Steps To Starting A Small Business
There are several possible forms of business organization or ownership. The most common forms of business as the sole proprietorship, partnership and corporation.
This is the simplest way to set up a business. A sole proprietor is fully responsible for all debts and obligations related to their business. A creditor with a claim against a sole proprietor would normally have a right against all of his or her assets, whether business or personal. This is known as unlimited liability.
Income earned by a sole proprietor is treated as personal income and subject to federal and provincial personal income taxes. This type of business comes under provincial jurisdiction.
A partnership is an agreement in which two or more persons combine their resources in a business. In order to establish the terms of the relationship and to protect partners in the event of a disagreement or dissolution of the business, a partnership agreement should be drawn up with the assistance of a lawyer. Partners share in the profits according to the terms of the agreement.
In a general partnership, two or more owners share the management of business, and each is personally liable for all the debts and liabilities of the business. This means that each partner is responsible and must assume the consequences of the actions of the other partner(s).
A limited partnership may involve limited partners who contribute capital only. Limited partners do not contribute to the management of the business and are personally responsible only for the amount of capital they have contributed. A limited partnership may also involve general partners. They are fully liable for the debts and obligations of the business, but may be entitled to a greater share of the profits. Partnerships also come under provincial jurisdiction.
A corporation is a legal entity separate from its owners, the shareholders of the company. Each shareholder has limited liability, meaning that a creditor with claims against the assets of the company would normally have no rights against its shareholders. Federal incorporation involves the completion and filing of the Articles of Incorporation, a Notice of Registered Head Office Address and a Notice of Directors. These documents, which are available from a kit from the Corporations Directorate, Industry Canada, must be accompanied by a filing fee. Applicants must also submit a Newly Upgraded Automate Name Search (NUANS) system report. This report, which relates to the name specified in the Articles of Incorporation, must be dated within 90 days of submission, and may be found in the Corporations Directorate kit.
If a company intends to operate solely within a province, it may be preferable (and cheaper) to incorporate provincially. In either case, we recommend that you get the assistance of a lawyer.
Sole Proprietorship
Advantages |
Disadvantages |
| Low start up costs Greatest freedom from regulation Decision making freedom Minimal working capital required Tax advantages to owner All profits to owner |
Unlimited liability Lack of continuity in business Organization in absence of owner Difficulty in raising capital |
Partnership
Advantages |
Disadvantages |
| Ease of formation Low start up costs Additional sources of investment Possible tax advantage Limited regulation Broader management base |
Unlimited liability Lack of continuity Divided Authority Difficulty of raising new capital Difficulty of finding partners Possible partner conflict |
Corporation
Advantages |
Disadvantages |
| Limited liability Specialized management Ownership is transferable Continuous existence Separate legal entity Possible tax advantage (lower, small-business tax rate) Easier to raise capital |
Closely regulated Most expensive to organize Charter restrictions Extensive record keeping Diluted ownership Double taxation of dividends |