Are you considering starting a small business and aren’t sure whether you should incorporate a company or not??
There 3 main ways in which to organize a business, depending on the kind of business and the number of people involved.
1. A sole proprietorship – 1 person working on his or her own;
2. A partnership - 2 or more people working together towards a common goal; and
3. A corporation – with at least one shareholder or more.
A Sole Proprietorship
A sole proprietor is a 1 person business. The individual files a personal tax return and is responsible for all financial obligations of the business. If the business fails and there are outstanding debts, the individual is personally responsible. Conversely, a sole proprietor keeps all of the profits of the business. Often, for those who can work from home, there are significant tax advantages to being a sole proprietor, as a portion of the overhead such as mortgage payments and utilities can be a taxable deduction.
Many people who decide to start their own business do so as a sole proprietor, and often out of their home.
A partnership is where 2 or more people join together in a working arrangement. The partners usually share all of the expenses and financial obligations equally, and share equally in any profits.
The biggest risk to a partnership is that each partner is liable for the acts or omissions of each other. In simple terms, if one partner makes a mistake or is sued, all of the partners are equally responsible.
The characteristics of a partnership are similar to a sole proprietorship, but with at least one more person.