Lesson 2: Type of Business
Which one is for you?
Before you go any further with your new venture you're going to have to decide on the type of business structure you will have. This is because you're going to choose a name and, if you incorporate, your name has to be unique and you'll have to do a name search. Then you're going to open a bank account and the bank will want to know what kind of business it is and will ask for supporting documentation. Then you'll get a logo, business cards etc. and you'll have to put "Inc." or something similar or not. So, before you do any of this, what should you do?
I've found that, for most small and home-based businesses it doesn't make sense to incorporate at the beginning. It took five years after I started my first small business before it made sense to incorporate. By then I had tried out different strategies and I knew what worked and what didn't. The business I incorporated was based on a much better model than the registered business I came up with initially. Instead, register a name and operate under that name as a registered business. Then, when you become successful and have grown to a certain size, incorporate if it makes sense.
Why shouldn't you incorporate at first?
- It costs time and money - you have better uses for both when you're starting out.
- A registered company is simpler to run and more flexible.
- There is more record keeping and formalities with a company and, when starting, you can make better use of your time.
- You will have a relatively low income to start with so the tax benefits of having a company don't apply.
- You'll be doing the work initially so the liability protection that a company offers doesn't apply as long as you're carrying out the activities.
Then, when you have some time and money, when you can hire someone to do the records, when your income is higher and when you have employees or contractors for whose mistakes you don't want to be personally liable, then incorporate.
There are exceptions. If you have substantial assets you want to protect and will not be carrying out a lot of work yourself, you should incorporate to protect those assets. If you expect to reach a high income from your business very quickly, you should incorporate to minimize your income taxes. And if you have a unique name which you want to keep for your business, better to incorporate under that name than to have to change it later. Finally, if there are several people involved in starting up your business, you need them and they should share in the business, then look at a partnership.
