When you first start a business, there’s a laundry list of things to take care of. Selecting a business structure, in all honesty, is probably pretty far down that list. But it’s actually one of the most important things you can do to protect your personal assets.
Why You Should Choose a Structure?
If you don’t deliberately choose a business structure like a corporation, cooperative, or partnership (or an LLC for you Americans), you’ll automatically be considered a sole proprietor or a partnership in the case of two or more persons. This is, by far, the most popular type of business entity, simply because you don’t have to do anything to operate as one (save the business permits and licenses you may need).
But operating as a sole proprietor can be problematic. You are personally tied to the business, meaning that the government sees no separation between your personal assets and that of your business. So in the event that you are — heaven forbid — sued, your personal assets may be seized. You may be required to pay court fees out of your personal finances if you don’t have enough in your business bank account to cover them.
And so, by not taking action in choosing a business structure, you make yourself vulnerable. Incorporating or forming an LLC, on the other hand, provide separation between you and your business and create that legal shield. You’ll file your business taxes separately from your personal ones (not the case with a sole proprietorship), and your assets won’t be lumped in with your business’ assets.
Which Business Structure is Right for You?
The Sole Proprietorship is the simplest form of business entity. However, without the protection of a corporate shield, personal assets are exposed to business liabilities. And, even where a small business owner doesn’t have assets today, a judgment against that business owner can last up to 22 years. Therefore, in light of how easy and inexpensive it is to incorporate or form an LLC online today, the only real question is: Should I form an LLC, a C Corporation, or an S-Corporation? Here are the key factors to consider in selecting the right business structure and a quick breakdown of each of the most common business structures in Canada:
C Corporation: most formal business structure; in Canada you can opt for Federal or Provincial incorporation. This entity is not recommended for small business owners. The C Corp is ideal for a business that intends to raise capital by issuing stock or attracting investors through VC funding
S Corporation: An S Corporation is great for a small business owner who can qualify: The IRS places limits on the number of owners and who can be an owner in an S Corporation. Plus, all owners are taxed based on their percentage of ownership.
Partnership: if you take on a business partner, this structure will outline the responsibilities and compensation of all parties.
LLC (Limited Liability Company): In an LLC, the owner’s personal assets are shielded from business liabilities just as they would be in a Corporation. In addition, the IRS views the LLC as a “disregarded entity”. Thus, an LLC does not file separate taxes; company profits and losses flow through to the owners and are subject to each owner’s individual tax rates. The LLC is great for a business that wants liability protection, but seeks minimal formality. It’s also the perfect structure for a business with foreign owners since anyone (C Corp, S Corp, another LLC, a trust, or an estate) can be an owner of an LLC.
Cooperative: ideal for companies run by associations or groups.
Once you decide on the type of business structure that’s appropriate for your needs, find out what you’re required to do to obtain and maintain your status. A corporation typically requires more hoops to jump through, and annual documents filed. Stay on top of any annual filing fees or paperwork required so you’re never out of compliance.
Setting up your business with a formal business structure can bring you peace of mind. Take time to do it at the start, and you’ll have an easier time ahead of you.
Nellie Akalp is a passionate entrepreneur, small business advocate and mother of four. As CEO of CorpNet.com, a legal document filing service, Nellie helps entrepreneurs start a business, Incorporate, Form an LLC, or set up Sole Proprietorships (DBAs) for a new or existing business. She has formed more than 100,000 corporations and LLCs across the U.S., building a strong passion to assist small business owners in starting, running, and protecting their small businesses the right way.