Types of Business Organization Models
There are three major business organization models, each with their own set of advantages and disadvantages. Depending on the stage, function, and attributes of your business, one of the following will be more suited to your organization.
Three Types of Business Organization Models
This blog highlights the advantages and disadvantages of three different business organization models: Sole Proprietorship, Partnership, and Incorporation.
Advantages to Sole Proprietorship:
- Inexpensive form of ownership to set up.
- Any losses generated from either your business or properties can be used to offset against other personal income.
- Simple to keep track of all your income and expenses.
Disadvantages to Sole Proprietorship:
- You have the potential of falling into a higher tax bracket if your company is making significant financial gains.
- Unlimited liability — as you are not protected by the veil of a company, any liability issues will fall on you, the business owner, personally as opposed to your company.
Advantages to a Partnership
- It’s simple and easy to set up.
- Seek the guidance of a professional when entering into a partnership agreement. A partnership agreement can assist in the delineation of tasks between the partners.
- Any loses generated from the partnership can also be offset against other sources of income to lower your personal tax liability.
Disadvantages to a Partnership
- No continuity once the partnership is broken.
- Unlimited Liability — all partners are jointly liable for the action of any partner in the business.
- If you earn significant income in the partnership, you can be subject to a much higher rate than earning income in a corporation.
Advantages to Incorporation
- Limited Liability — incorporated businesses are separate legal entities and, largely, the liability of incorporated businesses does not run to the individual(s) running the business.
- Continuity — the business remains in existence even with changing directors, shareholders, or owners.
- Optimizing your income and taxes — depending on the type of business, your personal situation, and the position the business is in can affect your tax savings for the future. We suggest speaking with your accountant about potential tax advantages available to you.
Disadvantages to Incorporation
- Another Tax Return – you will have to file both a corporate and a personal tax return. You may wish to speak with your accountant regarding potential tax credits.
- More expensive to set up than a sole proprietorship or partnership — there are certain set up and registration costs associated with both the Ontario and Federal Governments.
- Closing a corporation is more difficult — it is a more labour intensive process when closing down all accounts and either selling or cancelling shares in a corporation, and it can become time consuming.