Basically, the legal structure you choose for your business determines, to a large extent, how your company is organized, cash flows, taxes and more. Choosing the best legal structure carries many advantages:
- Save money at tax time
- Make it easier (and less costly) to pay yourself
- Avoid potential personal legal liability
- Bring revenue earned on foreign sales back to Canada
- Enable you to sell your business or pass it on to heirs.
3 basic legal structures
- Sole proprietorships – You alone own it and are 100% responsible for its debts and liabilities. All earnings are taxed as your personal income. This is the most popular small business structure because it’s simple and straightforward.
- Partnerships – Two or more owners share profits and losses according to their share in the firm. In a general partnership, all partners are liable for debts; in a limited partnership, one or more partners limit their liability by not actively managing the business.
- Corporations – The company earns revenue, incurs losses and pays taxes separately from its owners. Companies often pay tax at a lower rate than individuals. Owners’ liability is limited to what they invest in the company, and they have options as to when and how they take money out of the company.
Which is the right business structure for you? While your lawyer and accountant can help you make the final decision, this quick quiz can help determine which way to go. Keep in mind that a business can evolve from a sole proprietorship or partnership to an incorporated company if circumstances change.
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