Lay of the Land: An Overview of Business Structures

When conducting business, it’s very important to ensure that you are operating under the appropriate structure. How a business is structured can affect liability, taxation, and succession.

Here is a brief overview of the three main types of business structures and how they operate:

Sole Proprietor:

Ownership Structure:
One Person

Registration & Arrangement:
Quick and easy registration
Low-cost setup
Minimal working capital required

Liability & Legal Status:
The business is not a separate entity from the business owner
The owner is personally liable for any debts

Tax Treatment:
Income is taxed as personal income
Business expenses and losses can be written off from personal income

Capital Considerations:
Difficult to raise capital for expansion, etc.

Result of Death of Owner:
End of company

Partnership:

Ownership Structure:
Two or more people

Registration & Arrangement:
Low-cost setup, shared between partners
Quick and easy registration
A legal partnership agreement is recommended

Liability & Legal Status:
The business is not a separate entity from the business owners/partners
Partners are personally liable for any debts

Tax Treatment:
Income is taxed at each partner’s personal income level
Business expenses and losses can be written off from personal income

Capital Considerations:
Difficult to raise capital for expansion, etc.

Result of Death of Owner:
End of company, unless provision has been made in the partnership agreement

Corporation:

Ownership Structure:
Any number of people

Registration & Arrangement:
Legal registration comes with costs and complexity
Annual fees for accounting/legal
More oversight, with compliance and annual filing requirements

Liability & Legal Status:
Business is a separate legal entity
Owners have very limited liability for corporate debts

Tax Treatment:
Business files its own tax return
Taxed at the corporate rate
Can be used to defer taxes or for income splitting

Capital Considerations:
Much easier to raise capital

Result of Death of Owner:
Continuous existence; ownership is transferrable

Whether you have been in business for years or are just thinking of starting a company, it is important to make sure the structure you have in place is suitable and that you are maximizing your resources. The Ramberran Wealth Group can walk you through the process of structuring a business the right way to ensure the maximum benefit to you and your company.