Like many new entrepreneurs, Holly Singer spent her first year in business toiling around the clock, working long hours to establish her then-fledgling enterprise, Milk Jar Candle Company.

A nursing student at the time, Singer had hit upon the innovative idea to produce eco-friendly artisan candles, stunning in design as well as clean-burning. She started Milk Jar as a way to give back to the disability community by donating a dollar from the sale of every candle. What she had originally intended as a part-time hustle, instead proved a major success right off the bat. Within a few months, Singer, who manufactured all of the candles from her kitchen table, had sold out of Milk Jar’s modest initial allotment. To her surprise and delight, business was booming.

But success came with an increased workload.

“This was such a little baby of mine. It was my whole craft,” says Singer, who eventually expanded the Calgary company into its own dedicated factory workshop. “As Milk Jar got bigger, I was working really long days, and I was so scared to have someone help me.”

Singer needed to restructure. 

The evolution of your business structure

A sole proprietor or simple partnership—Milk Jar when Singer first established it, for example—is the most basic of business structures.

Businesses with more complex structures, such as corporations or limited liability partnerships, are considered legally distinct entities from their owners and have clearly defined organizational structures, as well as more demanding legal and financial regulation. These entities might be required, for example, to establish a board of directors and issue company shares to establish ownership.

Businesses may need to transform into a different structure to continue to grow. By not considering a structural change, there is the potential for inefficiencies within the businesses such as paying too much in taxes, increased personal liability or impacting your ability to sell. 

Structuring to remain agile in a shifting business landscape

Let’s say a sole proprietorship wants to expand and open a new location. Unless the sole proprietor is independently wealthy, financing this kind of venture will require a sizable investment through a bank loan or investor funding.

Faced with this financial hurdle, the sole proprietorship is at a disadvantage compared to a more sophisticated business.

While sole proprietors and even newly incorporated businesses may need to personally guarantee a loan and/or provide collateral, as a corporation becomes bigger and better established in its relationship with a financial institution, it can access more significant financing (including equity financing) at less personal risk to its owners.

The tax factor

Taxes are another factor to consider in determining the ideal structure for your business. In the case of a sole proprietorship like Singer’s, both business income and losses must be reported on the sole proprietor’s personal income tax return.

In contrast, a corporation is taxed separately from its shareholders. Generally, shareholders are only required to report their salaries and any dividends paid to them when they file personal taxes. 

When profits from an operating business are retained within the corporation, this can result in significant overall tax deferral, since the combined federal and provincial small business tax rate in Alberta (11 per cent) is far lower than personal tax rates.

Structuring to effectively reduce risk

Just as a corporation’s shareholders are less liable than a sole proprietor would be for their business’s debts and taxes, incorporation can also protect business owners from certain forms of legal liability.

As Milk Jar established itself as a viable business, Singer grew more receptive to the advice she was hearing. While she recognized that the financing and tax benefits of incorporation were significant, Singer ultimately decided to incorporate Milk Jar when she learned of her vulnerability, in the event of a court judgement against the company, as a sole proprietor.

“I was chatting with a lawyer who said, ‘You should incorporate immediately. You make candles that could burn someone's house down and potentially get you sued; you could lose everything you built’,” recalls Singer. “I was very convinced.” 

Singer’s experience illustrates the value of engaging with your strategic legal, financial and accounting partners to evaluate and weigh all of your options and make the right decision for your business.

A sole proprietor is inextricably linked to their company’s name and is fully liable for court judgments against the business. An incorporated business, on the other hand, is usually considered a separate entity, with its own assets and liabilities, distinct from those of the business owner. Incorporation offers the significant benefit of legally protecting the owner's personal assets from business liabilities; however, small business owners must remain mindful of their ongoing duties as directors, particularly when providing personal guarantees for financing, or risk becoming personally liable for specific obligations like unremitted taxes and employee wages.

Shifting liability from a person to a corporation can also help a business safeguard assets which otherwise could be forfeited. Some businesses choose to restructure different operations as separate entities to ensure patents or trademarks are protected in the case of a negative court judgement.

Some industries require mandatory incorporation and some professionals (such as engineers and lawyers) choose to incorporate due to liability concerns. 

Documenting your structure

When switching from one business structure to another, there will always be legal requirements to meet. One standard requirement is the drafting of “guiding documents”, which essentially provide a road map for how the new business entity will function.

In addition to guiding documents, you can implement a unanimous shareholder agreement (in the case of a new corporation) or a partnership agreement (in the case of a new business partnership). These agreements dictate the rules of the relevant new relationships, ensure all owners are held accountable and delineate a clear understanding of what’s expected from all parties. Such agreements are important in complicated scenarios like a buyout or dissolution of the enterprise.

Final thoughts on restructuring your business

The decision to switch business structures comes down to many factors, and owners must weigh the complexities of their individual situation against many hypothetical advantages. For instance, while a shift in structure might prove attractive to a potential investor, who could be offered company shares, voting rights or some other perk a sole proprietor couldn’t provide, not all startup business owners feel ready to tackle the legal and administrative requirements of incorporation.

Calling in the pros

Turning to the professionals—lawyers, accountants, bankers and other experts— can help to avoid missing any important details and to fully understand the implications of restructuring a business.

As an entrepreneur you need to be able to take all the advice you are receiving and look at your business as a whole, and then make a decision.

In the end, a business owner decides to switch structures when their current structure can no longer accommodate their goals. For Singer, those goals included using Milk Jar as a vehicle to give back to her community. In order to do more good without putting herself at risk, she knew she needed to incorporate.

Seven years later, she hasn’t looked back.

If you’re looking for a deep dive on everything you need to know around how to grow your business, connect with us to explore where you are with your business, where you want to be and how to get there!