Starting a Business: Part 1 of 6 - Different Types of Business Structure
Starting a business is a dream of many people. The freedom and flexibility to set your own hours, having the final say on big decisions and building something that can be sold to take you through retirement or that you can pass onto your children – these are some of the more common reasons why people leave the comforts of the corporate world to start their own businesses. But starting a business is a lot of work and involves a many important decisions – decisions that can impact your company during those most important formative years.
In this five-part series, we will explore the steps that you need to go through to start up a business and offer some insights into how to decide which options are right for you. In this post we examine the different types of business structure you can choose from when starting your business.
Unincorporated Sole Proprietorship
This is the simplest type of business structure because you are essentially your business. Any income that you earn from selling products and services is counted against you as a person and must be reflected in your personal income tax returns. This structure is typically preferred by people who want to do freelance work and don’t aim to build a sizeable business with employees and offices. You can do business under your own personal name or you can have a different business name, but if you do choose to do business under a business name then you must register that business name with either the provincial or federal governments.
Similar to a sole proprietorship, a partnership is where two or more people start selling products and/or services. The business name must be registered, but the business entity does not exist separate from the partners: there is no tax implications for the business, all of the income is passed through to the partners.
There are two types of partnerships. A general partnership is the most common and is where two or more people have active roles and responsibilities in the company. The second type of partnership is a limited partnership and is used where people might invest in but don’t actively participate in the business.
An incorporated business is the most common type of business structure. This type of organization requires much more setup at the beginning as a separate legal entity is created. Corporations can be owned by a single people or multiple partners – shares are issued when the corporation is formed and the ownership of the shares determines ownership of the corporation.
The corporation has a tax year-end (which can be set on any day during the year). Income earned by the corporation through selling products and services is reported against the corporation, as are expenses such as rent, equipment and salaries. Shareholders can also receive bonuses and dividends, but this is typically reserved for when the corporation is profitable.
In some cases, a number of individuals or corporations who aim to serve the same target market combine their efforts in a co-operative. The business is run according to cooperative principles and is typically managed democratically, with each participant in the cooperative receiving one vote per share owned.
A common example of a cooperative is dairy farmers, who don’t want to form their own individual businesses to sell their milk to dairy processors. A number of farmers will band together as a cooperative and the cooperative will manage the business of marketing and selling their collective supplies of milk.
Starting a business can be one of the most rewarding things a person can do, but it can be a lot of hard work. When you first start up your business you must make a number of important decisions that will affect the organization and operation of your business for years to come.
This series of blog posts examines the process of starting up a business. Check back to see the advantages and disadvantages of unincorporated sole proprietorships and partnerships.
Simply Bookkeeping1 provides professional bookkeeping services for freelancers, solopreneurs and owners of unincorporated and incorporated businesses. We customize our services based on your needs – we only see some of our clients a few hours a month but others we see on a more regular basis. Our services are reasonably priced and we tightly track the amount of time we spend working for you so you only pay for the services you get.
To learn more about us, please visit our website at www.simplybookkeeping1.com or contact Michele Hyde by phone at (647) 668 – 9363 or by email at firstname.lastname@example.org.
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