Which Canadian Business Structure is Right for You?Brian Jang ON August 27, 2020
As an entrepreneur in Canada, you are faced with an important decision: how do you want to run your company?
You have a couple of options available to you. You might choose to run it as a sole proprietorship, for example. Alternately, as part of a group, you might choose a co-operative structure. Or maybe you wish to form a partnership. No matter what you choose, there will be both pros and con which can help inform your final decision.
Here are some business structure types to consider:
A sole proprietorship is the number one choice among new business owners. The reason for this is likely due to it being not only the easiest structure to create, but also the most affordable. As the sole proprietor, you and your business are one and the same in the eyes of the law and the Canada Revenue Agency (CRA).
Being a sole proprietor means you are self-employed and thus will be paying personal income tax on the net income that your business generates. You will declare this on your personal income tax form. You will pay taxes based on business income minus your business expenses, in addition to the Canada Pension Plan (CPP).
Given that you and your business are the same, all liability for the company falls directly on your shoulders. This can have unfortunate consequences, such as someone going after your personal property should your business default on debts.
On the positive side, scaling the operations of your sole proprietorship is relatively simple and flexible.
Having a partner can be extremely beneficial; they can help you raise capital funds, and a combined credit rating is stronger, which facilitates borrowing. You and your partners will pay taxes based on your share of the profits from the business, rather than one person being responsible, as in a sole proprietorship.
Liability for debts is on all partners, regardless of whom accrues the debt. This means that if your partner runs out on you, you become wholly responsible. This is something that you need to consider right from the start. See Incorporation below for a way to limit your personal liability.
An obvious advantage of forming a Partnership is the ability to combine the skill and experience of each partner to make a stronger whole. A group of partners can bring very diverse talents to the table, creating strong opportunities for the growth of your business.
When considering the formation of a business partnership, be sure that you and your partners are all compatible with the values and goals of the business, or you could experience a difficult falling-out at some point.
Incorporation offers you some protection against liability. As mentioned above, a partner might leave you holding the bag for their debts, but in the case of a corporation, the business is its own entity which does not pass on liability to the owner(s). This makes it difficult for anyone to seize your personal property if your business ever defaults on debts. A corporation also does not pass on its income tax to the owners. Business tax rates are lower than personal tax rates, and you can defer and save these taxes.
Another advantage of incorporation is that should you decide to scale up, it is easier for incorporated companies to raise money. This makes the growth of your business a easier proposition. On the downside, setting up a corporation can be costly, and more complicated due to additional tasks such as record-keeping and bookkeeping, annual corporate tax returns, and more.
In this type of business structure, the business is owned and controlled by an association of members. This approach is becoming more popular in Canada, but ongoing success will typically require active participation form all members.
There are 5 main types of co-op:
- Consumer co-ops provide goods and services to members for personal use. Gas stations, housing, and credit unions are examples of this type of co-op.
- Worker co-ops. As the name implies, these are owned by employees. Some example of this type of co-op include brewery pubs, grocery stores and markets, and retailers and distributors of fair-trade products.
- Worker-shareholder co-ops are corporations with workers/ managers holding partial ownership of the business. Manufacturing and technology are some examples.
- Producer co-ops produce, market, and sell the products produced by their members. Agriculture co-operatives are an example.
- Multi-stakeholder co-ops consist of different types of members who work toward a common interest. This can include home care services, community services, and more.
Which Canadian Business Structure is Right for You?
While there are a variety of different considerations, the decision may be possible to simplify somewhat. If self-employment is a new experience for you, a sole proprietorship, with its simple and affordable set up might be the most appealing choice. If, however, you have a solid, dependable partner with whom you want to work, and upon whom you can depend, a partnership may be the answer. If you have one or more partners but wish to limit your personal liability or gain tax deferrals and savings, incorporation is a fine option, though it brings additional costs and greater complication.
This is an important decision to make, so take the time to examine not only your own needs and desires, but the financial needs of the company, as well as the level of risk you are willing to face and your expectations for growth.
For help with your business taxes, contact us.