Options for your Vending Machine Business Structure

While we realize that some of our new operators will already have a business structure in place, we have outlined some of your options in setting up your new business. Please review these options and feel free to check with your accountant as to the best way for you to set things up for yourself.

What form will your new business take?

One of the first decisions a new business has to make is its choice of its official structure. The primary issue is whether to incorporate or not. There is no right answer to this question and ultimately the decision depends on your specific circumstances. We thought we would send you this summary of the various options that are available to you.

There are three types of business:

1. Sole proprietorship

2. Partnership

3. Incorporation

Each structure has different taxation, liability and reporting implications. In the brief summary that follows, we outline some of the advantages and disadvantages of each option. If you require more information, you may want to talk with your financial advisor.

1. Sole Proprietorship

Sole proprietorship is the simplest form of company to start and the easiest to maintain. The business owner in a sole proprietorship is fully responsible for obligations of the business. All profits are the property of the owner and tax filing is only a little more difficult than filing taxes on wages. The proprietor is in full control of the decision making.

Some of the main advantages:

• Low start-up costs

• There are no incorporation fees and associated legal fees.

• Lower ongoing costs

• Compared with corporations, sole proprietorship have much lower ongoing costs including no company reporting fees, no increased banking charges and simpler and less costly accounting and tax filing.

• Less regulation

• A proprietorship has less strict reporting requirements, banking regulations and allows greater flexibility in the location of the company and its management.

Disadvantages of sole proprietorship:

• Liability

A sole proprietor is responsible for the obligations of the business. Proprietorship ceases to exist at the death of its owner.

2. General Partnership

A partnership is two or more people combining resources and sharing liability for a business. Unless there is a partnership agreement, the partners are jointly liable for the obligations of the business and equally share in its profits. Partnerships are similar in many ways to a proprietorships and have many of the same advantages and disadvantages. The main difference is the sharing of obligations and profit and the question of what happens to the partnership if one or more of the partners is no longer able or willing to continue the business.

A partnership agreement is common in all but the simplest and most short-lived ventures. It is a particularly good idea if there is an unequal assumption of liability and profit sharing among the partners. Partnership agreements can also define what happens to the company in the event of a dissolution of the partnership. Partnership agreement forms can be purchased from bookstores or online. In complex cases, advice should be sought.

3. Incorporation

A corporation (limited company) is separate and distinct from its members and can enter into obligations and contracts with other corporations and individuals. Companies are incorporated under provincial legislation.

Advantages of Incorporation:

• Limited Liability

• Under normal circumstances, no member can be held personally liable for obligations and acts of the corporation beyond the share capital invested by that member.

• Succession

• As a separate entity, the existence of the corporation does not depend on the continued membership of any of its members and ownership is transferable. The company can continue to exist with different shareholders and officers.

• Tax Advantages

• A corporation can offer tax advantages although this will depend on the specific circumstances. Generally, small business tax rates are lower than individual tax rates.

Disadvantages of Incorporation:

• More Regulations

• Corporations are required to file annual reports and notifications of any changes to official locations and officers. Corporate records need to be maintained.

• Higher start up costs. There are fees for filing name requests and registering a corporation. Articles must be prepared and stock certificates prepared. Although you may be able to do your own incorporation with a book or software package, errors are easy to make which cost time and money. Rejection due to minor errors in forms are common. If you use legal services to incorporate, charges can run to several thousand dollars. Some provinces have online registrations that might help with some of these issues. Expect initial costs to be somewhere between $400 and several thousand dollars depending on the complexity of the companies structure and how much of the incorporation process you are able to do yourself.

• Higher ongoing costs. Corporations are required to make a separate tax filing which may require the services of an accountant. There are also ongoing costs in maintaining the corporation including annual filing fees, notification of changes in registered offices, etc.