Once you have decided to take the plunge and start your own business, the next step is to decide upon the structure of your business. In Canada, there are three kinds of business structure. Sole Proprietorship (one owner), Partnership (2 or more owners), and Corporation.
With a sole proprietorship, you would be fully responsible for all debts and obligations related to your business and all profits would be yours alone to keep. As a sole owner of the business, a creditor can make a claim against your personal or business assets to pay off any debt.
A partnership is a good business structure if you want to carry on a business with a partner and you do not wish to incorporate your business. With a partnership, financial resources are combined and put into the business. You can establish the terms of your business with your partner and protect yourself in case of a disagreement or dissolution by drawing up a specific business agreement. As partners, you would share in the profits of your business according to the terms of your agreement. If you wish to share profits or losses with your spouse, then you must form a partnership; CRA will not allow a split of profit or losses otherwise.
Another type of business structure is incorporation. Incorporation can be done at the federal or provincial/territorial level. When you incorporate your business, it is considered to be a legal entity that is separate from the shareholders. As a shareholder of a corporation, you may not be personally liable for the debts, obligations or acts of the corporation. When making such decisions, it is always wise to seek legal advice before incorporating.
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