In starting a new business, one of the first decisions you need to make is what type of business you want to set up. The most common forms of business organization are:
An unincorporated business with one owner. It’s all about you: You take all the risks and you get all the glory. You own everything, you make all the decisions, and you get all the income. You also get to do everything yourself (mostly), you pay personal taxes on that income, you’re personally responsible for any debts and liabilities, and you can be personally sued if things go wrong.
Sole proprietorship is often the best choice for a small business, especially when you’re first starting out. It’s the simplest and least expensive way to start a business, and if the business isn’t making any money yet, your losses may deductible against your personal income.
An unincorporated business owned by two or more people. The income is still taxed as personal income, but now you’re sharing it with your partner(s). You also share any debts and liabilities, along with decision making and the work itself. If you’re starting a partnership, you really should get a lawyer to draw up a partnership agreement for you (and you should each have your own lawyer review it before you put pen to paper). The agreement should cover things like how the partnership’s property is going to be owned, how profits and liabilities are going to be divided up, what happens if one of you leaves the partnership, etc.
A partnership is a great choice for people with complementary skill sets who love working in a team, and who want or need to share costs and are willing to share profits, assets, and decision making. It’s legal structure is less complicated than a corporation.
A corporation is a separate legal entity from its owners. That means that the law considers it a completely separate “person” legally. A corporation can own property and it can sue and be sued in its own name. It has its own bank accounts and pays taxes separately from its directors and shareholders. It continues to exist as directors and shareholders come and go. If you’re a director or shareholder of a corporation, you’re generally not personally liable for its debts and obligations.
A corporation can be private or public, and it can have just one person as the only director and only shareholder, or many. If you’re on your own, you might want to incorporate simply to limit your liability, both financially and in terms of, say personal injury. For example, if you’re a contractor who shells out money up front for supplies, and you’re not incorporated, you’re personally liable for your debts whether your customers pay you or not. Or, if someone trips over the two-by-four you’ve left in the driveway and breaks their leg, they can sue you personally. If you’re the sole director of a corporation, it’s the corporation that has to pay the bills.
Non-profit Corporations and Co-operatives
These are specialized, less common forms of business organization. They’re generally most useful if you have a group with a specific mission or mandate.