Business Structures in Canada - Diamond and Diamond Lawyers
  • Thursday, 15 July 2021

Business Structures in Canada

Before registering your company, think about the many choices accessible to you. There are three basic forms of company types from a legal standpoint: sole proprietorship, partnership, and corporation. Liability, taxation, and succession are all affected differently by each arrangement. 

What are the advantages of forming a corporation over forming a partnership or a single proprietorship for your business? We give a summary of each company structure, as well as its benefits and drawbacks, below.

Types of Business Structures in Canada

One of the most essential decisions you’ll make as an entrepreneur is deciding on a business structure. What your business is, the responsibility connected with running it, and who your target market is are all factors in determining the best type of business ownership for you.

In most sectors, entrepreneurs can choose from four basic business structures: sole proprietorship, partnership, or corporation.  

Sole Proprietorship

You are the company and have complete control over it. The easiest choice is to run a firm as a sole proprietor, which many small business owners do. It’s the most famous structure, and it’s also the simplest to set up. It’s the simplest method to form your company, with less paperwork and the ability to be up and running quickly. You can also modify the structure later as your company expands.

Partnership

The company is owned by two or more people. A partnership is a group of two or more persons who work together to start a business. Finding the appropriate individual or persons to create a partnership is critical. You want to do business with someone you can trust since you’ll be held responsible if they make poor judgments. 

That is why it is critical to do business with someone you can work with within both good and bad times. While having a partner who brings a different perspective to the table is beneficial, being in a relationship where decision-making is delayed due to a difference of opinion may hinder your performance.

Corporation

A corporation is a legal body apart from you that is legally established with a predetermined number of shares that you select. People are then given a percentage of these shares, indicating the corporation’s ownership structure. A company can pay you a salary and possibly a dividend.

Cooperative

This is set up such that a group of people may govern it, and it can be used for both nonprofits and companies. It’s not a famous corporate structure, but if a group of people or firms agrees to pool their resources, it can work effectively. Co-ops vary from other organizations in that they are designed to fulfill the common needs of their members rather than increase profits for shareholders.

Advantages of Each Business Structure

There are several advantages to each of the business types; let’s look at some of them.  Sole Proprietorship You have complete control and can make all decisions without involving anybody else. There aren’t many fees associated with getting it up and running. You get some tax benefits, such as the opportunity to deduct losses and…

Advantages of Each Business Structure

Advantages of Each Business StructureThere are several advantages to each of the business types; let’s look at some of them. 

Sole Proprietorship

  • You have complete control and can make all decisions without involving anybody else.
  • There aren’t many fees associated with getting it up and running.
  • You get some tax benefits, such as the opportunity to deduct losses and costs from your taxable income.
  • You are the only beneficiary of all earnings.

Partnership

  • Setting up a partnership agreement is quite affordable, and the business is divided equally among you and your partners.
  • Each partner is responsible for the partnership’s debts; thus, losses are shared, and gains are split among the partners.
  • You and your partners can report your share of the loss on your tax returns if the partnership’s income is negative (i.e., the firm loses money).
  • In the business, you have assistance and, ideally, complementing skill sets.

Corporation

  • Because you keep your personal and business assets separate, it’s less probable that you’ll be personally responsible if the company goes bankrupt.
  • A corporation will continue to exist even if the management changes, making it easier to pass on or sell the company.
  • Shares might be sold to obtain funds for development or growth projects.
  • Any shareholder can sell their shares to a third party outside the firm if there is no shareholder agreement in existence. This means that such a transaction will only be subject to the approval procedures outlined in the articles of incorporation. According to Canadian case law, these may not be able to prevent a share sale to an outside entity.

Cooperative 

  • The same as a corporation, it has limited responsibility.
  • Profits are shared among the shareholders.
  • A democratically elected government runs it.  

Running a business means that you’d have to follow a lot of regulations set by the government. If you’re looking for professional lawyers that can assist you in setting up a legal business, contact Diamond and Diamond today to know more about the types of business structures in Canada.

Disadvantages of the Different Business Structures

There are also disadvantages to every form of business ownership. So we will take you through those as well.

Sole Proprietorship

  • You are responsible for all aspects of your firm, including debts and losses.
  • If you don’t pay a loan, a creditor can seize both your personal and company assets.

Partnership

  • Because there is no legal distinction between you and your company, you are still responsible for all business operations in the same manner that a single owner is.
  • Each member in your partnership is accountable for the partnership’s debts, regardless of whether that person incurred the debt personally.
  • Finding the proper relationship may be challenging, and conflict between you and your partners is always a possibility.

Corporation

  • The time-consuming and costly procedure of incorporation.
  • Doubling taxes is a possibility.
  • Strictly regulated.

Cooperative 

  • Laws governing the administration of justice can be complicated and varied.
  • Unlike other types of companies, it is less organized.
  • Arduous management procedures.

Which Business Structure Should You Adopt?

The sort of legal structure you choose for your company is one of the most essential decisions you’ll make when starting a business. Not only will this selection affect the amount of tax you pay, but it will also affect the quantity of paperwork your firm must complete, your personal liability, and your ability to obtain funds. 

Legal liability 

Are you willing to take full responsibility for whatever debt your company incurs? Or would you prefer to take on a limited amount of risk and share it with a business partner? You may narrow down which structure is ideal for you by deciding how much liability you want to take on.

Taxes 

How much you pay in taxes is determined by the form of your company. Depending on the structure you pick, you may face double taxes on corporate and personal income, or only flow-through taxation, in which the firm isn’t taxed at all.

Administrative costs 

Corporations, for example, have more complex paperwork and record-keeping obligations, which may take a long time and cost a lot of money to set up. For this reason, those who are beginning a business on their own may choose to select a sole proprietorship, which has fewer reporting obligations than other forms. Mention here how important it is to seek a legal expert or lawyer before deciding on a business structure.

pro tip icon

Pro Tip

“Picking the right business structure will influence your business’ success.”

FAQs About Business Structures in Canada

How do I incorporate a business in Canada?

Consult an attorney to verify that your company’s unique requirements are satisfied.

  • Step 1: Give your company a name.
  • Step 2: Create your articles of incorporation.
  • Step 3: Form the board of directors and establish the registered business address.
  • Step 4: Submit your application and pay the cost.

What are the different categories of cooperatives?

  • Marketing cooperatives
  • Consumer cooperatives
  • Worker cooperatives
  • Investment cooperatives
  • Multi-Stakeholder cooperatives
  • New Generation cooperatives
  • Housing cooperatives
  • Community Service cooperatives

What are crown corporations?

Crown corporations refer to government-owned firms that are organized like independent or private businesses.

How non-residents can open a business in canada

If you’re not a Canadian citizen, you can form a business in Canada by forming a partnership or starting an incorporated business. If you choose the former, you must have a Canadian business partner who lives in Canada. You can use your partner’s address for starting your business in the country. If you choose the latter, you still need a Canadian address and the right number of Canadian residents on your Board of Directors.

How bankruptcy works in partnership businesses in Canada?

If your business is a sole proprietorship or a partnership, bankruptcy is still treated as if an individual is running the business. Below are the types of discharge that you can receive after filing for bankruptcy:

  • Absolute – This discharge automatically releases you from any and all legal obligations to repay your debts.
  • Conditional – This requires you to meet a set of conditions before receiving an Absolute Discharge.
  • Suspended – You won’t immediately receive an Absolute Discharge, but you will get it on a future date.
  • Discharge Refused – If your discharge is refused, you may need to reapply for an Absolute Discharge at a later date.

How to set-up as a sole proprietor in Canada?

To register a business as a sole proprietor or partnership in Canada, you have to:

  • Register your sole proprietor business with the provinces and territories where you plan to do business
  • Secure tax accounts
  • Get a federal business number
  • Apply for any permits and licenses you and your business may need

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