Which Canadian Business Structure Is Best For You?

When you’re planning your new company, the biggest decision you have to make is the type of legal structure it should have.

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As an entrepreneur in Canada, you can run a business as a sole proprietorship, a corporation, or a partnership. If you have a group interested, you could set up a co-operative. There are advantages and disadvantages to each type of business structure. Deciding which structure is right for your business depends on various factors, including personal liability and tax deductions. Here are the four Canadian business structure types to can choose from:

Sole Proprietorship

A sole proprietorship is the easiest and most affordable structure to create and is the top choice for brand new business owners. With this structure, you are the sole owner of your company, and you and your business are the same by law and the Canadian Revenue Agency. 

Since you’ll be self-employed, you’ll pay personal income tax on the net income generated by your new business. You will declare business income on your personal income tax form, rather than having to file a separate tax return. You’ll pay personal income tax on your business’ earnings minus business expenses, as well as contributions to the Canada Pension Plan (CPP).

Unfortunately, you will assume all liability of the company, unlike a corporation where the owner(s) enjoy liability protection. Since the company doesn’t exist as a separate entity, all your personal property are directly linked to the business, which makes it easier for someone to go after your personal assets if the business defaults on debts. That being said, having a sole proprietorship is a simpler, yet flexible way to scale operations. To learn more about the advantages and disadvantages of sole proprietorship, read our in depth article, Pros and Cons of Sole Proprietorship.

Partnership

If you’re starting a business with one or more partners, it might seem obvious to form a business partnership. All partners can contribute towards raising capital funds and having multiple owners makes it easier to borrow than sole proprietorship, since a combined credit rating is stronger. Partners pay their personal income taxes on their share of the profits from the business, rather than have to bear the burden of all the taxes alone, like in a sole proprietorship. 

Each partner is personally liable for the debt obligations of the business, including those obligations entered into by only one of the business partners. So, if your partner signs a contract the business can’t fulfill and then decides to skip town, you’ll be liable for all the debts, not just half of them. If giving this power to a partner scares you, consider incorporating your business to lower the amount of personal liability you expose yourself to.

A balanced business partnership combines skills, knowledge, and different experiences which makes for more contacts and capabilities. Whether your potential partner’s talents complement or contrast with your own, they can significantly boost opportunities for growth, and higher profits.

Unfortunately, although it may seem logical to partner with a friend, it can also be a real challenge. Just as no one enters into marriage thinking it will irreparably sour, no one enters a business partnership thinking it won’t survive. Before committing to a business partnership, it is important to choose partners that fit well with the organization, its goals and values. To learn more about the advantages and disadvantages of partnerships and see the Business Partner Evaluation Checklist, read our in depth article Pros and Cons of Business Partnership.

Incorporation

Many new business owners deliberate whether to incorporate their businesses. A corporation is a business entity that is independent of its owner(s) and does not pass on either its income taxes or its liability to owners. An owner’s liability is limited to the amount they have invested in the business. With a corporation, it’s much more difficult for someone to go after your personal assets if the business defaults on debts.

As well, by operating your business as a corporation, you can defer and save taxes since business tax rates are lower than personal tax rates. In Canada, it’s common for a (private) corporation to be owned by a controlling shareholder who is the owner-manager. If you decide to scale up, an incorporated company is able to raise money more easily than a sole proprietor, which makes it easier for your business to grow and expand. Unfortunately, there are several costs involved in setting up a corporation as well as additional ongoing costs including legal and accounting fees. There will also be added administrative tasks, due to record-keeping and bookkeeping: regular corporate tax installments, annual corporate tax returns, separate bank accounts, and much more. To learn more about the advantages and disadvantages of incorporation, read our in depth article, Pros and Cons of Incorporation.

Co-operative

A co-op is a different way of doing business. In a co-operative business structure, an association of members owns and controls the business. Co-ops are set up to meet the needs and expectations of their members. This type of business can be set up as a for-profit or a not-for-profit entity, and typically the participation from all members is necessary for continued success. A growing number of people in Canada are seeing the benefits of doing business the co-op way There are five key types of co-operatives:

  1. Consumer co-op’s: They provide their members with goods and services for personal use. Examples include: Credit unions, gas stations, housing, and insurance.
  2. Worker co-op’s: These are owned by their employee members. Examples include: grocery stores and markets, brewery pubs, and distributors and retailers of fair trade goods.
  3. Producer co-op’s: This kind cooperatively processes, markets and sells their members’ products. Examples include: Agriculture co-operatives, wind turbine energy producers, and advisory services.
  4. Multi-stakeholder co-op’s: Membership is made of different categories of members who share a common interest in the organization. They are built on the strengths of different kinds of members. Examples include: home care services, health services, and community services.
  5. Worker-Shareholder co-op’s: These are incorporated and workers/managers hold partial ownership of the business. Examples include: manufacturing and technology.

Which Canadian business structure is best for your company?

Are you newly self-employed? A sole proprietorship may just be the best choice. It is the simplest and most affordable business structure to set up, and includes many freedoms.

If you have a potential partner with great integrity, work ethic, perseverance, and assets to contribute, then a partnership could be perfect for you.

Do you value limited liability protection as well as tax deferrals and savings? Do you plan on raising capital to grow the business, and hope to sell it eventually? Incorporation is probably the right choice, as long as you can afford the ongoing costs and complications that running a corporation brings.

Are you, and a like-minded group, looking for a different way of doing business? One that is ethical and sustainable in its approach? The democratic structure of a co-operative is probably your best bet.

For new businesses that can easily fall into two or more of these categories, it’s not easy to decide which structure to choose. It’s important to consider your new company’s financial needs, risk and ability to grow. Check with an accountant who specializes in business advice, so you can settle on a Canadian business structure that’s ideal for the type of work you plan to do.

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