When starting a business in Canada, you need to decide on a structure for your company. Some business structures are better than others depending on your idea and what stage you’re at with operations. Keep in mind that one structure may be good now, and in the future you may want to change it. For instance, if you’re just starting out, a sole proprietorship might make sense. But in a few years, incorporating may be the best move. The business structure you choose determines how the company is taxed and how much paperwork you will have to do each year. There are four business structure types in Canada: sole proprietorship, partnership, corporation, and cooperative. Each has its own benefits and drawbacks, so it’s important to choose the one that’s right for your business. Let’s take a closer look below.
Table of contents
- What are business structure types in Canada and why does it matter?
- What are the 4 types of business in Canada?
- How do I form a business in Canada?
The business structure of a company refers to the way in which it is organized, with consideration to its legal status and ownership. As a result, each has its own requirements in terms of compliance and paperwork.
The structure of your business can have a big impact on how much tax you pay, as well as a range of other important factors. Here are several ways in which business structure matters for taxation and business decisions:
- The legal structure of your business will determine which taxes you are liable for. For example, incorporated companies are subject to corporation tax, while sole proprietors and partnerships are not.
- The structure of your business can affect how much control you have over decision-making. For instance, if you are a sole proprietorship, you will have complete control over all aspects of your business. However, if you are a public company, your shareholders will have a say in major decisions.
- The way your business is structured can impact the amount of paperwork and compliance requirements you need to meet. For example, corporations are required to prepare and file annual returns with Corporations Canada, whereas sole proprietors do not need to do this.
- The tax treatment of different types of income can vary depending on your business structure. As an example, active and investment income are taxed differently within a corporation.
- Finally, the business structure you choose can have implications for the sale or succession of your business. For instance, if you are the sole owner of a proprietor business, you can simply pass on the business through an asset sale or similar. However, if you are a shareholder in a company, the sale process is generally more complex and may require the approval of your fellow shareholders.
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There are four main business structures types in Canada: sole proprietorships, partnerships, corporations, and cooperatives. Each type has its own advantages and disadvantages, so it’s important to choose the right structure for your business. Let’s explore in detail below.
1. Sole proprietorship
Sole proprietorships are the simplest and most common type of business structure. They’re owned and operated by one person, and they’re relatively easy to set up and maintain. However, sole proprietorships also have some drawbacks. The owner is personally liable for all debts and losses incurred by the business, which can put their personal assets at risk.
|Registering is quick and very simple to do.||Your registration will need to be renewed every 5 years.|
|You can save money on your business registration.||You are held accountable for the business’s actions as a sole proprietor.|
|You take home all of the profits.||The amount of tax you pay on your income is determined by your personal tax rate.|
|You are the one who makes all of the business decisions.||Your taxes may be more complex than what you’re used to as an employee.|
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Similar to sole proprietorships, but partnerships have ownership between two or more people. Like sole proprietorships, partnerships are relatively easy to set up and maintain, but the owners are also personally liable for all debts and losses incurred by the business. This structure is commonly seen among professional companies, such as lawyers and dentists.
|Registering is a quick and easy process.||You renew your registration every 5 years.|
|You can register your business at a lower cost.||You and your business partners are responsible for any debts or losses the company incurs.|
|All of the business’s profits go straight to you and your partners.||The income you earn is taxed at your personal rate.|
|You can pool assets with other partners to startup operations.||Your taxes may be more complex than what you’re used to as an employee.|
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Corporations are more complex than sole proprietorships and partnerships, but they offer some significant benefits. One of the biggest advantages of incorporating is that the owners’ personal assets are protected from creditors in the event that the business can’t pay its debts. However, corporations also have some drawbacks. For instance, they’re required to maintain detailed records and file annual reports, which can be time-consuming and expensive.
|Personal liability for the company is much less than with other business structures.||Each year, you need to file corporate records and reports. This involves maintaining records throughout the year.|
|By registering your business name, you are ensuring no one else can use it.||A corporation costs more to establish than other types of businesses.|
|You can give ownership to someone else.||You need to show residency or citizenship.|
|If you form a corporation, you could be eligible for lower tax rates and tax breaks.||You may need to hire an accountant or financial advisor to help with reporting and taxes.|
Cooperatives are owned and operated by a group of people who use or consume its services or products. Unlike other business structures, cooperatives don’t have any ownership shares or shareholders. Instead, they’re governed by a board of directors elected by the members. Cooperatives have several advantages, including democratic governance and shared ownership among the members. However, they can also be challenging to set up and manage effectively.
|You will have limited liability.||You will need to mediate arguments and disagreements among group members.|
|The profits will be divided and given to the members.||The process of making decisions might take more time.|
|In a cooperative, everyone has an equal say (one member, one vote).||In order to succeed, every member must participate.|
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Comparison of business structure types in Canada
Here is a comparison of the four business structure types in Canada:
|Aspect||Sole Proprietorship||General Partnership||Corporation||Cooperative|
|Set-up costs||Least expensive||Moderate||Expensive||Moderate|
|Maintaining financial records||Minimal||Moderate||Extensive||Moderate|
|Rules and restrictions||Little||Moderate||High||High|
|Scope of authority||Provincial||Provincial||Provincial and/or Federal||Provincial and/or Federal|
savings, loan, etc.
|Combined personal resources||Personal savings, loan, Venture or Equity capital||Personal savings, loan|
|Acquiring funding||Difficult||Difficult||Less difficult||Less dificult|
|Taxation levels||Personal only||Personal only||Personal and corporate||Corporate|
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How do I form a business in Canada?
Ready to form a business? Here’s how to get started for each business structure type in Canada.
If you’re looking to operate a business as a sole proprietor in Canada, you’ll first need to register with the province or territory where you plan on operating. The only time you wouldn’t need to register your business is if you plan to use your first and last name and live in one of the following provinces: British Columbia, Saskatchewan, Manitoba, Ontario, Quebec, New Brunswick Northwest Territories or Nunavut.
Even if your business is registered, you and your business are not viewed any differently under the law. In other words, your business is considered a part of you and you will be taxed this way.
Remember to apply for licenses and permits as required by law. Depending on the nature of your business, you may need to obtain special licenses or permits before beginning operations. You can find more information on licenses and permits by contacting or checking the websites of federal, provincial and municipal governments.
Setting up a partnership in Canada is fairly straightforward. The first step is to register with your province or territory, after which you will need to write up a partnership agreement. This agreement is not required by law, but it is highly recommended in order to avoid any potential disputes down the road. The agreement should list the responsibilities of each partner, how they help with day-to-day operations, and how profits are divided. Furthermore, the agreement should highlight how both parties will handle particular circumstances. In the absence of such an agreement, provincial law will govern the partnership. In general, it’s always smart to enter a business relationship with a written agreement because you never know what will happen!
A partnership dissolves if one or more of the partners sends a notice to all other partners detailing their intent to exit. A partnership will also end if the time limit set when the partnership was created has passed. If the term was for a specific project, then once that project ends, so does the partnership.
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Setting up a corporation in Canada generally requires filing articles of incorporation with your province or territory, or federally, selling stock to the new company’s shareholders and electing a board of directors. The board of directors are responsible for the management and function of the company as a whole. This includes coming up with and implementing long-term business plans. Keep in mind it’s possible to incorporate as the sole shareholder and without a board of directors, but you may want others involved in your business when you decide to incorporate.
Corporations are typically required to provide financial records and information to the Canada Revenue Agency or other regulatory bodies on a quarterly or annual basis. Depending on the province or territory, other requirements to maintain a corporation may include having a corporate seal and keeping track of corporate minutes. Companies that are incorporated at the federal level can do business throughout Canada without having to register in every single province or territory.
Before you can form a cooperative in Canada, incorporation is necessary. This can be done at either the federal or provincial level. Federal cooperatives are governed by the Canada Cooperatives Act and are formed by filing an application with Corporations Canada. One of the main benefits of incorporating federally is it allows cooperatives to operate in multiple provinces and territories.
To incorporate at the provincial level, you must file with your province or territory’s appropriate corporate office. Each province and territory has its own legislation governing the formation of co-ops, distribution of liability and other matters. Once you have been incorporated, you will need to develop your cooperative’s articles of incorporation, which must be approved by your members. The articles of incorporation outline the cooperative’s name, purpose, rules and regulations. They also set out the rights and obligations of members, directors and officers.
Once your cooperative’s articles of incorporation have been approved, you can then apply for a business licence from the government. A business licence allows your cooperative to operate legally in Canada. Depending on your business activities, you may need to register for other licences and permits as well.
These are just a few of the steps involved in forming a business in Canada. With careful planning and execution, you can ensure that your business gets off to a strong start. While this all may seem overwhelming, starting a business can be a rewarding and fulfilling experience. If you’ve got a great idea, go ahead and pursue it!
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