Your business structure can determine many important things within your business, like how your business does taxes and how you pay yourself. The most common business structures in Canada are: sole proprietorship, partnership, and corporation.
When deciding on your business structure, here are some of the main things to consider:
Where does your business operate?
It is important to know whether you intend to expand nationally or even internationally or whether you will choose to remain local when operating your business as this will determine what laws your business will need to abide by. If you are operating nationally for example, you may want to incorporate federally.
What is the risk level of your industry?
If there is a higher risk of legal action being taken against your business, you will want to choose a business structure that will protect you.
How many individuals own your business?
The answer to this question will easily sway you away from certain structures depending on your answer. For example, a sole proprietorship can only have one owner.
How many employees will you need?
This gives an indication of how complex your day-to-day operations are. If you require many employees, you may want to incorporate.
Will you require external financing?
Banks and investors usually require businesses to be incorporated for this.
When making the decision of which business structure to use, it is important to know how each structure differs from one another. Here is a summary of the most common business structures used in Canada:
A sole proprietorship can only have one owner, and all business taxes are done within your personal taxes. With this business structure, you receive all the profits from your business, and you claim all the losses. While this may make for easy set-up, it also means you are personally responsible for the business’ financial and legal liabilities.
There are three different structures within a business partnership to choose from.
A general partnership is where each partner is an active participant who contributes to the company to make a profit. The profits and losses are divided amongst the partners depending on their shares. Much like a sole proprietorship, members of a partnership report income and expenses on their personal tax returns and are personally responsible for the company’s financial and legal liabilities. Having a general partnership structure for your business means partners may legally bind one another without prior approval.
A limited partnership differs from a general partnership in that a limited partnership has a separate legal status from its partners. There are two types of partners in this business structure: the general partner and the limited partner. The general partner has unlimited liability and manages the day-to-day of the business. The limited partner has limited liability dependent on the amount invested by the partner, this partner does not handle day-to-day operations.
Limited Liability Partnership
A limited liability partnership has a separate legal status from its partners and is similar to the partnerships listed above. However, in a limited liability partnership the liability of limited partners is capped.
A corporation is a legal business structure which is separate and distinct from its owners. Corporations are capable of owning investments, entering contracts, and even being sued. Corporations are more regulated than sole proprietorships and losses cannot be claimed by shareholders. Some advantages to incorporating may be that your liability is limited as a shareholder, lower tax rates, and business name protection.
Alternative business structures
Some other business structures which may be beneficial to know are:
This structure is for a for-profit company which commits to promoting a public benefit.
Community Contribution Company
This structure is similar to a corporation, however it must allocate 60% of its profits towards the public benefit it is set up for.
Use these links if you would like more information on the various business structures or if you would like to take a short quiz to see which business structures may be right for your company. It is a good idea to discuss with your lawyer and accountant which business structure is right for you.