Small Business Talk: Business Structure and Business Name

  1. Naming your business

Selecting a name for your company is a crucial step in establishing your business. The following considerations should be made when naming your business.

Why is the business name important?

  • A business name serves as an identifier for your company.
  • Provides an effective advertising and promotional tool that can help your target market understand the goods or services you offer. 

Is the name unique? Is it memorable?

  • The business name can’t be the same or very similar to, an existing business or trademark. Prior to selecting a name, perform a business name search online to ensure that you are legally allowed to use it.
  • Research and register the availability of a domain name for your company. If “.com” or “.ca” are not available, consider “.net” or other commonly used categories of domain names.
  1. Selecting a business structure

When setting up your company, you must first consider the structure of the business. The type of structure you choose will significantly impact your legal liability, taxation of business income, and record keeping. Below are the most common structures:

Sole proprietorship

Why should I operate as a sole proprietorship?

  • This structure is easy to execute and offers complete control to you, the owner.
  • During the startup phase, there is a tax advantage of deducting any business losses against other sources of personal income.

Why might this not be the best option for me?

  • You are personally liable for all debts and claims incurred by the business (unlimited liability).
  • Once profitable, income from the business will be subject to tax at personal marginal rates (will likely be higher than corporate rates).
  • Cannot share business profits with family members in the form of dividends.
  1. Selecting a business structure (continued)

Partnerships

Why a partnership?

  • Good business structure if you want to carry on a business with a partner and you do not wish to incorporate your business. Startup costs are shared equally by partners.
  • In years of business losses, the partners are able to include their share of the partnership loss on their personal tax returns which may offset other income, thus reducing tax liability.

What should I be aware of?

  • No legal difference between the owner and the business (unlimited liability as mentioned above).
  • Each partner is held financially responsible for business decisions made by the other partner.
  • Cannot share business profits with family members in the form of dividends.

Corporations

When should I incorporate and why?

  • Shareholders are only personally at risk for the amount invested in the corporation (limited liability).
  • When there are significant profits being re-invested in the business, and the profit level of the business would otherwise cause the business owner to bear tax at rates higher than would be payable by a corporation.
  • Ownership of the corporation is transferrable. Therefore, there is room for succession planning.
  • The taxable gain on sale of shares of a qualified small business corporation are eligible for the $800,000 lifetime capital gain exemption.

Why should I wait to incorporate my new business?

  • More expensive to incorporate and maintain than sole proprietorships and partnerships.
  • Corporations are closely regulated and often, extensive corporate records are required to be maintained and filed annually with the government.

Food for thought: There are other hybrid structures that may be more suitable to your needs. Consultation with a professional services firm will undoubtedly help determine the most beneficial structure to help plan for the future.

Why do I need to become a strong bookkeeper (or at least know one)?

  • If you are carrying on a business or engaged in a commercial activity in Canada, you are required by law to keep adequate records.
  • Your business records most provide enough details to determine your tax obligations and entitlements for a period of six years. Some historical documentation surrounding your business must be retained indefinitely. 

Where can I turn for more information?

Interested in learning about grants and government incentives?

In collaboration with the WEtech Alliance, Deloitte is excited to host a free seminar on grants and government incentives, such as the Ontario Interactive Digital Media Tax Credit. Please register at crashcourseongovernmentincentives.eventbrite.ca.

This blog was written by the team at Deloitte Windsor. Deloitte is a proud Sponsor of WEtech Alliance.