Congratulations on deciding to start your own business! You will need to choose your method of carrying on a business. Here we address three potential business vehicles to consider depending on your needs: (i) Sole Proprietorship, (ii) Partnership, and (iii) Incorporation.
The Sole Proprietorship is perhaps the easiest method of carrying on a business. It comes into existence whenever an individual sets up a commercial operation. The sole proprietor owns the assets of the business and is the ultimate decision maker. There is no formal registration requirement for a sole proprietorship. However, you may have to register a business name. Although relatively easy to set up, this method does not have the benefit of separate legal status and limited liability, as may be found in a corporation.
When two or more persons carry on business together with a view to profit, the relationship is called a Partnership, and its co-owners are called Partners. Similar to a Sole Proprietorship, a partnership is relatively easy to create and does not have separate legal status apart from its partners. In addition, partners are agents of each other and can enter into agreements on behalf of the partnership, thus binding all co-owners. Although not required, it is recommended that partners enter into a partnership agreement in order to clearly set out the parameters of their relationship. Otherwise, the partnership relationship is governed by the default rules of the Partnership Act. When drafting a partnership agreement, it is crucial to address issues in the partnership relationship such as: admission of new partners, dissolution, how decisions will be made, retirement of a partner, etc.
Unlike Sole Proprietorship and Partnership, a Corporation is a legal entity separate in law from its owners. It can therefore own property, carry on business, possess rights, and incur liabilities. One of the main advantages to carrying on a business through this legal form is the limited liability and perpetual existence of the corporate form. To create a corporation, one or more individuals who are 18 years of age or older, not mentally incapable, and not bankrupt sign and file Articles of Incorporation (which is like a birth certificate for a corporation). Articles of Incorporation typically include information such as: company name, address of a registered office, the number of directors; the number and characteristics of shares authorized to be issued, and any restrictions that are imposed on the transfer of shares.
There are three major sets of players in a corporation: the directors, the officers, and the shareholders. Directors oversee the corporation and make major decisions. Officers carry out the day to day operations and implement the policy decisions put in place by the directors. While shareholders “own” the corporation through their ownership of its shares, they do not own the property belonging to the corporation, or assume its rights and liabilities due to the corporation’s separate legal existence. Shareholders are entitled to vote, elect directors, receive the remaining property of the corporation upon dissolution, and typically share in the profits through dividends declared by the directors.
*Disclaimer: The information provided in this article is NOT legal advice but fundamental information to be further inquired upon professionally. You should always consult with a qualified lawyer to obtain proper advice.