Factors to Consider when Starting a Business

Factors to Consider when Starting a Business 

You have an idea.  You may even have a plan.  The question is how do you do turn this idea into a “real” business?  There are several factors you’ll need to consider when starting a business, two of which are absolutely crucial: business structure and finance.  One of the first decisions you’ll need to make is what structure your business will take.  This decision will have legal and tax implications, so you must select one and operate within that structure’s guidelines[1].  There are three common business structures in Canada:

1. Sole Proprietorship
You are the business and own 100% of it.  Choosing to do business as an sole proprietor is your simplest option, and one that many small business owners prefer.  The advantages of it are the freedom of full control, minimal costs, tax advantages on your personal income, and undivided earnings.  However, as a sole proprietor you are also accountable for all parts of your business (including debts and losses), and creditors can claim your personal assets as well as the business if you fail to pay.[2]

2. Partnership
A partnership is a group of two or more who set up a business together.  The benefits of starting a partnership are the inexpensiveness to set it up, shared losses and profits.  However, since there’s no legal difference between you and your business you’re still liable for all business activities like a sole proprietor.  Additionally, you may experience conflict with a partner that could potentially damage the business outlook[3].

3. Corporation
A corporation is a separate legal entity from you and is set up formally with a number of shares divided between yourself and others, indicating ownership in the corporation.  The advantage of a corporation is keeping your assets separate from the company, so if the company goes insolvent it is less likely you will be personally liable.  Likewise, if you exit from the company, the corporation will live on without you.  One unique aspect of the corporation is the ability to sell shares of the company to raise capital it[4].
 
Another key consideration is how to finance your business.  Even if you have the greatest idea in the world and decided on the right business structure, your opportunities will be limited if you don’t have the capital necessary to get the business off the ground.  Until you have a steady stream of revenue, and even after that, you will likely need to finance the business.  Key assets are essential to the business, if you don’t have the money to strike when the iron is hot you may lose out on a once in a lifetime opportunity. Entrepreneurs often report that getting financing is the most challenging aspect of starting a business.  There are, however, both government and private-sector sources of financing that can help you get your business off the ground[5].  Two common forms of that financing in Canada are:

1. Debt
Any liability or obligation of a corporation is a debt.  Debt can be short-term, such as trade credit advanced to the corporation by its employees, or long-term that actually forms part of the company’s capital structure[6].  The benefits of debt to the company (borrower) is the ability to raise capital without selling any shares.  The benefit to the creditor is that, in addition to receiving interest payments, if the company goes insolvent there is a degree of certainty over repayment of the debt.

2. Equity
Equity can be described as an ownership interest in an incorporated entity, represented by shares.  The benefit of equity for the company selling it is the likelihood of more financing.  The benefit of the entity purchasing the equity is, in addition to dividend payments, the ability to sell the shares for a higher price as the company increases in value.  One significant aspect of equity vs. debt is that equity is subordinate to debt, meaning greater risk (and reward).
 
It is essential to understand the options for structuring and financing your business.  There are legal and tax implications depending on what form your business takes and the financing it receives.  For more information on choosing a business structure or financing options, it’s a good idea to consult with a qualified lawyer or accountant.
 
For information on how to register a business, visit: https://www.alberta.ca/register-business-name.aspx
 
Bradley Mills is a member of the BLG Business Venture Clinic and is a third-year law student at the Faculty of Law, University of Calgary.
 
REFERENCES:
[1] Royal Bank of Canada: Choosing a business structure, online at: <https://www.rbcroyalbank.com/business/pdf/Choosing%20Business%20Structure.pdf>
[2] Ibid.
[3] Ibid.
[4] Ibid.
[5] Government of Canada: Financing your new business, online at: <https://canadabusiness.ca/starting/financing-your-new-business/>
[6] Bryce Tingle, Start-up and Growth Companies in Canada: A Guide to Legal and Business Practice, Third Edition, LexisNexis Canada Inc. (2018).