Question

Hi Phil

I’m starting an application and gaming company with 2 close friends of mine in Vancouver. We’ve been told on multiple occasions that going into business with friends is a big mistake. But after looks of discussions we’ve all decided to take the plunge.

Now that we’ve made the decision to start the business together we need some advice on how to setup the startup and any other considerations we need to take into account.

Do you have experience helping new businesses like our? If not can is there someone the your office that can help?

Answer

Hi XXXX

Thanks for your email and congrats on the new venture. The initial process of starting a business can be quite exciting indeed. And yes, I’ll definitely be able to help you with your new startup.

First, it’s true that starting a new business with friends can be challenging and often these partnerships do not last indefinitely. That being said, the same can be said for business partnerships between anyone else.

Now that you’ve decided to start the business together you’ll want to establish which type of business structure best suits your needs.

Your most common choices are as follows:

• form a partnership
• incorporate a new business

Let’s discuss some of the advantages and disadvantages of both:

Form a Partnership

• A simpler and cost effective structure
• Does not provide limited liability like incorporation
• Requires relatively complex bookkeeping
• Both parties file independent tax returns
• No income splitting opportunities outside of the 2 partners
• No potential for future tax free capital gain
• No income deferral available
• Can flow losses out of partnership against other income personally

Incorporate a New Company

• Relatively expensive to setup and maintain
• Requires specialized bookkeeping and year end tax returns
• Provides for limited liability
• Ability to split income with shareholder spouses
• Ability to defer income within the corporation
• Cannot flow out losses
• Possible ability to exempt future capital gains on shares
• More flexibility in financing and raising money

As you can see from the list above both structures have their pros and cons. In most cases if the venture is one that will be considered a long-term project (which most long-term ventures are) incorporation is the ideal option for starting the business. Assuming of course that you can manage the additional expenses and have a qualified accountant to help you navigate appropriate tax rules.

To discuss your business structure options please email me at phil@hutcheson.ca or call 250-381-2400 to discuss your situation in more detail.