This is the second part in a blog series that follows Oscar, a prospective Albertan business owner who hopes to open a barbershop in Alberta. As Oscar gets his business off the ground, we’ll explore the steps entrepreneurs in Alberta must follow to start, grow, and protect their own businesses. In this chapter, we’ll see how Oscar chooses a structure for his new barbershop.
Following in his father’s footsteps and with a little help from AMA, Oscar was on his way to open his very own barbershop in Alberta. He’d finally settled on a name, 2 Bits Barbershop, and it was time to choose a structure that would accommodate his needs as an independent startup. He talked to a certified business expert at his local AMA centre and learned three structures a new business in Alberta can take: a trade name (sole proprietorship), a partnership, or a limited corporation.
Each structure comes with distinct advantages and disadvantages, and Oscar’s certified business expert asked him three questions to help him focus on the most important details as he made his decision:
“How many people will be running your business?”
“How much liability are you willing to accept?”
“How do you plan to fund your startup?”
Choosing the right structure at launch is a crucial foundation for the long-term success of any business. However, as Oscar’s business develops and evolves he may find he needs a different structure to meet his changing needs. Fortunately, choosing a business structure doesn’t necessarily have to be a permanent decision, and if he had any questions he knew he could book an appointment to meet with a Small Business Strategist from Business Link at an AMA Centre.
Trade Name (Sole Proprietorship)
A trade name, also known as a sole proprietorship, is a simple, low-cost option that’s popular with new businesses in Alberta. Structuring 2 Bits Barbershop as a trade name would give Oscar full control of his business and access to tax advantages that can offset some of his startup costs. But, with full control comes full legal and financial liability.
Under a trade name, there’s no legal distinction between Oscar and his business. This option would place the most responsibility on Oscar to run his daily business while also balancing all the necessary bookkeeping and paperwork behind the scenes. He’d still be able to hire support staff so that he could focus on cutting hair, but he would bear sole responsibility for the business as a whole.
A partnership is a shared responsibility for a business between a small group of people. In many ways, it’s similar to operating under a trade name; the owners accept full control and liability for the losses and profits created by the business. In Oscar’s case, a partner could help him acquire additional funds for startup and handle some of the administrative workload while Oscar worked with customers. He’d met other barbers through his time in barber school, but he wasn’t sure if they’d be a good fit.
To form a partnership, Oscar needed a reliable and trustworthy business partner. While the additional support can be vital for some businesses, an owner’s poor behavior or performance could do more harm than good. Oscar had to be sure that his partner would share his commitment to the barbershop’s success.
Of all the structures available to a business, incorporation provides the least liability for its owners. A limited corporation, unlike a trade name or partnership, is legally distinct from its owner. This means ownership is transferrable, and funds can be raised by selling company shares. It also means that the business is subject to additional costs and regulations. Annual returns, for example, require thorough record-keeping and an annual fee for filing.
Oscar planned to run 2 Bits Barbershop independently, and didn’t plan to share control with a group of shareholders. He wanted to be his own boss. And even though he didn’t think incorporation was right for him at the time, he knew the option would still be available if he chose to expand some time down the road.
The Next Step
Oscar decided that he’d be running his business by himself and would bear sole responsibility for the funding and success of 2 Bits Barbershop. A trade name was the natural fit, and with his mind made up Oscar was ready to register his business. And since he was already talking with a certified business expert, he was exactly where he needed to be to take the next step and officially become a business owner.
Please note that consultations with Small Business Strategists from Business Link will be held virtually while physical distancing recommendations remain in effect.
In the next entry of Oscar’s story we’ll walk through the information and forms an entrepreneur needs to register their business, and we’ll identify the final paperwork a business owner needs to complete before their business can operate legally in Alberta.