Legal Business Ownership Structures. Which one should I choose? (Part I)

What are the pros and cons of Canadian business ownership structures?

Earlier this week, we posted an article outlining certain commercial situations that a business lawyer can help with. In this article, we get into a bit more detail on the pros and cons of the first two common Canadian business ownership structures that a lawyer can help you with.

*If you’re looking for a lawyer specializing in business law in Edmonton, click here.

Sole proprietorship

As its name suggests, businesses under this legal structure are headed by a single owner. As such, the owner of a sole proprietorship business is alone in their responsibility for all debts and obligations related to their business, but also keep all profits. However, because owners under this structure are personally liable, a creditor can make a claim against not only business assets, but also an owner’s personal assets outside of their business, in order to pay off any debts.

Pros:

• Owner keeps all profits.
• Process for registration is simple and relatively inexpensive.
• Start-ups require comparatively little working capital
• Typically fewer legal regulations apply
• Owner has direct control of decision making
• Some tax advantages for struggling businesses

Cons:

• Unlimited liability (claims can be made against your personal assets to pay off creditors)
• Income is taxable at the owner’s personal income tax rate. As such, if a business is profitable, this can result in the owner being placed in a higher tax bracket.
• Owner is required to be personally involved in all major dealings related to the business.
• Available capital is limited to what an owner can raise on their own.

*For more information on the sole proprietorship business structure, click here.

Partnership

Just as it sounds, a partnership is business that is created between two or more people, but is not incorporated. In a partnership, business partners pool financial resources to put into a business and then share profits according to a legal agreement that establishes the terms of the partnership. There are three varieties of partnership business structures:

1. General Partnership – In this business structure, all owners of the business share liability, often in proportion to the amount of the business they own: They are jointly responsible for satisfying any debts their business accrues.
2. Limited Partnership – In this business structure, not all of the owners are involved in the business’ operations. Some owners may buy into or contribute to the businesses solely to share in the profits, but have no power over decisions made.
3. Limited Liability Partnership (LLP) – This is a special kind of partnership business structure that is usually limited to groups of professionals such as lawyers, doctors, engineers or accountants. In an LLP, some or all of the owners/partners have limited liabilities, which means that they are not liable for any other partner’s misconduct or negligence. As such, legal action against one partner does not impact the others.

 

Regardless of the variety of partnership, they all share common benefits and drawbacks:

Pros:

• Process for registration is simple and relatively inexpensive.
• Costs, management, profits and assets are all shared between owners
• Some personal income tax tax advantages for owners of struggling partnership businesses.

Cons:

• Good business partners can be hard to find! Owners are financially responsible for business decisions made by partners (E.g. Broken contracts).
• Unlimited liability (owners’ personal assets can be used to pay off business debts)

*For more information on the partnership business structure, click here.

Next week, we’ll explore the remaining two business ownership structures: Corporation and Co-operative.

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