A business woman holding binders. Stock photo by Getty Images
So you’re ready to start your own business, but don’t know your “Inc.” from your “LLP.” Relax, we’re here to help.
In Canada, there are a few types of business structures you can choose from: corporations,
sole proprietorships and partnerships. What business structure you
choose depends on a variety of factors. For instance, for a business
that has a lot of employees and for which you have to raise capital
quickly, incorporation would probably make the most sense.
The main thing to keep in mind, is that the business structure
you choose will dictate how much liability you carry, how expensive it
is to set up your business, the way the decision making process works,
and whether you have tax advantages or disadvantages.
Let’s have a look at these four factors for each of the business structures.
- Liability: the main advantage of a
corporation is that it’s a separate legal entity that holds liability.
That means the owner and the shareholders carry no personal liability
for the business and cannot be sued. Only the corporation can be held
liable by creditors.
- Set-up expense: the corporation is the
most expensive business structure to set up. (You need some examples of
the different fees charged by provinces)
- Decision-making process: it can be
difficult if the company is large, as a lot of shareholders will have to
vote on decisions. In large corporations, you could even have
- Tax advantage or disadvantage: both.
Unfortunately, shareholders are taxed twice — once at the level of a
corporation and again at a personal level. However, some corporations
enjoy lower tax rates. Whether you do or not depends on the type of
- Liability: you carry personal
liability for losses. In fact, you carry unlimited liability and
personal assets will be used to pay off debts if you owe creditors.
- Set-up expense: it’s quite cheap to
set up a sole proprietorship. All you need to do is to register your
business name with your province. Each province has their own
governmental office for the purposes of business name registration.
- Decision-making process: this is the
main advantage of a sole proprietorship as you are the only one making
decisions and therefore have direct decision-making control. Unlike the
corporation or partnership structure, you don’t have to consider
shareholders or partners. You are the sole decision-making entity in
- Tax advantage or disadvantage: depends
on whether your business is profitable or not. If it’s not profitable,
then you likely will be in a lower tax bracket and you will probably be
able to deduct losses from income. If your business is doing well, you
will be taxed at a higher rate.
- Liability: your liability is still
unlimited, which means the partners are personally liable for losses. If
you establish a limited liability partnership (LLP) then each partner
carries responsibility for their own losses and negligence. However,
only specific professions can create LLP’s.
- Set-up expense: these costs are relatively inexpensive and shared between the partners.
- Decision-making process: that depends
on how well you get along with your partner(s). If the relationship is
good, decision-making can be easy, if the relationship is difficult then
it’s likely the decision-making will be difficult as well.
- Tax advantage or disadvantage: similar
to sole proprietorship, except that the partners file their individual
tax returns with their share of the partnership.