Choosing a Business Structure

The structure you choose can affect whether your business attracts investors, partners, and other financial backers, as well as how your business grows in the future. There are three main types of business structures in Canada, each with different features:

  • Sole proprietorship
  • Partnership
  • Corporation

 

It is a good idea to talk to a lawyer who specializes in small businesses before you make a final decision. A lawyer can help you with partnership contracts and articles of incorporation. They can also help ensure you properly register a corporation.

 

Sole proprietorship

A sole proprietorship means only one person owns a business. If you are a sole proprietor, Canada Revenue Agency views you and your business as one. Your profits from the business become your income as the owner. Also, you are responsible for all liabilities of the business. If, for example, you cannot pay the business’s debts, you must pay the debts from your personal assets.

 

The advantages to this business structure are:

  • You have a straightforward business structure
  • The most freedom from regulation
  • It is the least expensive for you to set up and has minimal registration requirements
  • You have fewer ongoing administration and annual fees
  • As an owner, you earn 100% of the profits
  • You may be eligible for tax benefits in limited circumstances
  • You are the sole decision maker

 

The disadvantages to this business structure are:

  • You are personally responsible for all business liabilities
  • Any profits will be considered your personal income in the calendar year earned
  • You have fewer options to pay less tax or delay tax payment
  • You may have difficulties raising additional capital

 

Partnership

A partnership is similar to a sole proprietorship owned by two or more people. If you have a partnership, you and each partner share the responsibilities and profits of the business. You each claim your part of the profit on your personal income tax. Each partner is personally responsible for all liabilities of the business regardless of which partner incurred them.

 

The advantages to this business structure are:

  • It is relatively easy for you to set up
  • You have lower start-up costs
  • All partners contribute money or skills or both
  • Partners may be eligible for tax benefits in limited circumstances

 

The disadvantages to this business structure are:

  • You and your partners share control and authority, and this can cause major conflicts in the business
  • You and your partners may disagree on important issues (it is a good idea to hire lawyers to make a Partnership Agreement contract)
  • Profits are considered personal income, and you may pay higher income tax
  • Partners are each personally responsible for all liabilities of the business
  • If one of your partners cannot or does not pay their share of owed amounts, creditors can require full payment from you and the other partners

 

Corporation

A corporation is the most complex of the three business structures. When you incorporate your business, it becomes its own legal entity. It is separate from its owners (called shareholders). Shareholders of a corporation have limited liability. In most cases, liability is limited to the shareholder’s investment in the company.

 

The advantages to this business structure are:

  • As a shareholder, you have limited liability which provides personal protection from creditors
  • It may give you greater credibility with customers, suppliers, and lenders
  • You gain substantial tax advantages
  • Ownership is transferable and survives the death of shareholders (easier for estate planning)

 

The disadvantages to this business structure are:

  • It is more complicated to set up and maintain
  • You will need the help of a lawyer or someone with legal expertise
  • Its tax rules are more complex, and you will need to access professional accounting services
  • There are greater regulatory guidelines which require additional accounting, banking, and administration costs

 

Other

A co-operative is another legal incorporation structure. In a co-operative, you and a group of people start a business together to meet a common need or to maximize a common opportunity. You must operate on the same principles as any other business structure. A co-operative is democratically controlled (based on one member, one vote), has an open and voluntary membership, and distributes profits as patronage dividends.

 

There are 3 types of organizations you can use with the intention to achieve something other than profit:

  1. A charity is an organization that must use their resources for specific charitable activities, such as to support those who live in poverty
  2. A not-for-profit, or non-profit, is an organization which exists to serve a purpose other than generating profit although it may do so as part of its activities. These are often community initiatives, such as an organization formed to manage a local community center
  3. A social enterprise is a revenue-generating business with primarily social objectives. The enterprise reinvests surpluses for its primary social objectives in the business or the community, rather than by the need to deliver profit to shareholders and owners. Another name for a social enterprise is a Community Interest Company or CIC.