Choosing the right business ownership is crucial. It determines how your business is organized, how money flows in and out, and how your business is taxed. Consider these four types of business ownership to find the best one for starting a small business in Canada.
Forms of Business Ownership in Canada
In Canada, there are four primary types of business ownership:
Now, we will discuss the key benefits and drawbacks associated with each of these forms of business ownership.
The Sole Proprietorship in Canada
- Setting up is straightforward and cost-effective.
- The business is entirely controlled by the owner.
- Tax reporting is uncomplicated and doesn’t involve filing a separate corporate tax return.
- The owner is personally liable without any distinction between the business and themselves.
- Raising capital through debt or equity financing can be challenging, as banks are hesitant to lend to sole proprietorships, and there are no shares available to sell to equity investors.
- Selling the business can be difficult.
The Partnership in Canada
- The risks are shared.
- The management responsibilities are shared.
- Tax reporting is uncomplicated, as it doesn’t involve a separate corporate tax return.
- There is a risk of conflicts arising between partners.
- Both partners can be held accountable for the business debts incurred by the other partner.
- Decision making is a shared responsibility.
- Buyouts can present difficulties when one partner wants to leave the business.
The Corporation in Canada?
- Limited liability – owners are not responsible for company debts or obligations.
- Easier to raise capital from investors or financial institutions.
- Being incorporated is often a requirement when doing business with governments or other businesses.
- Business income can be paid out in the form of salary or dividends, allowing you to optimize your tax situation.
- Most expensive form of business to set up and maintain.
- Involves a lot of ongoing paperwork (must file annual business tax returns).
The Cooperative in Canada
- Owned and controlled by its members.
- Limited liability.
- Decision making can be slow.
- Risk of conflict between members.
Forms of Business Ownership and Business Registration in Canada
The type of ownership you select dictates the procedure for registering your business. Registering a sole proprietorship is simpler and less costly compared to registering a corporation. However, as you can see from the advantages and disadvantages mentioned earlier, there might be compelling reasons to go through more effort and expense when establishing your new business.
The primary reason for incorporating a business right from the start, rather than opting for a sole proprietorship or partnership, is the matter of liability. When you are a sole proprietor, both you and your business are considered legally indistinguishable. Consequently, any debts or obligations the business incurs also become the personal responsibility of the owner. Of course, liability is not the sole factor that could make starting as a corporation more favorable.
In Canada, all businesses, except sole proprietorships that solely use the owner’s legal name without any additions (except in Newfoundland and Labrador where even sole proprietorships and partnerships are exempt), must register their business names in their respective provinces or territories.
CBES is here to assist you; feel free to contact us for expert guidance.