So you’ve got a product or service ready to go but you haven’t set up your company yet. What now?
Well, you’ve got a few options to consider, here’s three different types of legal entities you could register:
A legal entity which is owned and operated by one natural person. Essentially the company is an extension of yourself, you are the company. Imagine shovelling your neighbor’s driveway after a snowfall and getting paid for it. Then you realize you could make some more money shovelling driveways in your neighborhood.
This is where a sole-proprietorship comes in handy. Your one person, making revenue off of a product or service, accountable to yourself and your customers, and sole manager of the business.
This also essentially means that you accept unlimited liability if you fail to deliver or make a mistake. For example, if you shovelled Ms Smith’s driveway but missed a patch that later turned to ice. After Ms Smiths lengthy morning routine, she goes out on her driveway and slips. She sues your sole-proprietorship which means she’s suing you. Essentially she can sue you for anything you own.
- Single view on business decisions
- Taxation is based on your own personal income
- All the Pros can be cons
- You go bankrupt = company goes bankrupt
- Difficult to raise capital
- Unlimited Liability
A legal entity which is owned and operated by two or more individuals. This means you and your partners essentially have a formal agreement that explains who does what, who’s money is in the business, how to get your money out of the business if you wish to leave, how to handle profits or losses, etc.
Many law firms use this type of corporate entity, however, it is useful for many types of businesses.
- Multiple views on business decisions and mutual support
- Potential shared start up costs
- Shared risks and expenses
- Complimentary skills of each partner
- Shared Profits
- Partners in a general partnership are jointly and individually liable for the business activities of the other. So make sure you trust them because if they skip town, you’ll be liable for all their debts too!
- You don’t have total control, decisions are shared.
- Shared Profits…
- A friendship may not survive a partnership
A legal entity separate from a single individual. In fact, corporations are treated as distinct individuals. By law, you have to register the corporation, identify boards of directors, shareholders, etc.
This is great for many reasons, corporations can have limited liability (LLC). So if you had registered your snow shovelling company as a corporation before you made the mistake on Ms Smiths driveway, she could sue the corporation but she can’t sue you personally.
Recently, many individuals have been known to ALSO go after members of the BOD individually. So don’t F*&k up.
- Separate Legal Entity and separate liability
- Lower tax rate depending on where you incorporate
- Perpetual Existence, the company lives on even if the owner dies, leaves, or sells the corporation.
- Investment through sale of shares
- Credibility, LLC or .INC after a corporation’s name just sounds much more professional.
- Double Taxation. Since corporations are taxed just like individuals, when you withdraw funds from the corporation, you’ll be taxed on income. Hence, you’ll get taxed twice and that just sucks. This can, however, be avoidable depending on the corporate structure under which you operate.
- More paperwork since you have to file articles of incorporation, bylaws, etc.
- It’s not cheap to register a corporation.
Did I miss any pro’s and/or cons that are worth noting? Leave a comment below!