What form of business should you choose when you're starting a business?
When you’re considering the legal structure of your business, in Canada you have four forms of business to choose from, a sole proprietorship, a partnership, a corporation, or a cooperative.
Each of these forms of business has advantages and disadvantages that you will want to weigh before choosing a particular form of business for your new venture.
(Note that while the basic procedure for setting up a business is the same, no matter what part of Canada you live in, the details are different in each province and territory. For start up information for particular provinces, such as business registration procedures for each form of business, see the sidebar, or visit my Starting A Small Business Library.)
The simplest form of business is the sole proprietorship, a business owned and operated by one individual. You can operate a sole proprietorship under your own name, or under another name you've chosen (as long as you don't add any of the legal designations of other forms of business, such as Ltd. or Inc.).
The advantage of legally setting up your business as a sole proprietor is that setting up and administering the business is comparatively easy and inexpensive. If you choose the sole proprietor form of business and operate it under your own name, for instance, you don't even have to register your business. And as a sole proprietor, you declare your business income on your personal income tax form, rather than having to file a separate tax form, (as you would have to do if you choose the corporation form of business).
However, if you set up your business as a sole proprietorship, legally your business is considered to be an extension of yourself, meaning that you assume all responsibilities for the business.
This means that as a sole proprietor, you are personally responsible for all the debts and liabilities of your business. So if your business fails, any of your assets, including your personal assets, can be seized and used to discharge the liability you’ve incurred.
This personal liability is the biggest disadvantage of choosing to operate as a sole proprietorship, although there are others such as a lack of tax flexibility.
Let's look at your other choices for legally structuring your business. Continue on to the next page to read about the advantages and disadvantages of the partnership form of business.
