Selecting an appropriate business structure is a crucial first step in starting a business. Location, staffing, advertising, and financing are all important, but what legal structure your business should take is equally significant.
The three basic business structures in Canada are sole proprietorship, partnership and corporation. You may want to start with a sole proprietorship or partnership if you’re a newbie. Partnerships and sole proprietorships have fewer regulations, but you’re legally responsible for the debts and actions of your business. Depending on the nature and location of the business, liability and general exposure issues, financing requirements, and tax considerations, the right structure is determined on a case-by-case basis.
Let’s start by looking at each structure in more detail.
Corporation
Corporations are separate legal entities from their shareholders. Corporations in Canada have all the legal powers of natural persons, including owning property, carrying on business, borrowing, lending, and suing. Shareholders receive a portion of corporate profits based on how much of the business they each own, but they are not responsible for the corporation’s obligations. Limited liability, simple asset transfers, and eternal existence are among benefits of corporations. A corporation must pay tax on its income since it is a separate legal entity. In Canada, the corporation is by far the most popular type of commercial entity.
Compared to other company structure options, corporations require more paperwork, though specific requirements can change based on where you live. In general, you have to sell shares to the new company’s shareholders, file articles of incorporation with your province or territory, and choose a board of directors. The business plan and overall operation of the corporation are the responsibility of the board of directors.
Sole Proprietorship
A sole proprietorship is often utilised when the company is owned and run by the same person who is liable for both the company’s debts and its obligations.
This structure is quite straightforward and has few legal challenges. Certain obligations, such licences and business name registrations, will nevertheless be necessary. Smaller companies gain from this structure because all obligations and liabilities of the company pass through to the individual.
Your company’s net income determines your tax liability, after which you are taxed at your effective tax rate. Liability? Indeed, but you can get around that with a solid commercial liability insurance plan. In contrast to a corporation, a sole proprietor’s assets are at danger if the business is unable to pay its debts. Another drawback is that there are little chances for tax planning because business gains pass through to the individual and are taxed in that person’s hands.
Partnership
A partnership is when two or more people or businesses conduct business together with the intention of making money. The firm is divided among the owners, who also split the earnings and losses. There are numerous varieties of partnerships, including:
- General partnership.
- Limited partnership.
- Limited liability partnership (LLP).
Each person is taxed according to their ownership stake in the company’s net income, with the tax treatment being the same as it would be for a sole proprietorship.
In Canada, the provinces have sole authority for partnerships, and as a result, each province has passed legislation specifically governing partnerships.
Bottom line
Before deciding which business structure to use, take into account your legal requirements, tax liabilities, and the effort required to start up and manage various business structures. Always talk to your accounting and legal teams about your choices before making any judgements. We work cooperatively with a small business-focused firm.
If you have any questions regarding business plans and business setup, feel free to contact finnection via email at info@finnection.ca or call us at (647) 795-5462
Disclaimer: Above information is subject to change and represent the views of the author. It is shared for educational purposes only. Readers are advised to use their own judgement and seek specific professional advice before making any decision. Finnection Inc. is not liable for any actions taken by reader based on the information shared in this article. You may consult with us before using this information for any purpose.