Starting a new business can be exciting but it's filled with countless decisions and challenges that come along the way. There are some important choices you'll need to make right from the beginning, starting with selecting a business structure and entity that best supports your goals.
There are many business structures available but determining the right one for your business can often be confusing. It's important to note that the structure you choose has many tax and legal implications. Typically, most small business owners often contemplate between two types of legal structures: Sole Proprietorship or Corporation. For today's post, we've complied the notable features from both business structures to help you determine which is the better fit for your business.
The simplest business structure is the sole proprietorship. It is one of the most common structures available to entrepreneurs and businesses owners when starting their own business. In a sole proprietorship, the business is owned and managed by one person who makes the key decisions and assumes the risks and rewards of ownership.
Under this structure, there is no separation between the sole proprietor and the business. What this means is that the business's income/loss, assets and liabilities are the proprietor's and vice versa. You pay personal income tax on the net income generated by your business and are accountable for any liabilities that are a part of the proprietorship. With this business structure, you can choose to register a business/ trade name or operate under your own name.
On the other hand, corporations are separate legal entities from the owners or shareholders and can acquire assets or incur liabilities. Since the corporation is its own legal entity, it has an indefinite life and does not stop when the owner retires or expires.
Corporations are governed by its articles of incorporation which are drafted during the incorporation process. This document names the directors of the corporation, discusses the rights of shareholders, explains the bylaws, and mentions the types of share classes or restrictions on the shares.
Which Structure Is Right For Me?
As you can see, both business structures have their own advantages and disadvantages. Although there is no one right answer to determine this, we hope the above highlights provide you with some guidance on which business structure is most relevant for your needs.
Aside from tax benefits, there can be other non-tax considerations that should be considered when determining which business structure to pursue. For example, a corporation offers limited liability which might be something that is critical for you to maintain depending on the type of business you conduct. There can also be personal factors that impact the structure of your business. For example, if you require all of the after tax income the business generates to manage your personal expenses, you may not need the tax deferral opportunities a corporation provides.
Overall, there are many factors and considerations to be made as each situation is unique. We suggest you to seek professional advice when making this determination.
Disclaimer: The above summaries and information are key highlights into some of the business structures available. The information provided above can change based on your specific situation and a professional should be consulted when making complex determinations.