Starting a business can be one of the hardest decisions you will make, but it will be worth it if you take the proper steps. If you have already made that decision, congratulations! Now it’s time to figure out the best way to organize your business.
What information do I need to start a business?
Before you start, it is important to confirm who will be part of the business and what role they will play. Ask yourself:
- Will you be the sole owner of the business or will you be running it with one or more partners?
- Will you be operating your business within a pre-existing business?
- Will others be involved as employees or silent partners with no decision-making power?
Once you answer these basic questions you will be closer to deciding which business structure best suits your needs.
Which business structure should I choose?
While there are many ways that you can structure your business, some of the most common structures are sole-proprietorships, general partnerships and corporations. Below are questions that will help determined the best structure for your business:
Will I be personally liable for my business?
Put simply, starting a construction company which could lead to injuries or damages would put you at a much higher risk of legal action against your company than, for example, starting a clothing store. In the construction company circumstance, a sole-proprietor or partnership is less desirable as it leaves the owner or partners personally liable for damages and claims brought against them; it also means that personal assets could possibly be on the line. Operating a corporation on the other hand would afford you an extra layer of liability protection to help avoid this result.
Conversely, a clothing store is not typically exposed to the claims and damages that a construction company may be. In the case of a clothing store, operating as a sole-proprietor or partnership may be a viable option especially if you have the business insurance policies in place.
Which business structure provides the best tax benefits?
There is not a set answer to this question. Every business and individual will have different tax implications based on their specific financial dealings. However, having a good team of lawyers and accountants will help you to determine the most accurate answer to this question so that you can be sure that you can take advantage of the tax benefits available to you.
It is important to retain legal representation and seek advice from your accountant no matter how large or small your business is.
How can I transfer my business?
In terms of sole-proprietor or partnership the shares cannot simply be transferred; in order to effect a transfer under this structure the new owner would need to purchase the assets of the business. As a corporate business on the other hand, you have the option of transferring the shares (ownership) to another person or multiple people, which makes this option ideal for those who intend to run family businesses that will one day be transferred to their children.
In any case, because transfers are complicated and change depending on the structure of your business, it is important to retain legal representation and seek advice from your accountant no matter how large or small your business is.
How much does it cost to start a business?
This is the number one question most people have when choosing to start a business. The answer naturally depends on the type of business you plan to have, whether that may be a construction company, book publisher, real estate agent or convenience store – and will vary vastly – the business structure you choose will also play a role. Below are some key points to consider with respect to business structure.
- A sole-proprietorship is typically the least expensive option to start up. There may be less fees to pay up front for the registration of your business with the government, but these will need to be renewed every five years. Taxes are filed with your personal income tax, so there is no need for separate tax filings for your business. While this is desirable, it is also important to consider whether a sole-proprietorship will provide you with the protection and tax benefits that you would receive from the other business structures before choosing this option simply to save on start up costs.
- The cost of starting a partnership will depend on the strength of your partnership agreement. If the partners are on the same page with respect to the terms and conditions of the partnership, legal costs for preparing the agreement will be lower. If there are complications and disagreements, you can expect greater legal costs. Like a sole-proprietor, partnerships must register the business and renew their registration every five years.
- Corporations need more attention and care in the beginning stages. It is important to speak with a legal professional to ensure that your corporation is set up in a way that allows you to operate the way you want and continue to operate without issues as you grow. Many people decide to find cheap ways to incorporate their business thinking that it will save on costs, however, this often leads to oversights, mistakes, and larger bills when they ultimately have to fix these issues. It is important to be accurate at the beginning in order to avoid unnecessary costs down the road. Corporations also have different requirements with respect to tax filings, record keeping and government filings which may not be necessary for your business if you are not utilizing the tax and liability benefits of incorporating. For most people running corporate businesses, the tax and liability savings outweigh the small costs that comes with these obligations.
Starting a business is not an easy task by any means, and running a successful business takes a lot of hard work and determination. The last thing you want when you could be focusing your time and energy on growth, is to be hit with a legal roadblock. Take the proper steps in the early stages so that your only priority later can be success!
Invest in your business and give it the attention it deserves early on so that you can save when it counts.
