Types of business structures: how to choose the right one for your business
Your business structure affects the tax you pay, and your level of liability under the law.

What is a business structure?
By ‘business structure’, we’re talking about the legal structure of a business. The main types of business structures are sole trader, partnership, and company.
Choosing a business structure for your small business affects your admin burden, your business’s taxation, legal status, daily operations, and your personal liability.
Types of business structure
Here's a comparison of the different types of business ownerhsip.
What is a sole proprietorship?
A sole proprietor is a single-owner business. It doesn’t have to be a single-worker business, though, so you can hire staff.
Advantages of sole proprietorship
It’s easy to set up as a sole proprietor and your tax obligations are simple – you just declare income on your personal tax return.
Disadvantages of sole proprietorship
A sole proprietor doesn’t have any special legal status, which means the owner is personally responsible for what the business does. If the business gets into debt or legal trouble, so does the owner, so your insurance must be comprehensive. A sole proprietor may also miss out on some tax advantages that come with being a corporation.
What is a partnership?
If you and at least one other person share ownership of your business, you’re in a partnership. There are no rules about how ownership is divided – one partner can own 99% of the business.
Advantages of a partnership
It’s easy to set up as a partnership, although you should have an official letter that sets out the agreement between partners. Your tax obligations are simple, too: you just declare your share of business income on your personal tax return.
Disadvantages of a partnership
If the business gets into financial or legal strife, the partners do, too. You could also get into difficulty if another partner does something wrong, so proper liability insurance is essential. A partnership may also miss out on some tax advantages that come with being a corporation.
What is a corporation?
A corporation is legally separate from its owner or owners, which means you’re less exposed to legal or financial issues than under other business structures. A corporation can be owned by one person or many.
Incorporation is most often done in the operator’s home province, but some companies that operate across multiple provinces or internationally choose to incorporate federally. Federal incorporation can provide broader recognition but is typically more costly and complicated.
Advantages of a corporation
You get some legal and financial protection if things go wrong – your accountant or lawyer can give you the lowdown. Corporations generally pay a lower tax rate compared to individuals and can choose when to draw income from the business, which gives you more options for lowering your tax bill. Corporations can also raise money more easily than other business structures, as they can sell shares in the company.
Disadvantages of a corporation
It'll cost you more to operate as a corporation than as a sole trader or partnership. There’s also more admin as you’ll have to regularly submit paperwork to various authorities.
What is a cooperative?
A cooperative is owned by a group of members. They share a goal and work together to offer a good or service. Each member has an equal vote, regardless of their investment or capital contribution.
Advantages of a cooperative
A cooperative aims to be accountable to, and inclusive of, everyone involved. Decisions are made democratically – members listen to all opinions, and profits are shared between them. Because cooperatives don’t rely on a small number of people, they can be very resilient.
Disadvantages of a cooperative
Because there’s no single person in charge, it’s often tricky to make decisions and set a clear strategy. Capital can be limited, often relying on member contributions or loans, which can limit the ability to scale.
The risks of not choosing a business structure
If you don’t formally choose a structure for your business, you may face:
- Unlimited personal liability: Your personal assets – such as your home or savings – could be seized to satisfy business debts or legal judgements. Here’s more about personal liability.
- Tax implications: Your personal income and business income will be treated as the same, so you might pay more tax than you need to.
- Difficulty raising capital: Potential investors and bank lenders might be discouraged if you don’t have a formal business structure.
- Limited growth potential: Have visions of expanding? To make significantly higher sales? Your scope may be limited without the right business structure.
What happens if you don’t choose: default business structures
If you don’t choose a business structure, you’ll default to a sole proprietorship or a partnership. This could expose you to personal liability for your business’s debts and legal issues.
Choose the right business structure for your small business
Here are things to think about when choosing between the various entity types.
Understand your liability risks
Think about what it means to be responsible for your business’s debt. You need to balance the risk of personal responsibility with other factors. For instance, while sole proprietors are exposed to more financial risk, a corporation comes with disadvantages like higher costs and admin.
Consider your control and decision-making preferences
How many people will be running the business? Will you want to grow your leadership team or the number of owners? For instance, when you’re weighing up the benefits of a corporation vs a partnership, consider how you’d like to distribute power and responsibility.
Work out your funding needs
Even the smallest businesses need cash to get started. Corporations can issue shares, making it easier to raise capital, while other business types (such as cooperatives) may struggle to secure large loans.
Plan for future growth
Flexibility is the key to meeting the evolving needs of your business. Maybe you’ll want to sell it one day? Maybe it’ll diversify or double in size? Your choice of structure must give you room to develop, so think about how different legal structures for businesses compare – for instance, a corporation lets you transfer ownership and manage growth more easily.
Can you change your business structure?
Yes – you’re not locked into one structure. Many businesses start out as sole traders or partnerships and grow into companies. You might change your business structure if the business grows and you take on more complex projects with more financial or legal risk.
Simplify your business finances with Xero
Choosing the right entity for your business is just the start of building your company.
Xero software streamlines your financial admin so every step of the process is faster – whether it’s sending invoices, managing cash flow, or creating customized reports.
Automatic calculations always put the latest numbers at your fingertips, while Xero’s cloud-based platform means everything you need is in one secure, accessible place. Less admin means more time for the rest of your business. That’s why small businesses love Xero.
Disclaimer
Xero does not provide accounting, tax, business or legal advice. This guide has been provided for information purposes only. You should consult your own professional advisors for advice directly relating to your business or before taking action in relation to any of the content provided.
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1. Research your idea
Your business idea is clearly inspired. But it helps to check you’re not the only one who thinks so.
2. Write a business plan
It helps to map your way from having a genius idea to a real business. Your plans don’t even have to be long.
3. Do a budget
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4. Set prices
Work out what you need to charge to cover costs. And choose a pricing strategy that works for your business.
5. Choose a business structure
Will you be a sole proprietor, a partnership, or a company? And what's the difference anyway?
6. Sort your startup accounting
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7. Register your business
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