Legal-Ease by Aaron Salter
You and a friend are ready to embrace your entrepreneurial spirit and start up your own business.
You have the vision of what your business will do and now want to set up the legal structure for the business.
The two most common ways to structure a business between two or more people is by a partnership or by a corporation.
When deciding on your business structure you will want to take into consideration the tax consequences, liability issues, and practical circumstances such as cost of implementation and yearly maintenance costs.
The partnership model
The partnership structure is ideal where you and your business partner will be operating a low-risk business where you are willing to pool your assets and liabilities in view of sharing in the profits of the partnership.
You can further establish the terms to protect yourself in case of disagreement with your partner by entering into a partnership agreement.
The partnership agreement will ensure that you have clearly defined terms with regard to issues like profit sharing and dissolving the partnership.
Some of the disadvantages of structuring your business as a partnership include:
• You would incur unlimited liability for business debts. This means that any business debts would be secured by your personal assets in your name including your house, bank account or car.
• It can be hard to find a suitable partner because you will be held financially responsible for business decisions made by your partner such as entering into a lease or breaking a contract.
• Income would be taxable at your personal rate. If your business is profitable, this may put you in a higher tax bracket.
The corporation model
The other most common business structure is to incorporate your business creating a “legal personality” that bears the liability of the business operation separate from the owners (called “shareholders”) of the company.
The shareholders will then elect directors who will be the controlling mind of the corporation.
In our scenario of two individuals incorporating a company together, both of the shareholders would most probably be elected to also act as directors.
Except in limited circumstances, as a shareholder and a director of a corporation, you will not be personally liable for the debts, obligations or acts of the corporation.
A corporation may be a more appropriate structure when the nature of the business involves some risk of liability and the current or prospective revenues warrant incorporation and tax planning at both the personal and the corporate level.
Furthermore, as a shareholder you can enter into a shareholders agreement in order to establish the terms to protect yourself in case of disagreement with your fellow shareholders.
Some of the disadvantages of structuring your business as a corporation include:
• A corporation is closely regulated, requiring documentation filed annually with the government.
• A corporation is more expensive to start up than a partnership.
Your corporate lawyer and accountant can help you identify all the factors you need to consider when planning your new business venture.
Aaron Salter is an associate lawyer with RDM Lawyers. He practises in the areas of wills and estate planning, real estate, and business law. Questions or comments about this article can be sent to [email protected]