Peter Boys, Boys Financial Services

The Right Business Structure

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According to statistics,

  • There are almost 100,000 small businesses startups every year, and
  • Companies with fewer than 100 employees make up 98% of all businesses in Canada

These numbers are evident of a strong entrepreneurial spirit in Canada, but they don’t reflect the confusion that many business owners have when it come to establishing the right business structure for their business.

As a former farm equipment dealer, I feel that there are three smart strategies to consider.

First, choose the right business structure.  

Four Main Business Structures

Sole Proprietorship:  The simplest to set up and administer, but all of your net business income is taxed at your personal marginal rate.  Your personal assets such as your home and vehicles could be vulnerable to business creditors.

Partnership:  A structure that has a partnership agreement that defines how the management, profits, and assets of a business will be shared.  If needed it can also define how to dissolve the business.  A partnership is subject to the same limitations as a sole proprietorship.

Corporation:  Is a federally or provincially regulated entity that comes with more regulation, more record-keeping requirements and more expenses.  The advantages is that it creates a separate legal entity so that shareholders are not personally liable for many of the company’s debts, obligations or actions.  There are also tax benefits, as well as allowing more flexibility as far as ownership.

Cooperative:  Is an association of members that own and make decisions for the business.  A group of people or companies can pool resources to provide goods and services to a community.  Like a corporation, it provides limited liability protection for the members.

Which is the best structure for your business depends on numerous factors.  This is where your financial advisor, lawyer and accountant can help to determine the right structure for you.

Next, protect your personal assets:  If you run a sole proprietorship or a partnership, it’s very important to protect your personal assets from creditors.  One solution is to hold personal savings inside investments administered by insurance companies.  That allows you to name a “family class” beneficiary to provide creditor protection for these investments.  Work with you financial advisor, legal and tax professions to develop a plan.

Finally, protect your current and future retirement income:  While business owners are usually interested in the taxes they can save or defer as a result of doing some tax planning, many tend to neglect their insurance and retirement income needs.

Business owners have similar life insurance needs as your average person but often lack group plans that provide adequate protection for the owners and their families.  Critical illness, disability and business interruption insurance are also vital to protecting the business and the family’s income in the event the owner cannot run the business.  Where there is more than one business owner, key-person life and disability insurance also need to be put in place.

Business owners need to consider the best structure for tax efficiency and creditor protection to protect their business during their working life.  They also need to plan what changes are required both before and during retirement to ensure they have adequate tax advantaged income for as long as they live.

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