You have skill and talent and are ready to start your own business. Congratulations! Depending on your needs, sources of financing and type of business, there are several options for structure that you can choose. The most common of these are briefly discussed below.
Note: this section is based on the current law in Alberta; laws in other provinces and countries may be different. It is given as general information only and does not constitute legal advice. You should always consult your own professional advisors.
Owning a proprietorship or being a sole proprietor is just a way of saying you alone are the business. This is the simplest way to start a business. If you want to use a name other than your own, you can register it as a trade name, but this is not a legal requirement. However, if you use a name that is too similar to an existing name, and the owner has a registered trade name and objects to your use, you may have to change your name. This can be costly in terms of redoing business cards, stationery, signs, website, etc, so it is best to do your own research before committing to a business name.
Some of the advantages of a sole proprietorship are the simplicity; low cost, and—as a general rule—your personal income and expenses from all sources are combined and offset against each other for tax purposes. This means that if you continue to work at another job while your business gets going, the expenses of your business are deductions against all of your income and not just income from your new business.
The disadvantage of a sole proprietorship is mainly that you will be personally liable for all debts and claims against your business, and failure can mean a loss of your other assets.
Corporations must be created through Alberta Corporate Registry, and are an entity separate from you personally. Corporations have shareholders, who are the owners of the business, directors, who are legally responsible for the business, and officers who run the business on a day-to-day basis. You can be the sole shareholder, director, and officer of your corporation. In that case, it is similar to being a sole proprietor with a couple of important differences. Your corporation (or company) has a few ongoing filing requirements with Alberta Corporate Registry and must also file a separate corporate income tax return. As a shareholder of a corporation you are not personally liable for its debts. You have some personal liability as a director; mainly to the Canada Revenue Agency for corporate income tax, GST, employee withholdings, and employer contributions etc. If your business is successful enough that you can leave funds in the business, there can be some tax advantages. Also note that if your business is to be a consultant to other businesses, most potential clients (if they are knowledgeable) will insist that you be a corporation for their own protection.
Forming a corporation may be the structure of choice for you, but please beware: there are pitfalls when two people start a 50/50 business as a company, because if you have a disagreement the corporation can be deadlocked and not able to do anything, often resulting in the necessity to go to court. This can be avoided with good planning and a document called a unanimous shareholders agreement, but the time to do this is at the beginning! Once you have a disagreement, it is too late. This other person may be your best friend or life partner, but being in business together is different—please don’t think that this can’t happen to you and you will always avoid disagreements.
So far there has been no discussion of how you will finance your business until it becomes profitable. If you have your own resources this is wonderful. If you do not, or if your own resources are not enough, the usual sources of financing are loans and lines of credit or private investors. With respect to credit from financial institutions like banks or credit unions, you should know that it is usual for them to require you (and your partner, if any) to personally guarantee the loan. This removes a primary reason for incorporating. Another source of financing is to sell shares in your company, but there are pitfalls for the unwary and unadvised.
Even a so-called private company is governed by the Alberta Securities Act, which has strict rules on to whom companies can sell shares, and what you can tell potential investors about the business—even if they are your family and close friends. Also, you are admitting new owners into your business. Note that in addition to owning shares of the company, you, your partner and investors can loan money to the company in addition to or instead of purchasing shares. But the same restrictions on selling shares can also apply to private lenders.
A general partnership is similar to a sole proprietorship, but involves two or more people. No government filing is required to create a general partnership, and the same rules apply if you want to reserve a trade name for it. For the debts of the partnership, each partner has joint and several liability. This means that even if you and your partner agree to be 50/50, this does not bind creditors who, in case of non-payment, can go after either of you and your personal assets for 100% of the debt. A partnership agreement to govern the relationship between general partners is highly recommended.
A limited partnership is more similar to a corporation than a proprietorship. A limited partnership must be registered with Alberta Corporate Registry and have a limited partnership agreement, and can have one or more general partners and one or more limited partners. The general partners are similar to the directors of a corporation and run the partnership business, but unlike directors they are each still personally liable for all of the partnerships debts. The limited partners are similar to the shareholders of a company, although unlike shareholders they may agree in the limited partnership agreement to continue to invest money in the partnership on an ongoing basis. But like shareholders, they have no personal liability to the partnership’s creditors, except to the extent that they owe contributions to the partnership. And the Securities Act rules also apply to limited partners.
Whatever structure you select, your business will need to form relationships with a banker, accountant, and lawyer. Shop around and ask other business owners about their relationships. Which bank you choose just to have your business accounts can affect your ability to later get a commercial loan. There is a wide variance among the chartered bank and even branches of the same bank, as to their willingness to work with small business. And don’t forget credit unions and similar associations. Interview accountants and lawyers to find someone you feel comfortable with. Have a frank discussion of fees and other charges by the firm such as per-page charges for faxing, photocopying, typing, etc. If possible try to negotiate flat fees rather than hourly rates for normal day-to-day assistance. Look for advisors who have business sense as well as expertise in their field and who will understand your problems. Also look for a level of experience that is extensive enough to service your needs, but not someone with so much high-level experience that the fees will be too high. As well as talking to small business owners where you are located, look for mentors in the same type of business. There are a number of associations of different types of small business, networking groups, and professional associations that can be a source of good advice.
Business Numbers and Licenses
Even if your structure does not have an income tax reporting requirement, you will need to set your business up with a GST number, even if you think your initial income will be below the minimum threshold. Check with your municipality about whether you will require a business license. Depending on your type of business, you may also need health inspections, building inspections, liquor licenses, etc. If you are planning an office in your home, check the municipal bylaws and any restrictive covenants in your neighbourhood to make sure it will be permitted. Your legal and accounting advisors can advise you as to what you will need, and most municipal clerks are very helpful too.
If you lease premises for your business, most leases will require you to carry certain minimum limits of fire and general liability insurance. Even if not required, speak with an independent agent and seriously consider getting coverage. Advertising Depending on your budget and type of business, there are many ways to advertise: on-line, newspapers, local neighbourhood papers, flyers, signs, etc. What works best for your area and type of business are good questions for your advisors and mentors. Whatever forms you use, remember that pleasant, efficient, and ethical service are the keys to one of the most effective means of advertising: word of mouth from satisfied customers.