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Smart Investor Tip of the Day
Many investors like to either start their own business, or invest into a new startup here in Canada and when one does so there are three major types of business ownerships: sole proprietorship, corporation, and partnership. Each have their pros and cons that should be analyzed in turn.
Sole Proprietorship is the most basic form of business which is owned and operated by a single person under one’s own name or as a registered name. Sole Proprietorship business names do not have any extension appended to the end of it like you see for other legal entities such as corporations with “Inc.” or “Corp.”. Setting up and managing this type of business is relatively easy and inexpensive. There are subtle differences in how this type is setup from province to province. Filing taxes as a sole proprietor is also much simpler by way of including your business income on your personal income tax form. One major disadvantage of this business type is that you are wholly responsible legally for debts and liabilities you may incur during its existence.
Partnerships come in three forms: General, Limited and Limited Liability. When you choose to start a business with a partner(s) it’s usually this type of business you look to form. General Partnerships are the most popular of the three and each partner is liable for all debts. Limited Partnership restricts one’s personal liability to how much they had originally invested in the company. A limited partner also cannot be involved in the management aspect of the business. If one does then they instead become a general partner. Limited Liability Partnerships are strictly limited to certain types of professions such as lawyers and accountants. Partnerships have the same tax simplicity awarded to sole proprietorships where each partner files information on their own personal income tax forms. One significant disadvantage with partnerships is that situations between partners can become strained due to different viewpoints and beliefs in how the business should operate, and on how to dissolve it.
Because the amount of personal liability is significant when structured as a sole proprietorship or partnership one can look to becoming incorporated as an alternative. A corporation is separate and distinct from its founders and shareholders. No individual can be held responsible for debts or obligations carried by the company. Establishing a corporation can be very expensive and difficult to set up. Tax filings are also much more complicated and have more strict deadlines to meet.
Whichever type of entity you choose always make sure you are fully aware of its benefits and its shortfalls so that your new business can flourish in the best possible way.