Are you looking to set-up a business in Canada and you are wondering what the best option might be for your business needs? 

Choosing the correct business structure is important in the overall success of your business. The business entity you choose determines the tax implications, allowable tax deductions 

The following is a brief description of some forms of business ownership and registration available in Canada:

Sole Proprietor:

The Sole Proprietorship is the easiest, most straight-forward and least expensive to set-up. It is an unincorporated entity owned solely by one person.

Advantages 

• Low start-up costs are ideal for self-employed contractors, part-time home based business and other small business
• Full ownership allows the flexibility to run a business the way you see fit
• Tax deductible benefits against earned business income and any other regular T4 employment income, allowing for an individual to reduce the amount of tax they are required to pay
• Can deduct travel expenses, automobile and insurance expenses, advertising costs and you are even able to deduct a portion of your home expenses
• Can deduct expenses relating to professional standing and licensing fees
• Ideal way to transition from employee to self-employed over time
• Overall simpler accounting and tax practices

Disadvantages 

• No legal separation between the business owner and the business, increases personal liability to business related debt and financial obligation
• Business income is reported as personal income
• May be a bit more challenging to secure larger contracts such as government related contracts
• Not as easily marketable to sell company because the business in intricately tied to the business

A limited partnership is a form of general partnership but has added benefits, such as limited liability.

Partnerships:

The partnership business structure is one wherein, two or more individuals, separate legal entities, corporations, trusts, or partners join together to carry on a trade or business.

There are some characteristics that differentiate a General Partnership from a Limited Partnership. A limited partnership is operated by a single general partner with unlimited liability, the limited partners contribute capital but are not involved in the management of the company and the partner’s limited liability is restricted to the amount of capital they contribute.

There are no formal legal requirements in a general partnership business structure. All that is required in setting up a general partnership is, a registered trade name, a registered tax number and a bank account.  Partnerships are generally simple and inexpensive to form. 

Advantages 

• Low start-up costs
• High-caliber employees can be made partner
• Increased access to knowledge
• Shared responsibility
• Limited liability in the the case of a Limited Partnership or LLC

Disadvantages 

• Decision-making can be cumbersome
• There are limits to what expenses can be deducted for tax purposes
• If the company is sued, liability of the partners is joint and severally liable and their assets are open to seizure
• Can be difficult to raise significant capital

 

Corporations: 

A corporation is a separate legal entity, separate and apart from its owner, which serves to reduce owner or limit personal liability.  In the creation of a corporation, each owner is issued shares in the business, proportional to the percentage of ownership. A corporation may be private or public and traded on the stock exchange. 

The difference between a federally and provincially incorporated business, is that a federally incorporated business provides for greater business protection and  to operate throughout all of Canada.  Whereas, a provincial incorporation is registered pursuant to the applicable provincial corporate statute and the business is restricted to operations within that particular province. Depending on your business needs, this may not be an issue for you. 

Advantages

• Provides for limited liability, no member of the company can be held personally liable for the debts or actions of the company. (However, it is important to note that Canada Revenue Agency (CRA) can hold a Director personally liable for unpaid Trust funds, such as GST/HST and/or payroll taxes. Directors’ Liability – CRA)
• Lower tax rate on a corporation
• Can qualify for various corporate tax deferrals and other financial incentives, such as the Small Business Deduction (SBD)
• Directors are only taxed on the income that they draw from the corporation
• Directors are not required to draw an annual salary and may choose to let the equity of the corporation increase in lieu
• Corporations have the same rights as an individual and can own property, incur liabilities, carry on business at arm’s length of the owner
• If sued, the corporation is the one being sued and not the business owner (except in the event of a CRA Directors’ Liability assessment as noted above)
• Business continuance – unlike a sole-proprietorship, a corporation has unlimited lifespan and it will continue to exist even if directors or the company’s shareholders die or leave the business
• Selling of the business is more straightforward with a corporate entity
• Raising money is easier

Disadvantages 

• Incorporating a business entails greater start-up, registration and operation costs
• Accounting and banking costs are higher than that of a sole-proprietorship
• Increased record keeping such as, meeting minutes, articles of incorporation, registration of directors, financial statements, general ledgers and journals, electronic copies of critical documents, cash records, bank statements and loan documents, unpaid invoices and other statements relating to corporate sales and debtor record
• Ongoing costs of annual filing fees to be paid along with accounting costs relating to the required annual corporate tax return and related financial statements

 

Cooperative:

A cooperative business can be described as a corporate entity that is legally owned and operated by its members. Liability of its individual members is limited to the extent of the value of shares held. A cooperative is registered pursuant to the Canada Cooperatives Act.

Advantages 

• Equal voting rights for members
• Cooperative structure encourages shared responsibility and contribution from its members
• Democratic organization
• No limit to the number of members
• Limited liability
• Can own property
• Obtaining capital through investors
• Less taxation
• Funding opportunities
• Perpetual existence

Disadvantages 

• Cooperatives can have limited resources, which can mean the financial strength of the cooperative or corporation is low due to limited supply of capital
• High interest rates
• Can have management that is less capable since it may be limited by the skill set of its operational members
• Rigid business practices
• Limited consideration
• Undue government intervention

Contact SamLaw to explore your many options of operating a business in Canada. Let us help you select the business entity that makes the most sense for you and your business needs.