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Gettin' Down to Business
It seems like every time you turn a corner in Fernie, there is a new business popping up. Indeed, even though our community appears to be driven by one or two larger industries, small business is a huge contributor to Fernie’s economy.
If you are thinking of starting a business, or if you already have one, you should be thinking about the best way to structure your business. Financial, tax, and liability concerns should all be considered when deciding on your business structure. In order to be in the best position to make this decision, you should seek the advice of a lawyer and an accountant, because these professionals will help you choose the most effective structure according to the particular type of business you are running.
However, there are some basic principles about business entities that are good for everyone to understand, whether they are a business owner or not.
There are three main ways to structure your business:
A sole proprietorship is a non-incorporated business, owned entirely by one person. This is how many small businesses are operated. With this type of business organization, you would get to keep all profits, but at the same time, you would be fully responsible for all debts arising out of your business. The advantages to this type of business structure are: it is easy and inexpensive to form, it has the lowest amount of regulatory burden, and you, the “proprietor” have direct control and all decision making authority. You also have the ability to deduct all business losses from your personal income, which can be a huge tax advantage if your business isn’t profitable right away. The disadvantages are that you are exposed to unlimited liability, meaning that you are on the hook personally for any business debts and any injury or damage the business may cause to others. Also, business income is taxable at your personal rate, so when your business starts doing well, your income will increase, possibly moving you into a higher tax bracket.
A partnership is an association of two or more persons carrying on a business for profit. A partnership is a good business structure if you want to start a business with a partner and you do not wish to incorporate. If you go the partnership route, you should seek the assistance of a lawyer to draft a contract to establish the terms of the business with your partner and to protect yourself in the event of a disagreement. The advantages and disadvantages of a partnership are similar to that of a sole proprietorship: it is an easy and inexpensive start-up, you can deduct losses from your personal taxes, but there is unlimited legal liability. However, an extra disadvantage with a partnership is that it might be difficult for you to find a suitable partner. You need to pick your business partner wisely because you might one day be financially responsible for business decisions made by your partner.
Everyone has heard of a corporation, but most people think of gigantic companies when they hear that word. However, incorporating can also be a good option for small businesses, particularly when your business has a high risk of liability. A corporation is an artificial person or a legal entity having an existence distinct from that of the individual members that form it. If you are engaged in a business where there is a likelihood of causing injury or damage to others, you should seriously consider incorporating. As an owner of a corporation, you will not be personally liable for the debts, obligations or acts of the corporation. On top of the limited liability advantage of incorporating, there is also the advantage of easy ownership transfer and potential tax savings. The disadvantages are that corporations will have more regulation, the start-up costs are more and you will be required to keep extensive corporate records, which will cost money every year.
If you are thinking of starting a business, it is always a good idea to seek professional advice about the best way to get going. If you already have an established business, you should be assessing whether your current structure is still suitable as your business grows.