Logo Business
Basics for
Engineers by
Mike Volker

Starting a Business (Canadian context)

Anyone can start a business. A business can best be described as any activity designed to generate a material transaction (e.g. cash exchanged for something received). Some people run their businesses as personal businesses - i.e. they are synonymous with that business. Any business income or loss is reported on a personal basis to the tax department and not by the business. Others incorporate companies in which case they detach themselves from the business in a legal and tax sense. Be our own boss! This may be your ticket to immortality.

Legal Forms of Business

What legal form should my business take? There are a number of  legal formats for establishing a business. However, in the simplest terms there are only two formats: Incorporated and Unincorporated. In the case of an unincorporated business, you as a person are the business. It's like having a separate bank account which you use for the transactions of your business. All you have to do is to "hang out your shingle", i.e. come up with a business name (or simply use your personal name), register it with your local government (to get tax numbers and any necessary business licenses) and start working on getting customers. Usually this form of business is referred to as a Sole Proprietorship. It is the simplest and least expensive format. You, as the owner, receive all the profits and you assume and accept all the risks personally. Really simple!

A Partnership is an extension of the sole proprietorship and is similar to a sole proprietorship except that there is more than one person involved. In this case, a partnership agreement spells out the sharing of risks and rewards among the parties. Profits and losses as well as liabilities flow through to the individual people involved as spelled out in said agreement. This is an arbitrarily determined legal partnership. Limited Partnerships may be formed when several people wish to invest in a business but do not necessarily want to run or manage (or take on risks associated with) the business. In this case, limited partners are liable for debts only to the extent of their original contributions of capital. In terms of what you need to do, i.e. licenses, tax numbers, name registrations, etc. - the best bet is to check with a business advisory service (e.g. a law firm, government office, etc.) because the requirements will depend on where you do business and perhaps what kind of business it is. Requirements will vary from city to city and province (or state) to province (or state).

Often, professional firms (law firms, accounting firms) are set up as partnerships but with a special form of partnership limiting the liability (known as an LLP) of the partners. In B.C. for example, until April 2004, active partners in a partnership in B.C. were personally responsible for the liabilities of all the partners and the partnership itself. An LLP is a partnership in which each partner is responsible only for his or her own liabilities. It makes partners more fully accountable to their clients or customers, and ensures all partners can engage in their business without the concern of having their personal assets at risk, unless there is negligence or wrongdoing. Now, LLP's can be formed in B.C. by almost anyone under B.C.'s updated Partnership Act.

Incorporation is the preferred route for most people - especially when several investors or founders are involved and especially if the aspirations of the owners are such that significant growth (and risks) are mandated.

Other, more subtle forms of business format, entail Joint Ventures, Franchising, Dealerships, or Licensing arrangements. However, in each case it will be either you personally (or a company which you incorporate) which becomes the participant in one of these alternate forms. In a Joint Venture arrangement, you work with another company and an agreement between the parties spells out the obligations and rewards of the participants. This format might apply if you take your idea to a larger, established company and you access their capital and talent and you supply your ideas or designs. Instead of starting a business from scratch, you can buy a Franchise - i.e. the right to use an established business name and model in a particular geographical area (e.g. a restaurant). This eliminates many of the start-up risks, but will require you to make up front payments to the franchisor and will require you to work within the guidelines of said franchisor. When operating a dealership, you act as an agent for other companies - selling their products under your name or in your store. Dealerships can be incorporated or unincorporated.

Other Options

An often unconsidered option for the entrepreneur is that of a Licensing Agreement. In this case, you would license another company to take your innovation or idea to market in exchange for a fee or a royalty stream. This is an ideal option if you are not interested in running a business or if you plan to have a one-shot product wonder. Why go through all the rigors of owning and running a business when you can piggy-back onto an already established venture. There are many companies who need your product! Large companies are always on the lookout for entrepreneurial innovations or businesses to acquire. Think about this as a viable option. Look at it this way - it is a lot less risky to get 5% off the top (i.e. 5% on someone else's sales) than it is to try to generate a 5% bottom line (and worry about all the expenses in between!).

A Home-Based Business

You can set up an unincorporated business which you run from your home (or from your briefcase) just by saying so. Technically, you don't need to get permission (you may, however, need a license depending on the type of business). You just do it. Give yourself a name (or use your own name), generate some interest in your products or services (do some form of advertising, even if word-by-mouth), keep a few record books, and have some form of game plan.

Should You Incorporate?

What are you really doing when you incorporate? You are creating another taxpayer! Normally, governments tax their citizens and their corporations. If a business is not incorporated and set up as a new taxpayer, all matters pertaining to taxation and liability rest with the owner of that business. Incorporation is a formal filing procedure with a legal jurisdiction such as the Province of British Columbia. Lawyers will incorporate companies for a small fee, usually in the $300 to $1000 range. Of course, there are also government fees which are levied for doing the corporate registration but these are quite nominal and are typically in the $300 to $500 range, depending on where you incorporate. You can also do it yourself but it is a good idea to get some professional help to make sure it is done properly and so that you know what is being done and why.

Businesses that have not been incorporated can always be incorporated at some later date. The decision as to whether or not to incorporate depends on a few key questions such as:

  • Is this a modest personal side-line or will it be your life's work?
  • Will there be more than one owner of the business? (E.g. partners, investors)
  • What are the personal liabilities issues (e.g. financial credit, product liability)?
  • Are there personal tax advantages to being incorporated?
  • Are there business (or market) advantages to being incorporated?
  • Can you justify the extra expense and paperwork associated with being incorporated?

Another question that should be addressed is that of timing. When should a business be incorporated (if ever)? It might be a good idea to wait with incorporation until certain milestones or events trigger the need to be incorporated. For example, if you are testing the water with a business concept and you are not sure if it will really work or not, you can save some time and expense by doing your product and market development work on your own account and then proceeding with incorporating only when you are convinced that the business makes sense to you.

It is suggested that, no matter what, you seek the counsel and advice of some experts in this field. A good accountant can advise you on various matters pertaining to taxation. Perhaps a good personal financial planner would also be consulted. A good lawyer can advise you on your legal obligations possible personal exposure to liabilities. This may sound expensive, but you can usually get an initial meeting with lawyers and accountants on a "complimentary" basis. After all, they are looking for new clients all the time and they general will invest an hour or two of their time with you in the hope that it will lead to a long term relationship. Talk to others who have done it. One problem with people starting up is that they do not know what questions to ask. For example, how are your shares held? Have you considered family participation? What about off-shore trusts? There is a tendency to not think about questions like "How can I minimize the amount of tax I have to pay if I sell my company for a million dollars?"  Sure, we tend to think that would be a nice problem to have. But, now is the time to give it some thought - before the million dollar gain!

Benefits of Incorporating

When you incorporate a company, remember that all you are really doing is creating a new legal entity -  i.e. a new, taxpaying corporate body with its own "soul" and presence.  Incorporating a company offers you many advantages, even if you are a one-person business. Some of these advantages are:

  • personal liability protection (to a large degree)
  • substantial tax advantages  (especially when you sell a business)
  • a high degree of flexibility in personal financial planning
  • greater control in transferring ownership
  • easier to bring in outside investors and other partners
  • a company survives human death (i.e. may last indefinitely)
  •  Protecting Your Personal Assets

    This is the number one reason why many people incorporate. In case of a lawsuit or judgment against your business, no one can seize your personal assets, e.g. your house, car, boat, bank accounts, etc. unless you have pledged these as collateral. Incorporation is the best protection for personal assets that you can get in business. However, there are other liabilities which you may not be able to avoid by incorporating. For example, if you do not remit certain taxes, you could be held liable as a director of the company. Note that shareholders are not necessarily held liable - only the director(s) and they are not necessarily the same person although in startup companies usually the shareholder(s) and director(s) are one and the same.

    A Possible Tax Shelter

    There are many more tax options available to corporations than there are to proprietorships or partnerships. You can establish various pension, profit-sharing and stock option plans which are favorable to the owners of the corporation. For example, in most cases, a corporation can deduct your life and health insurance premiums whereas you could not do this personally. You can also pay salaries to family members thereby reducing your family's overall tax burden. Furthermore, family members can be shareholders (even through off-shore trusts or tax shelters) and thereby benefit from lower capital gains taxes when they sell their shares. In Canada, owners of a Canadian Controlled Private Company (CCPC), can sell their shares and enjoy the benefit of zero taxes on the first $750,000 of capital gains!

    Small companies are taxed at lower rates. For example, a CCPC pays less than 22% in corporate income tax on the first $200,000 of net profit which is about half the "big" company or personal rate. Therefore, if a profit is made in a CCPC and if the CCPC's owners do not need this profit to be paid out to them, it can be re-invested by the CCPC.

    Other Aspects to Consider

    • A corporation wishing to raise capital is more attractive to investors who can purchase shares of stock allowing you to raise money without incurring debt and thereby avoid interest payments.
    • A corporation's capital can be expanded at any time by issuing and selling additional shares of stock.
    • Shares of a corporation can be easily distributed to family members and others - including other companies. That makes estate and family planning a lot easier.

    Public or Private Company?

    When for-profit companies are incorporated, at least in Canada, they are incorporated as Canadian Controlled Private Companies (CCPC). (Of course there are also other legal entities such as non-profit charities and societies which may be formed.) Companies, as they grow and expand, may become "public" companies, i.e. have their shares listed on a stock exchange to be traded by members of the general public. The possibility of becoming a public company is not something which one needs to be too concerned about when incorporating initially except that care should be taken to ensure strict compliance with the Act to avoid great legal expenses and headaches later on. Again, good legal counsel is recommended. I know of one case where a company was incorporated by the founders to save a few dollars in legal costs but when it was ready to go public, its records and share structure where a mess which first had to be cleaned up (at great expense and time) before the company could be cleared for going public!

    Incorporation Documents and "Articles"

    Companies, especially the financial aspects such as share issuances and ownership, fall under the scrutiny of legislation which exists in whichever jurisdiction they are incorporated. The provinces as well as the federal government each have passed "Acts" of legislation for this purpose. In B.C., the Company Act (replaced in March, 2004) sets forth many details relating to the operation and governance of incorporated companies. These constitute a set of rules by which one must abide. Additionally, when you incorporate a company, you will adopt a set of "Articles", or rules, by which you must abide. This entails several pages of documentation and covers matters relating to the issuance, transfer, purchase and sale of shares, rules pertaining to the calling of meetings, definitions of decision making powers, and many other aspects of corporate governance. These rules are useful insofar as they clearly set out what companies may or may not do. Often, the shareholders of a company will enter into a "shareholders' agreement" among themselves and this may further define certain details about how a business will be run and how ownership issues will be handled. However, such agreements are optional whereas the articles of incorporation are mandatory. It is a good idea to fully understand these articles and to become knowledgeable about corporate governance matters. The B.C. Company Act was recently replaced by the new Business Corporations Act, SBC 2002, c. 57 that came into force on March 29, 2004, introducing both substantive and procedural changes in the incorporation, organization and activities of all British Columbia companies and the registration and obligations of all extraprovincial companies.

    In a B.C., you need to register with the provincial Registrar of Companies (see below). A registration package may be obtained from any government office or from the website. It may take a week or two for the name search and registration. 

    In Canada, you can incorporate federally under the Canada Business Corporations Act (the "CBCA") just about as easily as incorporating provincially. Federal incorporations are handled by Industry Canada. What is best? The quick answer is: "Federal". Why? Because it costs only a little bit more (around $100), you get your company's name protected across Canada (not just in one province), there is more flexibility (although it may be harder to get clearance) in choosing a name, and perhaps most importantly, the CBCA statutes are more closely aligned with those in American jurisdictions and hence it may be easier to conduct business with U.S. entities (e.g. investors, partners, etc). Also, insofar as British Columbia in particular is concerned, there are many variations among companies with respect to the "articles of incorporation", meaning that greater care must given to understanding these. Federal companies are governed by statutes and need not have extensive articles. In B.C., for example, it is always necessary to obtain shareholder approvals on certain matters which could cause logistical delays. It really only makes sense to restrict oneself to a provincial incorporation if you plan to keep the company small, closely held (e.g. you plan to be the sole shareholder), do business only in B.C., do not need cross Canada name protection. If you are a federal corporation, you could then use your name in the Canadian internet domain name system, e.g. yourname.ca. If you are a B.C. company, you'd have to use yourname.bc.ca. A company such as a personal holding company (for purposes of making investments in other firms) would be a good example of a company that you might incorporate provincially. If you're not sure, go with the CBCA. Note - you will still need to get provincial registrations in those provinces where you intend to do business (so that they can get you to collect sales and other taxes), but that's not a big deal.

    There are some other major factors which might affect where one incorporates. One of the most important relates to corporate governance, i.e. the directors of the company. In B.C., a majority of the directors of the company must be Canadian residents with at least one director also being a resident of B.C. This is the same under Federal rules. If you incorporate in the Yukon, then you do not need a majority of Canadian resident directors . This is why this jurisdiction may be favored by foreign companies doing business in Canada.

    Corporate Jurisdiction

    In Canada and the USA, companies are generally incorporated in a province or state. In many countries, incorporations are handled at a national level. If you are a Canadian company and you intend to conduct a substantial amount of business in other countries, you may be advised to incorporate in other jurisdictions. There may even be some corporate tax advantages in so doing because of international tax treaties which exist among trading nations. Obviously, this is an area in which some competent legal and accounting advice will serve you well.

    If you are considering the USA, you could check with a USA incorporation specialist in conjunction with your own legal advisor. Some information on incorporating in the USA can be found at http://www.incorporate.com.

    With respect to Canadian (Federal or Ontario) incorporations, a good (but inexpensive) law firm specializing in corporate matters is the best way to go about this. Check with other entrepreneurs in your area for referrals.

    What's in a Name?

    There's often confusion between corporate names, business (unincorporated) names, trademarks, product names (or brands) and other names such as internet dot-com domain names - not to mention the jurisdiction where a name is registered, incorporated or trademarked. Confusion among names is common in the marketplace. Sometimes similar names are created unintentionally. Sometimes the similarity is intentional. This discussion deals mainly with the selection of an incorporated company name although many of these ideas are applicable to an unincorporated business name.

    How should you choose a name for your company? You are going to have to live with a name for a long time - especially if you advertise and promote the name heavily in which case it will take on value. For example, look at the value in a name such as "Kleenex". A corporate name should be carefully chosen. In some legal jurisdictions, you may be constrained with a choice in names. In B.C., the rules are rather specific: The first part of your name must start with a distinctive non-descriptive word or phrase, for example a geographical location, your name, a made up word or phrase, or initials. The second part of the name must describe the type of business, e.g., shoe store, investments, technology. A third component is called the corporate designation, for example Limited, Ltd., Corporation, Corp., Incorporated, Inc. (If you are registering a sole proprietorship or partnership, a corporate designation is not used.) A name that would meet the criteria would be Bowen Technology Corp. The rules under the CBCA are different. You could, for example, incorporate under a name like RDM Corp. Exxon Corp. would, interestingly, not be approved in B.C. (But, it could be registered in B.C. if incorporated federally!).

    As for the choice of name, here are a few suggestions: Choose a unique name (but not one that's hard to remember), one that is not likely to be "accidentally" copied elsewhere (note - having a corporate name does not automatically give you trade mark rights). It will also differentiate you from your competitors and should be something that your customers will remember. You could incorporate a company called Easytote Luggage Corp. but if another entity has trademarked the name "Easytote" in the USA, you may have a problem. Avoid generic sounding names like Microtek Computers Inc - they are too easily confused with others and too easily copied. I have seen many examples of technology companies in different parts of North America with exactly the same name - by coincidence! You wouldn't want to spend a lot of money promoting a name only to have to change it or find out that another party is deriving the benefit of your promotions. Faddish names are also not a good idea. What's "in" today may be "out" tomorrow. Recently, Internet names with "dot-com" in them are fashionable. But will this popularity last long? Names that endure the test of time are good. Names that are easy to remember are also good. Names with some techy-sounding words may appear to be easy to remember but are often confused with other names or forgotten...e.g. now was that Microcomputers or Microsystems Corp? Short, simple names are also better than long names. Completely fabricated names like Xillix, Xerox, Exxon are good because they are very unique, simple, and can be remembered (hopefully!). Proper names also lend a ring of credibility and respectability, e.g. Hewlett-Packard Corp. Finally, don't restrict yourself too much. If you call yourself the Pinnacle Pager Corp., you may find that the name is no longer appropriate once pagers have become obsolete. If you do feel strongly about using a word like "pager", then at least select a very distinctive first name. Then, if you do need to change the name, it would now be something like Pinnacle Wireless Corp, and not too much of your investment in the name would be lost. As for getting ideas - think "out of the box". Ask some kids. Look up some latin words (caution: when you are picking a name give some thought to international use. Avoid picking an English name that may sound offensive in Japan). Eat some alphabet soup for lunch and good luck!

    Speaking of names, it's a good idea to identify yourself and your business by getting some business cards. Having a well designed business card is very important. Never leave home without a supply of cards.

    Share Classes and (i.e. Capital Structure)

    One of the details of incorporation, covered in the afore-mentioned articles, relates to classes of shares. A company has the right to define its "capital structure" in many different ways, i.e. it can define various classes and types of shares which it will issue. For example, companies usually issue one class of shares, namely "common" shares. These shares are precisely that: "shares" of ownership. Each share entitles shareholders to one vote at shareholder meetings and each share entitles its holder to one share (i.e. 1 divided by the number of shares issued in total) of the corporate profits. You may have heard of "Preferred" shares. Such shares have certain "preferred" rights. For example, they might entitle the holder to a fixed dividend rate. They may also entitle the holder to a conversion into common shares (at a given ratio or formula). They can be used to give investors special rights or additional security in order to attract their investment dollars. Sometimes different types of shares, common or preferred as described as Class A or Class B (or Class C...etc) shares. There are no universal definitions relating to Class A vs Class B. For example, one company's Class A shares might be quite different from another company's Class A shares. The different classes permit companies to assign different rights to the shareholders of these securities, e.g. different classes may have different voting or liquidation rights.

    Startup Checklist

    The following checklist will give you an idea of the essential steps that you have to take to formalize your business - whether incorporated or not. This checklist is particularly applicable to companies planning to operate in British Columbia, but the steps are almost identical in other jurisdictions. You may (correctly so) get the feeling that you will be working for the government. It's actually not as bad as it looks. In fact, until you actually start doing business (e.g. selling something), you don't need to bother with most of this. You can operate under your own name, keeping track of all your expenses for tax purposes. If you need some time for doing product development or design work or just working on the details of how your business will operate, you can afford to wait until you are ready. In any event when you are ready, you can make this process easy for yourself by obtaining the services of a good and hopefully inexpensive business lawyer. This should not be too expensive (around $1000 in legal fees) and you'll have the peace of mind, hopefully, that the paperwork has been done properly. However, you can save a few dollars by doing some of the legwork yourself. Beware, though, rules and regulations are always changing and what you'll find in this write-up may not necessarily be up-to-date.

    Here's how:

    1.Registering the Business - You need to register a business name with the provincial Registrar of Companies unless you intend to operate under your own name without incorporating. A registration package may be obtained from any government office. (It may take a week for the name search and registration). A good place to start is with B.C.'s One-Stop Business Registration System. The Registrar also looks after incorporating. Contact information:

      Registrar of Companies
      2nd Floor, 940 Blanshard Street, Victoria, BC
      PO Box 9431 Stn Prov Gov
      Victoria BC, Canada V8W 3E6
      Tel: (250) 387-7848 Fax: (250)356-0206
      From Vancouver call: (604)775-1041
      Web Site: http://www.fin.gov.bc.ca/registries/corppg/

    2.Business License - If you locate your business in an incorporated municipality (city, town, village or district), obtain a business license from the municipal business license office. (Check the blue pages in the telephone book). This may be important in certain cases, especially when selling to the public.

    3.Land Use and Zoning -  Check with municipal (or regional district) authorities to ensure conformity with zoning and building regulations. This is generally not a big deal and you may be able to skip this step.

    4.Provincial Sales Tax (Social Service Tax) You must register with the Consumer Taxation Branch, Ministry of Finance and Corporate Relations, and collect social service tax on your taxable sales and leases if you engage in any of the following activities: virtually any type of retail sales or services. The Consumer Taxation Branch will issue you a Certificate of Registration and provide information on your responsibilities. Contact:

      Consumer Taxation Branch
      1061 Fort Street
      Victoria, BC V8V 3K5
      Tel: (250) 387-0656

      500-605 Robson Street
      Vancouver, BC V6B 5J3
      Tel: (604) 660-4524

    5.Federal Goods and Services Tax (GST)  If your annual revenue from the sales of taxable goods and services will exceed $30,000, you are required to register for GST. If you are below the $30,000 figure, you need not register. If you do not register, you will not charge GST to your customers and you will not be able to receive a refund for any GST paid on any of your business purchases. For more details contact:

      Revenue Canada Excise
      British Columbia/Yukon Regional Office
      201-4664 Lougheed Hwy.
      Burnaby, B.C. V5C 6C2
      Tel: (604)666-4664 Toll-free: 1-800-463-6737

      (Also check Industry Canada's Startup Assistance website - includes registration, info, help, etc)

    6.Business Number - When you register with Revenue Canada for any one of the following four business accounts: corporate income tax, import/export, payroll deductions and the goods and services tax (GST) - you will receive a Business Number (BN) to identify you to Revenue Canada.

    7.Workers' Compensation Board (WCB) - Most businesses (>80%)  in British Columbia are required to have compensation coverage. The overall responsibility for complying with the Workers Compensation Act and WCB Regulations and for paying assessments rests with you! Contact:

      4514 Chatterton Way
      Victoria BC, Canada V8X 5H2
      Tel: (250) 881-3400 Fax:(250) 881-3481 Toll Free: 1-800-663-7593

      6300 River Road Richmond, BC
      PO Box 5350
      Vancouver BC, Canada, V6B 5L5
      Tel: (604) 244-6182 Fax:(604) 244-6377
      Toll Free: 1-800-661-2112
      Victoria (604) 380-3416
      Vancouver (604) 273-2266
      Web Site: http://www.wcb.bc.ca/

    8.Labour Requirements -  If you are hiring employees or subcontracting for labour, you should know the requirements for minimum wage, statutory holidays and other employer/employee rights. For details, contact the Employment Standards Branch office of the Ministry of Skills, Training and Labour (see blue pages of the telephone book) or:

      Employment Standards Branch
      Suite 400 - 3960 Quadra Street
      Victoria, BC V8V 1X4
      Toll Free: 1 800 663-3316 Fax: (604)387-1200

      201-865 Hornby St.
      Vancouver, BC V6Z 2G3
      Tel: (604)660-4000 Toll Free in BC: 1 800 663-3316 Fax: (604)775-1983

    9.Other Regulatory Matters -  You must be aware if any regulatory bodies or agencies which may affect your business. For example, does your product need CSA (Canadian Standards Association) approval before you are allowed to sell it? What about FCC (Federal Communications Commission) approvals for the USA (most computer and electronics products cannot legally be exported to the USA without such approvals)? What about FDA (Food and Drug Administration) requirements in the USA. And then there is the CE mark which is required for most consumer sales into the European Community. What about environmental concerns? The best way to find out about all these is to do a little networking with other business people. Join various groups (like a Chamber of Commerce) or an industry association. You owe it to yourself to identify all the hurdles over which you have to jump before you can be successful.

    10.Business Records -  It's a good idea to set up an orderly record and accounting system. You should contact the nearest Revenue Canada office for relevant  forms, information on expense deductions, interpretation  bulletins and income tax return forms. There are many good personal computer software programs which will get you started (e.g. Simply Accounting by Computer Associates or Quickbooks by Quicken). For certain businesses, e.g. manufacturing or restaurants specialized software and systems have been developed. Check out what your peers and competitors are using.  Using the services of a qualified accountant is a good investment which will save you much time and potential grief later on.

    Important note - even if you incorporate a business, you may still be personally liable for ensuring compliance with some of the above steps, especially those pertaining to taxation. Like it or not, you are not only a taxpayer but as a business person you are also a tax collector and if you fail to do so properly, you will be personally liable. In Canada, messing around with the tax authorities can carry a stiffer penalty than crimes like theft and murder!

    More Checklists...

    Well, now that you've done what the government and the bureaucrats want you to do, what should you do for yourself? Here's a brief personal checklist:

    1.Pick a business name
    2.Structure your business
    3.Operationalize the business

    1.Pick a business name - Perhaps the most important thing to get started is to pick a business name. This will also have the psychological impact on you of "Hey, I really am in business. Now I better do something!" The choice of a name is very important because it will stay with you a long time and after a while, the name may become vary valuable (e.g. what's the value of "Coca-Cola"?). See section above on "What's in a Name?".

    2.Structure the Business - You have to decide what legal form your business will take. The choices are basically: sole proprietorship, partnership, or incorporated company. Many companies start of as a sole proprietorship and then later become a partnership or incorporated company. The main difference between a sole proprietorship and a partnership is that instead of being on your own, you are bringing in other partners, i.e. owners, to work with you. Except for very simple businesses, it may be best to incorporate. Incorporation is usually the preferred choice when more than one owner is involved. There may be some minor tax or other advantages to a partnership format, but you should explore this with both your lawyer and tax accountant.

    If you incorporate, you will need to determine how many shares to issue (and to whom). the officers and directors of the company. It is at this point in time that you should also think about the future. For example, should your spouse or children be shareholders? Should any shares be held by a family trust or by an offshore company to save on future taxes? How are the shares to be voted? What's a "fair" distribution of shares? Usually, people do not think about these points until it is far too late. Again, some experienced mentorship is strongly recommended (see article on "structuring" a company).

    As soon as you involve other people, be it a partnership or corporation, you should give some thought to partnership or shareholder agreements. These determine who can do what - how profits are shared, how ownership can be changed, how the business will be run and how profits will be shared and distributed as well as to obligations if the business gets into any difficulties (like cash flow problems). Check with others as to their experiences with partners and agreements. There is no such thing as a "standard" agreement. Each case is unique and will depend on your preferences, style, and objectives. You really need both peer input as well as legal opinions on this point. When you start this process you often don't even know what questions you should be asking. This is where some experienced mentorship will be helpful.

    3.Operationalize the Business - So, let's get on with it. You've incorporated and you have a name. What else is needed? You will need business cards, letterhead, an address, telephone, fax, email, website, bank account, advisors (lawyer, accountant, mentors), forms (sales orders, expenses, etc), filing system, and possibly trademark registrations (or patents) to name a few. A trip to your local office supply warehouse will get you going. All you really need is a state of the art computer and some high quality paper and you can print your own business cards and letterhead (in the old days, you'd have to invest in a stockpile of these only to find out that the address or phone number needs to be changed a few months later).

    Beyond these basics, there is the whole question of "the system". A business should be (in this writer's opinion) designed as a "machine" - i.e. with inputs, outputs and what needs to be done in between. A well designed and maintained machine will run on its own - without constant tinkering and fixing. Look at Macdonalds restaurants. That's a machine if I ever saw one. Every detail is defined and operationalised. Very little guesswork is necessary. Each location serves essentially the same standard of quality and service. Will your machine work without you? Is it in good enough shape that you can sell it for maximum profit? Some of the most successful ventures have been built with this kind of rigor and planning in place.

    Go For It

    Don't worry. You'll learn as you go. Good businesses have been built by good people (note the plural). You might be able to say "I did it my way", but it might be better if "we do it our way". No one has a monopoly on knowledge and experience. Mentorship is strongly advocated. You can have two types of mentors - hands on people as well as role models. Study the habits of those that have been successful. What can you learn from them?

    Mike Volker is the Director of the University/Industry Liaison Office at Simon Fraser University, Past-Chairman of the Vancouver Enterprise Forum, President of WUTIF Capital and a technology entrepreneur. 

    Copyright 2006-2007 Michael C. Volker
    Email: mike@volker.org - Comments, suggestions and corrections will be appreciated!
    Updated: 20070904