One of the first tasks for an entrepreneur is to decide what type of business structure is best suited for their new endeavour. Each structure comes with its own benefits and drawbacks, and as your business evolves you may find it advantageous to move from one type to another. Let’s take a closer look at the different types of business structure in Canada to understand which makes the most sense for you.
What are business structure types in Canada
In Canada, there are 4 primary business structures;
- Sole Proprietorships
These names refer to different ways of organizing the legal and ownership status of your business. The option you choose will impact a number of things, including your personal liability, your tax rate, and many other important factors in your business. Let’s take a look in more detail.
A sole proprietorship is a business made up of one business owner (you) that has not been registered with the government as a corporation. For tax purposes, a sole proprietorship is the most basic way to run a business in Canada.
An incorporation is a business structure in which the company operates as its own distinct legal entity, separate from it’s owners. Incorporation provides greater liability protection for you as a business owner versus sole proprietorships or general partnerships. It also changes the way you’re taxed, as the corporate tax rate is lower than the personal rate.
A partnership refers to any business endeavour jointly taken by multiple parties. While the partnership rules can vary according to the specific type of partnership and the province in which it is registered, there are three main business structures for partnerships:
- Limited liability
A cooperative is an incorporated business that is democratically controlled by people with common needs. There are different types of cooperatives in Canada, including consumer, producer, worker, and multi-stakeholder.
Pros and cons of business structure types in Canada
Pros of a Sole Proprietorship
Simplicity and Speed
Registering as a sole proprietorship is the easiest business structure, and Ownr makes it even simpler. You can complete the registration process in a matter of minutes.
Full Decision-Making Control
As a sole proprietor, you enjoy complete autonomy over your business decisions. There’s no need for board or shareholder approvals since you are the sole owner.
You can deduct business losses from your personal income, helping you stay within a lower personal income tax bracket and reducing your overall tax liability.
Low Startup Costs
Registering your business as a sole proprietorship is cost-effective. With Ownr, you can do it for a one-time fee of just $49.
Considerations and Risks of a Sole Proprietorship
Full Personal Liability
One significant drawback is that as a sole proprietor, you are personally liable for any business debts. Your personal assets may be at risk if your business incurs financial obligations.
Higher Personal Taxes
If your business becomes highly profitable, you might find yourself in a higher personal tax bracket. While increased profits are a positive, it’s essential to be aware that your personal tax liability could rise along with your business’s success.
Difficulty Raising Capital
Sole proprietors may encounter challenges when trying to secure financing or investments. Financial institutions and investors may prefer to work with incorporated businesses, potentially making it more challenging for sole proprietors to access capital.
Pros of Incorporating
Limited Liability Protection
Unlike sole proprietorships, incorporating your business offers you limited liability protection. This means your personal assets are shielded from business-related liabilities.
Access to Funding
A corporation has the potential to attract investments from angel investors and venture capitalists. These funds can be instrumental in fueling the growth of your business.
As the owner of a corporation, you have greater control over when and how you receive income. Corporations often benefit from lower tax rates, and their income is separate from your personal earnings, potentially resulting in significant tax savings.
Considerations or Risks of Incorporating
Complex Tax Filing
Incorporation introduces more complex tax filing requirements. You’ll need to file separate tax forms for your personal income and your business income.
No Personal Tax Credits
As a corporation owner, you won’t receive personal tax credits. This means that all income earned by the corporation is subject to taxation.
Higher Initial Costs and Ongoing Management
Compared to a sole proprietorship, setting up a corporation involves higher initial expenses. Additionally, ongoing management can be more time-consuming, requiring careful attention to corporate compliance and governance.
Pros of a Partnership
Expertise and Skill Enhancement
Running a business requires a diverse skill set, and it’s impossible to excel in every aspect. Partnerships allow you to bring in individuals with complementary skills. For instance, if you excel creatively but need support with organization and finances, a partner with those strengths can be invaluable.
Increased Capital and Cost Sharing
More partners mean more capital injection into the business. Partners can also leverage their contacts and expertise to secure additional funding. Moreover, the financial burden of the business is shared among partners, reducing the sole responsibility.
Partnerships extend your capacity to take on more projects and clients. With a more productive team, you can pursue a broader range of opportunities and increase revenue. Partners may also provide access to new client networks and industries, fostering growth.
Even in situations of unlimited liability, partners share the burden. While having insurance is crucial, sharing responsibilities with a partner alleviates the weight of running a business on your own. In both profits and losses, partners are equally invested and supportive.
Considerations or Risks of a Partnership
In partnerships, shared liability can be a double-edged sword. While it distributes responsibility among partners, it also means you’re accountable for your partners’ actions. Mistakes or client perceptions of errors made by your partners can impact your own standing, unless you’re in an industry that allows for limited liability partnerships.
Loss of Autonomy
One significant drawback for solo business owners entering partnerships is the loss of autonomy and full decision-making authority. Partnerships require compromise and shared decision-making, where every party’s input carries weight. It’s no longer a scenario where “what I say goes.”
Future Selling Complications
Partnering with someone who shares your business vision is crucial, especially if you plan to sell the business in the future. Introducing partners can complicate the sale process, particularly if there are differing views on the matter. It’s advisable to establish an exit strategy in the original partnership agreement to address potential conflicts.
Changes in your partner’s circumstances can introduce instability to your business. When considering a partnership, it’s vital to envision how you’d handle such changes. Effective collaboration becomes essential during challenging times to maintain business stability.
Pros of a Cooperative
Democratic and Socially Conscious
Cooperatives are inherently democratic and often prioritize social consciousness. Every member, regardless of their financial contribution, has an equal say in the cooperative’s decisions and direction.
In a cooperative, employees become co-owners, fostering a strong sense of commitment and ownership in the company. This can lead to increased dedication and productivity among the workforce.
Considerations or Risks of a Cooperative
Founding members may find that cooperatives are not as profitable for them individually. Typically, members receive a percentage of the profits, and the remainder is reinvested back into the cooperative for its growth and sustainability.
Securing financing and start-up loans can be more challenging for cooperatives compared to other business models. Financial institutions may view cooperatives as riskier ventures, making it harder to obtain necessary capital.
How do I form a business in Canada?
If you’re looking to start a sole proprietorship or corporation, our friends at Ownr can help. For sole proprietors, Ownr’s $49 fee is actually less expensive than registering your business with the government, plus you can get a $49* refund when you about an RBC Business Bank Account
Before deciding to incorporate, you’ll also have to choose whether to do so under provincial law or federal law. This will determine which governing body you’ll go through to incorporate your business.
If you want to incorporate in Ontario, Alberta, British Columbia or Quebec, Ownr can help you get started, as well as set you up with on online minute book, legal documents, annual returns and much more.