Choosing a legal structure for your business

You've put the final touches on your business plan and you're all ready to go. But which legal structure should you choose? Should you opt for a business corporation, a partnership, an NPO or a cooperative, or go the self-employed route?

Picking the right legal structure is crucial. Here's a tour of the basics to help you weigh your options. 

A business corporation's owners hold shares that can give them a portion of the business's profits via dividends.

Pros

• Shareholders aren't personally responsible for the company's obligations, except in certain cases.
• There are two ways of selling the company: selling shares and selling assets.
• Business corporations can pay out salary and/or dividends in whatever proportion works best for you.
• They often pay less in tax than a self-employed worker with the same amount of profit. And the tax savings are even greater if you keep the money in the company and reinvest it, for example. But you'll need to consider the tax implications when taking money out of the company via salary or dividends. When you add up the tax paid by the company and its shareholders, business corporations usually have an edge, but it's smaller than a lot of people think.

Cons

• Business corporations have to fulfill specific legal and accounting obligations. Incorporating and administering a corporation can be more complex and costly.

Members of the board of directors can be held personally liable for certain obligations like salaries, payroll deductions, and GST and QST payments.

Partnerships are formed between 2 or more people known as "partners." The classic example is a law firm.

Pros

• A partnership may be easier to operate than a business corporation.

Cons

• In general, the partners are personally responsible for the partnership's obligations, although some partnerships do have different regulations regarding obligations.
• At the end of the year, the profits (or losses) are divided up between the partners, who declare their shares on their personal income tax returns. The tax bill is often higher than with a business corporation.

 What if starts getting a bit too high? "The company's accountant may recommend changing the structure to a business corporation," says Ms. Bois.

A cooperative is a group of people with shared economic, cultural or social needs. There are different types of cooperatives, like ones for housing, workers and agricultural producers. 

With for-profit cooperatives, profits are reinvested, saved or paid out in member dividends.

Pros

• Members are not held personally responsible for the cooperative's debts, apart from the value of their shares. For example, a creditor wouldn't be able to seize a member's cottage, unless it was put up as collateral for a loan or other credit taken out by the cooperative.

Cons

• All members usually have equal "owner" status and the same number of votes, which isn't necessarily suitable for all business activities.

"The cooperative business model is very democratic," says Ms. Bois. "It really embodies values like equality and fairness."

NPOs are enterprises with a social mission, like protecting a lake or fighting poverty. They are NOT intended to turn a profit.

Pros

• NPOs are categorically exempt from paying tax.
• Members are not held personally responsible for the organization's obligations.

Cons

• NPOs must spend their revenue to achieve their mission and aren't allowed to accumulate too much cash.
• They cannot pay out profits to members. But they can pay salaries to employees.

"If the model fits, the real benefit to forming an NPO is tax savings," says Ms. Bois. "It maximizes the amount of money available to help the organization achieve its mission."