Sole proprietorship or incorporation: which is the best for your new business?

New businesses face many challenges, from funding to hiring. It's important to know the benefits and drawbacks of sole proprietorships, partnerships, and corporations before making this important decision.

• About 70 per cent of new business owners opt for the sole proprietorship, the simplest form of business structure in which the owner runs the business on his own and is held personally responsible for its debts.
• But the fact that this is the most popular type of business entity doesn't always mean it's the best.
• Depending on the type of business you operate and your individual needs, it might make more sense to establish a partnership or a corporation.

• One of the reasons this business structure is so popular is that owners have full control of their business and can keep all the profits.
• A sole proprietorship also tends to be simple and inexpensive to create, involves low startup costs and is less burdened by government regulations.
• Finally, sole proprietors enjoy tax advantages (such as being able to deduct losses from their personal income) if their new business runs into trouble.
• On the downside, just as sole proprietors take all the profits of their business, they are also solely responsible for all the debts.
• Their business liability is unlimited, which means that creditors can come after their personal assets to cover business debts.
• In addition, as a sole proprietor, the taxes you pay are based on your personal tax rate, which means that you could find yourself in a higher tax bracket as your business becomes more profitable.

• By entering into a business partnership, you share both the profits and the liability with your partner(s).
• Like sole proprietorships, partnerships are relatively simple to establish, and partners can combine their resources to get their business started.
• Partners to the business have the opportunity to establish a clear partnership agreement, allowing you to protect your interests, and can benefit from their combined experience.
• Finally, as with sole proprietorships, partnerships offer tax benefits when a new business loses money.
• On the other hand, like sole proprietorships, partnerships don't recognize a legal distinction between you personally and your business, which means you and your partner could be forced to pay off business debts with personal assets.
• Beyond this, it's incumbent upon you to identify a partner whom you can trust and with whom you can effectively work and make joint business decisions.

• Unlike sole proprietorships and partnerships, corporations are legal entities which are distinct from the shareholders who own them.
• This limited liability feature of corporations is one of their principal advantages, as creditors can't come after your personal assets to pay off debts.
• It's also easier to transfer ownership of a corporation, and to raise necessary capital.
• Incorporating, however, also means you'll be subject to more government regulations, and they tend to cost more to establish than either partnerships or sole proprietorships.
• Finally, establishing a corporation will require that you maintain substantially more documentation, including records of important meetings, and that you submit these documents to the government each year.

• Every business is different, and no single business structure is right for everyone.
• Unless you feel confident that you have all the necessary facts, you should consult with a trusted attorney and an accountant before deciding which type of business entity is best for you.