Starting a Business

What Are The Different Types of Business ?
Lets take a look...

Sole Proprietorship

A business that is owned and operated by one individual can be classified as a Sole Proprietorship. Can you have staff? Absolutely, you are simply the sole – owner.

NOTE: If you choose a sole proprietorship, you and your business are one being as far as the law and the government is concerned; your business is simply an extension of yourself.

i.e. Any loans the business takes out are identical to the personal loans of the individual. On that same note, any assets (cash, chair, computer, building, etc.) your business has, you personally own. The same can be said for all business debts (loans, money to contractors, taxes payable).

As an owner of a sole proprietorship you are personally responsible for all factors of the business. This explains the expression “unlimited liability”. If a sole proprietorship is forced to close down because of extensive debt, the owner is still responsible for all money owing; therefore, you need to use your own personal assets to pay for them.

A sole proprietorship does not have to file or pay income tax. All money earned or lost by the business is considered to be the income/losses of the owner and must be filed under his/her personal income tax file.

General Partnership

General Partnerships are similar to sole proprietorships but they apply to businesses that have two or more owners. They are inexpensive to register and often offer significant tax advantages at startup. Each of the owners has the right to make decisions (in accordance with your partnership agreement) and each has unlimited liability.

NOTE: Unlimited liability in this case means that EACH partner has 100% responsibility for all debts of the business regardless of his/her current share. You could be personally responsible for the mistakes that your
partners make. You must have considerable trust in your partners.

A partnership does not have to file or pay income tax. All money earned or lost is considered to be the income/losses of the owners and must be filed under their personal income tax file in accordance with their share of the company.

Corporation

Many people have the misconception that in order to be incorporated you need to be a “big” company. In reality, size has absolutely nothing to do with the legal form of a company: a business with only one person can be a corporation. The owners of a corporate company are now referred to as shareholders. Ownership of a company is divided up according to
percentage of shares owned. i.e. Owning a 51% share or more would likely give you the right to decide who should run the company. It also reflects the percentage of any dividend (portion of profits that the company decides to distribute to shareholders) that shareholders (owners) will receive.

The major difference with becoming incorporated is that unlike the other two forms of businesses mentioned, individual owners do not personally own any of the assets and as such are not responsible for any incurred debts. This is what is meant by the term limited liability - owners are not personally responsible for any of the debts of the company but rather only stand to lose their initial investment. No personal assets are at risk.

A corporation does have to file and pay income tax separate from the owners of the company. The only income that owners need to claim is that which was paid out in the form of a dividend.