Starting a Business
What Are The Different Types of Business ?
Lets take a look...
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.
- Easy & inexpensive to form
- Relatively low cost to start
- Lowest amount of regulatory burden
- Direct control of decisions
- Minimal capital required for start up
- Tax advantages if your business isn’t doing well
- All profits go to you directly
- Unlimited liability
- Income is taxable at your personal rate and if your business does well then you will be placed in a higher tax bracket
- No help if you need to be absent
- Difficulty raising capital on your own
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.
- Easy to start-up
- Start-up costs would be shared equally with you and your partner
- Equal share in the management, profits and assets
- Tax advantage, if income from the partnership is low or a loss occurs
- There is no legal difference between you and your business
- Unlimited liability
- Hard to find a suitable partner
- You are financially responsible for business decisions made by your partner
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.
Sole Proprietorship -
a legal form of business where only one person owns and has the legal right to operate the
company. The sole proprietor has unlimited liability for the company’s debts
Assets - things that are owned and have
Debts - money owed to others for funds
borrowed or things
Unlimited Liability - total personal responsibility for the debts of a business
General Partnership - a business where two or more people own and have the right to manage the company. Each owner in a general partnership has unlimited liability for all the debts of the
Corporation - a legal form of business that exists separately from the owners (shareholders) who have limited liability for the company’s debts
Shareholders - the
owners of a corporation. Shareholders have limited liability
Dividend - a portion of the profits that the
company decides to
distribute to its
Limited Liability - a situation in which
company owners do not have any personal
responsibility for the debts of their company. The personal assets of the owners are protected