Why is Business Structure Important and How to Choose the Right One

A small business owner evaluating his business structure

Deciding to start your own business is a huge step. It takes a lot of learning and planning before starting and running a business. One mistake many small business owners make is not planning a business structure with a long-term vision. The right business structure can help your business grow, evolve and withstand the most challenging situations.

This article will discuss how a business structure can make a difference and how you should choose the one that is right for you.

What Is a Business Structure?

A business structure defines your business for legal and tax purposes. Canada recognizes four business structures: sole proprietorship, partnership, corporation, and cooperative. The federal and state government and the Canada Revenue Agency classifies your business according to these structures.

Why Is a Business Structure Important?

Business structure determines your liability, taxation, compensation, ownership, and responsibility as the business owner.

Taxation: The CRA taxes sole proprietorships or partnerships and taxes individuals. But corporations and cooperatives face tax rates lower than individual taxes. The business owner of a corporation has to file personal and corporate income tax separately.

Liability: A company is not distinct from the owner in the case of sole proprietorship or partnership. Hence, the business owner(s) is personally liable for the business. But a corporation is a separate legal entity, which means its liabilities are separate from the owner.

Compensation: A sole proprietor’s profit and loss are the same as the business. But that is not the case with corporations. Hence, business owners of corporations pay themselves a salary and/or dividend and show it as taxable income in personal tax filings.

Decision-making power: Sole proprietors and partners have complete control of their business. They can decide whether to expand or sell the business. But corporations and co-operatives don’t have this liberty. The business owner has limited decision-making power and has to secure board member and shareholder approval to make bigger decisions.

Administrative work: A corporation needs to undergo a lot of administrative paperwork, from having Articles of Incorporation to financial statements. Lack of paperwork can attract the undue attention of the CRA. Sole proprietors don’t need too much paperwork.

Fundraising: Your business structure also determines how you can raise funds. You have to be a corporation to go public and launch an IPO sometime in future. Sole proprietors and partnerships cannot raise funds from the public. They have to depend on business loans and other sources.

How Should Small Business Owners Choose the Right Business Structure?

Deciding on a business structure depends on the vision and goals of the business owner. As an entrepreneur, you need to ask yourself what you want from your business and how you want to run it. Every business structure has its pros and cons.

Sole Proprietorship and Partnerships

Sole proprietorships and partnerships are easy to create and dissolve. Hence, it is the most common structure chosen by new businesses. Less paperwork and control of your business can expedite business decisions. Moreover, partners can keep all the profits to themselves in the ratio determined under the partnership agreement. But with great power (profits and decision-making authority) comes great liability (personal tax), as personal and business liabilities are not separate.

These structures work best if you want straightforward ownership and no involvement of internal or external shareholders.

Corporations and Co-operatives

Corporations and co-operatives come with a set of corporate records and filing requirements. You have to create a separate budget for record-keeping and other paperwork. Moreover, you must find creative ways to withdraw money from the corporation and pass on ownership to your heirs. But a corporation enjoys several small business tax advantages and easy fundraising.

These structures work best if you want to raise capital, have liability protection, and reduce tax.

This is just the tip of the iceberg. There are several considerations before selecting the right business structure. Changing your business structure at a later stage could be expensive and lengthy. A professional business consultant and tax expert in your industry can help you weigh your options and select the best structure for your business.

Contact Edelkoort Smethurst CPAs LLP in Burlington to Consult On Structure and Other Business Decisions

Talk to a professional business consultant to help you identify the right business structure that aligns with your business goals. At Edelkoort Smethurst CPAs LLP, our accountants and business consultants can provide services such as determining the business structure and estate planning. To learn more about how Edelkoort Smethurst CPAs LLP can provide you with the best accounting and business consulting services, contact us online or by telephone at 905-517-2297.