If you’re a professional services provider, whether in healthcare, accounting, financial services, consulting, or any other service industry, branching off on your own can seem a daunting experience (because it is daunting).
But it can also be an incredibly rewarding one.
Entrepreneurs often find themselves trading a stable, guaranteed income to pursue a livelihood more closely aligned to their passion and lifestyle preferences. Reasons include seeking rewarding work, wanting to set your own hours, and a desire to kindle the entrepreneurial spirit; regardless of why you want to jump into the small business world, any reason is a good one!
Chances are, if you’re reading this, you’ve already made the jump, or you’re getting ready to start your venture. Most professional providers want to spend their time and energy on delivering exceptional service to their clients – not having to worry about confusing legal hurdles and red tape.
Don’t worry. With a little bit of guidance you’ll be well on your way.
The first question you should be asking yourself is “how do I want to structure my business?” Sometimes it’s as easy as creating content and selling it to your friends and family, no fancy bells or whistles needed. However, if you’re looking to grow your company, protect yourself from potential liability, and take your entrepreneurship to the next level, being deliberate in how you organize your company is important.
There are generally three ways that small businesses can be structured:
1. Sole Proprietorships
Sole proprietorships are the easiest and the least complicated method of business organization. One individual, as the sole proprietor, is in charge of all business-related activities. The business lives and ends with the sole proprietor, and as they are one and the same. Business taxes and liability are directly attributed to the individual.
Generally, these structures are appropriate when the business is just starting out, smaller in scope, or if you’re not entirely sure you want to take the full plunge into the small business world. As there are no complicated set-up procedures, fees, or costs, it is easy to test some ideas out.
However, with the business liability being attributed back to you, you open yourself up to a lot of risk (i.e. if someone got injured - physically or financially - from the professional services you provided them). So if you’re running a sole proprietorship, please be careful.
Partnerships are similar to sole proprietorships in two key ways: unlimited personal liability, and business income attributable directly to the individual.
The major difference being, as the name implies, two or more persons are carrying on a business together with a view to profit (as opposed to the lone individual).
That is not to say that partnerships are inflexible; partnership agreements can be drafted at the outset to ensure that certain roles, rights, and responsibilities are given to specific partners, and additional provisions can set out what is to happen in the event of liability.
Despite higher setup costs, annual fees, and cumbersome administrative tasks, corporations are the business vehicle of choice for most entrepreneurs.
For good reason.
In the eyes of the law, corporations are separate legal entities, meaning that they can enter into contracts, have bank accounts, and are required to pay corporate tax.
The two key benefits of a corporation relate to its flexible business structure. Corporations allow many individuals to partake in the business (i.e. shareholders) and maintain limited liability if the business goes under. In other words, investors are only liable for the amount invested - their personal assets remain separate and untouched.
A key consideration when setting up a corporation is how to get paid. This is particularly important if the corporation is a solo-show, meaning that the entrepreneur wears the hats of director, shareholder, and officer all at once.
Entrepreneurs can either pay themselves through corporate dividends or by being the corporation’s employee and receiving a wage. Generally, total taxes are lower on dividends but, as any good lawyer will tell you, it depends! Learn more about the law and get the help you need at goodlawyer.ca.
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