Friday, May 14, 2010

Preparing to go into business

Let's look at the deeper meaning of Going Into Business.

You're planning to go into business for yourself. Is there a difference between a business and a company?

Although you'll often hear the terms "business" and "company" used interchangeably, they don't mean exactly the same thing.

The word business generally applies to any venture whose purpose is to make a profit, whether you're selling shoes, software, or your services as a consultant.

If you decide to go into business, you have three legal forms to choose from: the sole proprietorship, the partnership, and the company (or corporation). each has its own advantages and disadvantages.

As a sole proprietor, you own your business directly. However, you are personally responsible for all debts of the business. If things go badly, you can lose everything, since the creditors of the business can seize your house, your car, your personal bank accounts and investments, and other assets.

In a partnership, two or people pool their resources, financial and otherwise, to carry on a joint business venture in order to share the profits (and the losses). The partners are jointly responsible for the debts of the business - and its creditors can seize their personal assets.

For this reason, many entrepreneurs decide to incorporate: that is, they found a company. Rather than owning the business directly, they own the company (i.e. they become shareholders) which will carry on the business.

A company (also called a corporation) is a distinct legal entity, with its own assets, liabilities, rights and obligations which are distinct from its shareholders and directors. (Directors run the business; they may or may not be shareholders).

Your company will be responsible for the debts of the business, and your personal assets will be safe from the company's creditors. This is because the company has a distinct legal personality from that of its shareholders and directors.

You should note, however, that there are some exceptions to this rule. For instance, directors are personally liable for the unpaid salaries of the company's employees under certain conditions.

Also, you cannot use a company to do something which is fraudulent or in bad faith. For example, a city councilor who owns a snow removal business cannot get around the conflict-of-interest rules forbidding him to bid on city contracts by "hiding" behind his company.

If your company enters into a commercial lease, you'll find it's a common practice for landlords to require your personal guarantee of the obligations under the lease. As well, if your company borrows money, you can be certain that the bank will demand that you sign as surety for the loan (personal guarantor).

However, there can be significant tax advantages to incorporating. For instance, while a sole proprietor or a partner pays income tax on his or her profits at the same rate as other individuals, companies pay income tax at a lower rate.

The main disadvantages to incorporating are the increased cost and complexity. Some entrepreneurs start out as sole proprietors but incorporate once the business begins to turn a real profit.