Step #3: Prepare a Business Plan
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Prepare a Business Plan
One of the first decisions you must make when you are starting a small business is what business structure you should choose. You need this information to comply with any government regulation and licensing, as well as for opening a business bank account.
There are four basic structures to choose from in Ontario and each of them serve different legal and tax needs.
Sole Proprietor - A sole proprietorship is a business owned by one person. It is the easiest and most common way to start a business. As your business grows, you can choose to incorporate it later. A sole owner is fully responsible for all profits, debts, and obligations related to the business. This means that a creditor can make a claim on your personal or business assets against any debt.
Pros:
- You have full control of your company
- It is easy and more affordable to set up
- You can deduct losses and expenses from your personal income
- You earn all the profits
Cons:
- You are responsible for all debts and losses
- Creditors can take your personal assets and your business to pay debts
- Your business name is not protected
- Your income is taxable at your personal rate
Partnership - A partnership is a business owned by two or more people. Partners combine financial resources, and share in profits and losses, according to any agreements established. It is wise to establish the terms of the partnership, to protect yourself in case of disagreement or dissolution, by drawing up a business agreement (typically with the assistance of a lawyer).
Pros:
- It is easy and more affordable to set up
- Partners can contribute to costs and provide different skills to the business
- Debts and losses are shared between partners
- Expenses and losses can be included on your tax returns
Cons:
- All partners are responsible for all debts and losses
- Finding the right partner and agreeing on business decisions can be harder
- Must register a partnership name
Corporation - A corporation, whether for-profit or non-profit, can be registered at the federal or provincial/territorial level. The business is a legal entity that is separate from shareholders. Shareholders of a corporation are not personally liable for debts, obligations, or acts of the corporation, so long as the debts are not personally guaranteed. Note: If you choose to register your business provincially, you can always change to federal incorporation later.
Pros:
- You have limited liability
- You can transfer ownership
- You have more access to capital and grants
- Your business name is protected (if you register federally)
Cons:
- It costs more to set up a corporation
- The tax rules for corporations are more complex
- You will need to provide annual filings and corporate records
- Less privacy regarding financial and other affairs
Co-operatives - A legal co-operative is a corporation owned by an association of persons seeking to satisfy common needs (access to products or services, sale of their products or services, employment, etc.). Co-operatives are managed by everyone involved with the co-op, including consumers, producers, and workers, all of which contribute their opinions as to how the organization should be run. Just like a corporation, it can be registered provincially or federally, and each option comes with pros and cons. For more information on starting a co-operative, visit ontario.coop.
Pros:
- You are not responsible for all debts and losses
- Decision-making is democratic (one member, one vote)
Cons:
- It takes longer to make decisions
- All members need to participate to succeed
Is the name of your new business already taken? Search the Ontario Business Registry for free to find out.
Partnership/Shareholder Agreement
If you decide a partnership is the way to go for your new business, serious consideration should be given to defining the business relationship by way of a partnership agreement. You can allow your relationship to be defined by provincial statute law (profits and liabilities are split equally), but it is always a good idea to have a written agreement. It forces each person to determine their respective roles and responsibilities before going into business together and reduces the risk of conflict.
Consideration should be given to having a lawyer, skilled in working with small businesses to create the agreement. An agreement should be put in place at the beginning of the relationship, before any disputes may arise. A business relationship is relatively easy to create, but it can be difficult to maintain, and can also be very troublesome to dissolve.
The partnership agreement or shareholder agreement should therefore deal with:
- What do the parties expect each other to do while they are in business (i.e. is one partner expecting to sit behind a desk while the other partner makes the product, sells it, pays the bills, collects the invoices, deals with the accountant, lawyer, banker, etc.)?
- What happens if one person dies, becomes disabled, or goes personally bankrupt?
- What kind of decisions must be made by all parties rather than just by one or two of you?
- What will your response be if the marriage of one business associate breaks up, and a judge orders
that the spouse be given an interest in the business? - How is the partnership property is owned?
- How is the work divided?
- How are the profits and liabilities shared/divided?
Additional services:
- Ontario Business Registry: 1-800-361-3223
- Corporationcentre.ca: 1-866-906-2677
- Corporations Canada: 1-866-333-5556
- Dye & Durham Corporation: 1-800.268.7580
- ESC Corporate Services Ltd. (Toronto): 1-800-668-8208
Register your business online
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