In the previous post, I discussed my decision to start a micro business. The first step was to decide how to set up the business legally. There are several options available, and each has its own merits, so I was off to another debate with myself – what should be my legal structure.
A quick segue about this topic and other posts that touch on legal stuff: I am a Canadian, living in Canada, this blog focuses on the Canadian aspects of starting and running a business. Note, I am not a legal expert. I share my own experiences, challenges, and decision making that I had to do or currently facing while setting up and operating my first business. Whatever you do with this information is at your own risk – please make sure to read my disclaimer here. Now that we cleared that, let’s move on.
And by the way, there are some useful links at the end of this post worth checking out.
There are three major types of business types, legally speaking. All three applied to my situation, so I had to consider each.
Also known as a sole proprietorship. This type is the easiest to establish but brings along maximum liability. In other words, you are personally responsible for everything you do as a business. In a nutshell, these are the highlights of the sole proprietorship.
- One owner.
- Can use your legal name as the business name.
- Legally liable for everything.
- Business income is considered personal income for tax purposes.
If you chose to operate under your legal name, you do not even have to register. A trade-name is required if operating under another name.
This form of business setup was too close to personal life, so I chose not to go this route.
Like proprietorship but for partners. The business income is again considered personal income for each of the partners. You would need to register a business name. In a nutshell, these are the highlights.
- Two or more owners (partners).
- Will require a trade-name registration.
- Partners are legally liable for everything.
- Business income is considered personal income for tax purposes for each of the partners.
Just like tall fences make good neighbours, good contracts make good partnerships. Make sure you have one. This type was irrelevant to me.
The third option was a corporation – this is what I chose for my business. A corporation is a separate legal entity, with its CRA tax number, bylaws, and limited liability. Limited liability essentially means that if something went wrong, the business is sued and not you personally. Well, almost. Sometimes you can be liable, but those would be exceptional cases. To summarize, the following are key characteristics of a corporation.
- A separate legal entity that can have many owners (shareholders).
- Limited liability that protects the owners (and somewhat the directors).
- Business income is taxed according to corporation tax laws.
The two reasons I chose to incorporate were:
- It sounded cool to be a corporation;
- I liked the limited liability part as it provides some legal protection if I exercised due diligence and played by the rules.
- It is a great exercise. In the future, I want to have more significant and impactful ventures, and this is an excellent opportunity to learn about corporation organization first-hand.
In Canada, federal corporations are governed by an organization called Corporations Canada that essentially set the rules by which the corporations operate.
To become a corporation, you must undergo a process called incorporation. There are many details to consider when setting up a corporation, and I will talk about it in my next post.
As promised, some links for more information.
Business types and benefits of incorporation