STARTING AND RUNNING A BUSINESS with THE COACH in your corner.

How to Start a Business?

Pros & cons of incorporating and partnerships

Choosing the appropriate structure for your start-up business can be a fairly daunting task when you start to think about tax-implications, how quickly you expect your small business to grow, how you want to want to get paid by the business, etc. The corporate, partnership, or the proprietorship definitions and their advantages and disadvantages are some of the questions that many people are often confused about. By clearly presenting the options and their definitions, I hope to give insight that makes any conversation you might need to have with a lawyer or accountant, more meaningful for you.

A CORPORATION is an independent body created in law that is just like a person. It is seen as a specific unique identity and it does not attach to the person owing it, other than through shareholdings. So in other words, the liabilities and relationships of a corporate entity are not the personal liabilities of the owners - unless they have signed on to take that responsibility as a guarantor.

The advantages of corporations are typically tied to lower tax rates, liability protection and having choices at year-end. Disadvantages include the upfront costs for professional fees and other start-up costs, in addition to year-end losses potentially being unusable.

A PARTNERSHIP is an entity created between two or more people and has advantages and disadvantages as well. From my experience the greatest benefit of a partnership is having someone to brainstorm with, share ideas and confirm business direction. As a new entrepreneur, confidence is gained by having another person who is equally invested (at least emotionally) in the success of your small business.

The advantages of a partnership are often also tied to tax because you can tax right through to the individual partner's personal account. As an example, a partner that has other business expenses and profits could write off some of the expenses of the start-up business against the income of another business.

Partnerships do require an agreement generating the expense of legal work, but entering into a new business without a written understanding of your relationship is not recommended. Memories fade with time and can lead to serious conflicts regarding responsibilities to the business, how money is distributed, control, etc. Having a concise agreement forces you to discuss and come to terms with a clear understanding of what each partner brings to the business before you start. It also becomes a valuable reference tool if issues arise.

LIMITED PARTNERSHIPS are another specific form of partnership but not very often utilized in a small business. It is often the preferred structure for a larger business entity where the operating party has the need or want to have control but does not have the majority share of the money. The cost of an agreement is often one of the greatest disadvantages of setting up a Limited Partnership.

These are all matters to discuss with accountants and lawyers but again if it isn't a well thought out decision before a business starts it can lead to some serious consequences and regrets. For more information on topics to discuss with attorneys and accountants, visit www.startingabusinesscoach.com

 

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