Owning a business can take the form of many different structures, each with their own advantages and disadvantages. Several factors differentiate business ownership including the risk involved, the amount of ownership, types of tax regulations, and more. Understanding the different types of business owners is important before you undertake your own business so you can decide which type of structure works best for you. In this article, we discuss the different types of business owners and the pros and cons to each structure.
The most common types of business ownership
In Canada, there are four primary forms of business owners including:
Sole Proprietorship
Sole proprietorships are businesses that are owned and operated by one individual. There is no legal distinction between the business owner and the business entity. In this structure, personal assets of the business owner can be used as leverage to finance business assets and can be taken as collateral is the business default on it’s loans.
Advantages
Simple and easy to set up
Single owner holds full legal and business control
Does not require a separate tax returns and processing as it’s claimed through the tax return of the owner
Disadvantages
Unlimited personal liability meaning the personal assets of the owners can be forfeited in the event of bankruptcy
The owner Is responsible for generating upfront capital
Can make selling the business more difficult
Partnership
A partnership is an arrangement between two partners to advance their mutual interests in the form of a business. Partners can be individuals, businesses, groups, churches, or organizations. The structure of the business including ownership and risk is dictated by a written agreement that both parties sign before starting the partnership.
Partnerships can be either limited liability partnerships or unlimited liability partnerships. In a limited liability partnership, individual partners don't accept losses caused by another, meaning one partner's possessions can't be seized or sold to pay for the other partner's debts. In an unlimited liability partnership, both partners are responsible for the business. If one partner is directly responsible for a loss, all other partners pay for the debt, even if they were not directly responsible for the losses.
Advantages
Greater access to resources, funding, and knowledge
Reduced startup costs and expenses
The division of labor among partners creates a better work-life balance.
Disadvantages
Partners are equally responsible for debts of the business, regardless of who holds the debt.
Less autonomy in business actions and decisions
Can be difficult to sell if both partners don’t accept the same terms
Potential for conflict amongst partners
Corporation
A corporation is a legal business entity that is separate from it’s owners. Corporations can earn profit, be taxed, hold assets, and incur debt as their own entity. Corporations can be owned by a single individual or a group acting in the best interest of the corporation. As a corporation is it’s own entity, the personal assets of the owners of the business are not at risk in the event of bankruptcy.
Advantages
Business owners are not responsible for business debts.
Easiest structure to generate capital and business investment
Business earnings can be issued as dividends or paid as salary allowing business owners to optimize their tax situation.
Disadvantages
Most complex and expensive to set up and maintain.
Regular auditing and paperwork as corporations require their own tax return.
Cooperative
A cooperative is an enterprise that is privately owned by the same people who benefit from it. The owners of a cooperative, who are also the shareholders, are involved in the decision-making process. There is no limit to the number of shareholders in a cooperative, which means there is no limit to the number of owners.
Owners receive a share of the profits from the cooperative's investments, depending on their shareholdings. The cooperative is managed by a board elected by the owners.
Advantages
There is democratic control by members who have equal rights.
It brings people together for a common cause.
There is access to diverse and unique funding opportunities.
Disadvantages
There are fewer incentives for angel investors and venture capitalists.
There might be slow decision-making among owners.
Different types of corporations
Canada recognizes five different types of corporations, each with their own limitations including:
Canadian controlled private corporation (CCPC)
CCPC’s are Canadian owned businesses that meet a specific set of criteria set out by the Canadian Revenue Agency. These corporations get favourable tax breaks and incentives in an effort to promote entrepreneurship and business growth in the Canadian economy. CCPC’s are required to be private corporations, have full ownership by Canadian residents, be solely listed on the Canadian stock exchange, and cannot have majority stakeholder interest by any party outside of Canada. While it can be difficult to meet the criteria of CCPC, the tax incentives make this form of corporation highly lucrative.
Other private corporation
Other private corporations are corporations in Canada that do not meet the requirements of a CCPC. This can be due to a number of factors including foreign ownership, foreign stock market access, international divisions and more. These corporations are classified as other private corporations for tax purposes and are subject to a higher tax rate than CCPC’s.
Public Corporation
Public corporations are traded on the public stock exchange and anyone may buy a controlling interest. Ownership of public corporations is organized by selling shares of stock on a public stock exchange in which the public has access to during trading hours. The percentage of ownership available for sale is up to the discretion of corporation owners.
Corporation controlled by public corporation
These corporations are controlled by public corporations but are listed as private corporations. They are not publicly traded on the stock exchange but the public has ownership of the corporation that controls the business. For example, if a public corporation chooses to expand their operations and develop subsidiary businesses, they would be classified as corporations controlled by public corporations.
Other types of corporations
The Canadian Revenue Agency classifies all other remaining corporations as other for the purpose of tax returns. These corporations don’t meet the standards of the other four titles but still exist as corporations. Crown corporations are a common form of other corporations.
What to consider when choosing a business structure
When choosing which business structure works best for you consider the following:
Risk
The amount of risk you are willing to undertake is a larger proponent of which business structure works best for you. Different business structures hold different levels of risk and deciding whether or not you want to leverage your personal assets is an important decision to make. If you are looking to limit your risk, limited partnerships or corporations can help you protect your personal assets. If you’re looking to jump straight into your business with your own capital, sole proprietorship may be right for you.
Capital
When choosing a business structure, it’s important to consider how much capital you have. Raising funds for a business can be difficult and you may need access to the resources a partnership or corporation brings. If you have the money to invest in your business, a sole proprietorship can be easy to get started with and can have you in business quickly. If you require the support of investors and grants, you may need to consider incorporating. The loans and grants you may be eligible for will also depend on how your business is structured and can make acquiring funding difficult.
Exit Strategy
When considering which structure is best suited for your business, consider the outlook of your business plan. If you plan on only holding on to your business for a few years before selling, sole proprietorship may be the best option for you. When you have other parties sharing ownership of your business, it can be complicated to sell your business and differing interests in the longevity of your business can lead to conflict during the process of selling. If you choose to enter a partnership, consider establishing a buy-out plan in advance in the event you wish to sell your portion of the business.
Growth
Changing the structure of your business can be a difficult undertaking once you’ve already been running. Considering the growth and future of your business is important to do before you choose a business structure. If you have plans of launching yourself to the public one day, you may want to consider launching straight into a corporation. If you have plans on remaining the sole owner of your business for it’s entire duration, you may want to reduce your workload and start with a sole proprietorship.
Work life balance
Regardless of which business structure you choose, it’s important to consider the work life balance that each holds. As sole proprietor, you are the sole owner of the business and responsible for the actions and operations of your business. This can lead to an increased workload for some, and can make finding a work life balance difficult. For those looking for increased balance, you may want to consider a partnership whereby the workload is divided. Conversely, a corporation allows you to hire a board of directors to help with business operations and decisions.