Updated: Jan 15, 2021
Canadian business structures and figuring out the right one to achieve your business goals
When starting a business is it wise to consider what kind of structure would fit your business needs and goals. This article will break down the most common types of business structures used among Canadian businesses, including corporations and partnerships, and their associated advantages and disadvantages.
The Sole Proprietorship
It is not uncommon for individuals to opt for a simpler, unstructured form of business organization, which is referred to as a sole proprietorship. A sole proprietorship is ideal where the ownership and governance of a company is desired to be held by one individual and where there is little to no risk of personal liability from the business operations. Sole proprietorships are relatively simple and inexpensive to set up however, where the business name used is different than that of the individual carrying on business, the business name being used must be registered with the registrar. Another advantage of operating as a sole proprietorship is that the proprietor (or its agent) is the only person who has the ability to bind the business. The flip side of this advantage is that the proprietor carries the liability of the business in his or her own hands – there is no limited liability with sole proprietorships.
It is always important to consider the tax advantages with each business structure available to you. Sole proprietors can write off their business losses against their personal income but it is important to note that they are the only ones who can do so. Further, is it only the proprietor who can realize the profits of the business.
Like a sole proprietorship, a partnership is simple and inexpensive to set up. By definition, a partnership is when two or more people enter into business together without forming another type of entity. Within a partnership structure, the partnership agreement may allow all or a few partners to have the ability to contribute to the management of the business. The disadvantage of a partnership structure is the personal liability that attaches to all partners. While a partner, each partner will bear personal liability of all debts and obligations of the business and, in some cases, may be liable for the wrongful acts of other partners where those acts are connected to the business of the partnership.
There are certain tax considerations associated with partnerships that should be noted. Partnerships are not taxed as business entities in and of themselves. This gives the partners of a partnership the ability to write off business losses against personal income but all profits are deemed to be received by the partners resulting in a loss of tax planning opportunities.
Most businesses opt to operate their business under the structure of a separate legal entity called a corporation. The corporation is unique in that it is a legal entity that exists separately from its shareholders or owners. This means that the corporation can enter into contracts and hold property. The corporation is subject to the law and can be sued or can commence a legal action itself.
While a corporation is costly to set up, the advantages associated with this structure generally outweigh those costs. For example, the shareholders of a corporation have only limited personal liability for the corporation's obligations and debts (being limited to a shareholder’s contributions made to the company). Another benefit of the corporation is that this structure makes it easier to raise capital for the business. Corporations may sell their shares, borrow money and issue security to its creditors.
Canadian controlled private corporations ( CCPCs) are taxed at a much lower rate in comparison to personal tax rates. The general corporate tax rate in British Columbia currently sits at 12% while the small business deduction is currently at 2%. There are more tax planning opportunities available to corporations as well as a maximum protection from personal liability for the risks associated with operating a business in Canada or elsewhere.
At Kickstart Law, we’re here to help you determine which business structure will best serve your needs. Connect with us to today and we’ll help set you and your business up for success!