You may have heard your friend or family member saying that they are carrying on business as a sole proprietor or as a partner. You may also know a friend or family member who is a shareholder of a company or you may be a shareholder yourself. However, what does it mean to be a sole proprietor, a partner or a shareholder? What are the differences? Most of all, why does it matter? In today’s article, we will answer those questions.
What is a sole proprietor?
A sole proprietor is a person who is carrying on business on his own account. Forming a sole proprietorship does not require much work. It simply comes into existence when a person starts to carry on business on his own account. Further, the name of the sole proprietorship need not be registered if the sole proprietor is carrying on business under his own name.
What is a partner?
Becoming a partner, on the other hand, requires two persons. In order to form a partnership, there must be more than one person who is willing to carry on business with you. However, that does not mean that the partners must sign an agreement or declare that they are forming a partnership. It simply comes into existence when persons carry on business together with a view of profit. Therefore, you may find yourself to be in a partnership if you are carrying on business together with another person.
What is a shareholder?
A shareholder is a person who owns shares of a company. The shares represent the shareholder’s ownership of the company. Forming a company, unlike a sole proprietorship or partnership, requires some ground work. For example, in order to incorporate a company in British Columbia, you must file an incorporation application with the BC Corporate Registry. Further, you must obtain the consent of all the individuals who are to act as the directors of the company, issue shares and pass the necessary resolutions. Once incorporated, a company will be considered as a separate legal entity that is distinct from its shareholders, which means that it can own assets, open up a bank account, borrow money, lend money, sue or be sued all in its own name.
What are the differences and why do they matter?
Although a sole proprietorship is the simplest form of a business, the owner is responsible for all the debts and obligations of the business as they and the business are essentially the same legal entity. Further, a sole proprietor may be found liable for the wrongs committed by employees if those wrongs were committed in the course of the business.
Forming a partnership allows the partners to pool resources together. However, each partner is responsible for all the debts and obligations of the business (with the exception of a limited partnership). Further, a partner may be found liable for the wrongs committed by other partners or the employees of the partnership if those wrongs were committed in the course of the business.
In a company, a shareholder is not liable for the debts and obligations of the company. They risk only the amount of the money the shareholder has invested in the company by way of purchasing shares of the company. As the company and the shareholder are separate legal entities, creditors of the company cannot seize assets of the shareholder in order to satisfy the debts of the company (unless the shareholder has personally guaranteed those debts), unlike a sole proprietorship or partnership.
Another thing to note is that there may be tax considerations for adopting one form of a business over another. For example, the income or loss of a sole proprietorship or a partnership is taxed as if it is the income or loss of the owners. Therefore, in certain circumstances, it may be advantageous to carry on business as a sole proprietorship or partnership, especially if the business expects to incur losses for a period of time. The income or loss of a company, on the other hand, is not reported as the income or loss of shareholders, as the company and shareholders are separate legal entities. Shareholders will be taxed when they receive money from the company in the form of dividends or when the shareholder sells his shares. Although it may seem disadvantageous to be a shareholder of the company as the income of the business may be taxed twice, there are many exceptions and rules which make a company more attractive than a sole proprietorship or partnership from a tax perspective, such as the lower tax rate for companies, the capital gains exemption for qualified small business corporation shares and tax deferral options.
In British Columbia, you may carry on business as a sole proprietorship, a partnership or a company. In this article, we have explored the differences between them and found that each form has its own advantages and disadvantages associated with them. If you require advice on which form of business is best for you please contact us as we would be honoured to assist.