You are personally liable for all business debts or other liabilities of the business
  • It can be difficult to raise capital
  • You cannot transfer ownership of the business without selling it outright

While these disadvantages are worth careful consideration, they should be weighed against the ease, simplicity, and flexibility that a sole proprietorship provides. A Toronto business lawyer at Fauri Law can help determine whether a sole proprietorship is the right structure for you. 

Partnerships

Partnerships are similar to sole proprietorships in that they are not legally distinct from their owners. The difference is that partnerships are businesses that are owned by two or more people. As a result, partnerships offer a great deal of flexibility and are easy and inexpensive to start up. At the same time, you face the same limitations – the profits and losses of the business are included in the partners’ taxable income and the partners may be personally liable for the debts and other liabilities of the business. 

Corporations

Corporations are on the opposite end of the spectrum from sole proprietorships in that they are a legally separate entity from their owners. Because corporations are a more complex business structure, they are more difficult and more expensive to establish. However, as a benefit, they completely shield their owners from liability for any business debts and other claims. In addition, the profits and losses of the business are not included on the owners’ personal tax returns. 

Starting a Business? Work with a Toronto Business Lawyer at Fauri Law

Choosing the right business structure is a big decision that requires some careful thought. In addition to the options listed above, there are other structures that may be worth considering. Before deciding how to structure your business, reach out to us – we can schedule a call to discuss your goals and provide you with the guidance you need.