How to Select Your Business Structure
- Feb 6
- 4 min read
This lesson digs a little deeper into the technicalities of starting your wellness business so you can be legally prepared. It will help you understand the inner workings and legal technicalities of running a business.
Lawyers, bookkeepers, accountants, and business coaches (including myself) are sometimes a necessary part of running a business smoothly. I am a jane-of-all-trades and love to DIY everything, but even I work with marketing specialists and other coaches to further my understanding!
*Note: Please be sure that you research how the legal entities function in your country/region. Many of the examples I give below are terms used from Canadian verbiage but have the same structure concepts. For example, in the USA, Canada's incorporated (Inc.) businesses are known as a limited (Ltd.) corporation. A lawyer can help you decipher what is appropriate for your country and business.
Before you register your business, you need to know the following:
✓ What regions/territories/countries will you be operating in
✓ What type of business best suits your needs
✓ What your proposed business name will be
As a reminder, a business is "an activity where there is a reasonable expectation of profit and there is evidence to support that intention". Thus, if you plan to coach, make money, and have a website that promotes these services, you are running a business.
The structure you choose for your business will affect how you register it, report your income, and the type of tax returns to file each year.
Here are the definitions of each tier of business you can expect to see:
SOLE PROPRIETORSHIP
This is an unincorporated business that is owned "solely" by yourself and is the simplest of business structures.
You as the owner have the sole responsibility for everything that goes on in your business including, making decisions, receiving all the profits, claiming all losses, and do not have legal separate status from the business. That means that you legally assume all the risks related to the business as well, including personal assets and property.
You will pay personal income tax on the net income generated from your business. If you choose to run as a sole proprietor you can choose to register a business name operate under your name, or both.
CORPORATION
A corporation is a separate legal entity. It can enter into contracts and own property in its name, separately and distinctly from its owners.
It may have some of the following features:
✓ It is a separate legal entity with a lasting existence
✓ It can generally raise large amounts of capital (money or other assets) more easily than a sole proprietorship or partnership
✓ The shareholders cannot claim any loss the corporation incurs
When forming a corporation, the owners transfer money, property, or services to the corporation in exchange for shares. The owners of these shares are called shareholders.
You can buy and sell shares of a corporation without affecting the corporation's existence. A corporation continues to exist unless it closes, amalgamates, or gives up its charter for reasons such as bankruptcy.
You set up a corporation by completing articles of incorporation and sending the documents to the appropriate provincial, territorial, or federal governments.
PARTNERSHIP
A partnership is an association or relationship between two or more individuals, corporations, trusts, or partnerships that join together to carry on a trade or business.
Each partner contributes money, labor, property, or skills to the partnership. In return, each partner is entitled to a share of the profits or losses of the business. The business profits (or losses) are usually divided among the partners based on the partnership agreement.
Like a sole proprietorship, a partnership is easy to form. A simple verbal agreement is enough to form a partnership. However, most partnerships are governed by a written agreement setting out rules for partners entering or leaving the partnership, the division of partnership income, and other matters.
The partnership is bound by the actions of any member of the partnership, as long as these are within the usual scope of the operations.
Overall, there are advantages and disadvantages to running each type of business and which one is the right for you is dependent on what type of business you are running.
For example, a sole proprietorship is perfect for a consultant or coach. It is uncomplicated to set up, it costs less to run from a financial standpoint, however, you will hold all responsibility if something goes wrong. It is important to carry proper liability insurance for your business for this reason.
If you are thinking of starting up a gym, restaurant/food company, or plan to have a partner, you may want to think about incorporating. Doing this separates you legally from potential financial or legal liabilities, and can allow for multiple shareholders to invest in the company. The downside is that you will incur more financial start-up costs including lawyer fees, tighter expectations on reporting income and taxes, and thus more accounting fees too.
Determine Which Business Structure is Right for You
Now that you've learned about the different types of business structures—sole proprietorship, corporation, and partnership—it's time to apply this knowledge to your own business idea. Consider the nature of your business, the level of liability you are comfortable with, your financial capabilities, and how you plan to raise capital.
These factors are crucial in determining the most suitable business structure for your needs:
1. Reflect on Your Business Goals and Needs: Think about your long-term goals and the day-to-day operations of your business. Which structure aligns best with your vision?
2. Assess the Risks: Understand the personal liability involved with each structure. How much of your personal assets are you willing to risk?
3. Consider Financial Implications: Look at the tax implications and the potential for raising capital. How do these align with your financial planning?
4. Consult Professionals: This decision has significant legal and financial implications. It is highly recommended that you speak with a business advisor, accountant, or attorney who can provide personalized advice based on your specific situation. These professionals can help clarify any doubts and assist in making the best decision for your business.
5. Make a Decision: Based on your analysis and professional advice, decide which business structure best suits your needs. Remember, the structure you choose will influence your business registration process, tax obligations, legal liabilities, and your ability to grow.
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