Forms of Business Ownership in Canada

Sep 20, 2023

 If you’re thinking about the legal structure for your business in Canada, you have four options for ownership: sole proprietorship, partnership, corporation, or cooperative.

These different types of business ownership come with their own sets of pros and cons. It’s essential to consider these factors before deciding on the right structure for your new venture. To begin, let’s explore the advantages and disadvantages of sole proprietorships, which are widely favored among business owners.

 

Sole Proprietorship in Canada

The most straightforward type of business is a sole proprietorship, which refers to a business that is owned and operated by one person. You can either use your own name or choose a different name for your sole proprietorship (excluding legal designations like Ltd. or Inc.).

A major benefit of a sole proprietorship is the ease and affordability of setting up and managing the business. In many provinces, if you opt for sole proprietorship and operate it under your own name, there’s no need to register your business.

It’s important to note that although the general process of starting a business is similar across Canada, the specific details vary in each province and territory. To find province-specific information such as business registration procedures for different business forms, you can refer to:

– Business Registration in British Columbia
– Business Registration in Alberta
– Business Registration in Ontario
– Business Registration in Quebec
– Business Registration in Nova Scotia

Even in cases where you have to register your sole proprietorship with your province or territory, the registration cost is significantly lower compared to registering a corporation. Additionally, you aren’t required to file annual reports for your sole proprietorship, although some provinces, such as Ontario, mandate renewing the sole proprietorship registration every five years.

Tax simplicity is another significant advantage of sole proprietorship. As a sole proprietor, you report your business income on your personal income tax return instead of filing a separate tax form, as would be the case for a corporate business structure.

For many small business owners, the greatest advantage of a sole proprietorship is having complete ownership of their business. As a sole proprietor, you have full control over your small business without anyone else dictating how you should operate or make decisions.

 

Disadvantages of Sole Proprietorships

At first glance, something that seems beneficial can turn out to be a significant drawback. When it comes to the drawbacks of a sole proprietorship, being the exclusive owner can be extremely problematic if things go wrong.

If you establish your business as a sole proprietorship, legally it is regarded as an extension of yourself, implying that you bear full responsibility for the business. This means that as a sole proprietor, you personally assume all the debts and liabilities associated with your business. Consequently, if your business fails, any of your possessions, including personal assets, can be seized and utilized to settle the obligations you’ve incurred.

The primary disadvantage of opting for a sole proprietorship is this personal liability. Additional drawbacks of sole proprietorships encompass limited tax flexibility, increased difficulty in raising funds, and the potential for inadequate management, particularly if the sole owner lacks the necessary skills or knowledge to effectively lead the company.

 

The Partnership Form of Business Ownership in Canada

If you prefer not to embark on your business journey as a sole proprietor, taking on the full responsibility and control, you might consider officially establishing your business as a partnership.

A partnership can be formed with two individuals or as many as thirty, as the legal framework doesn’t impose a restriction on the number of partners involved.

In Canada, there are three distinct types of partnerships; however, the possibility of legally establishing a partnership other than a general one depends on the province or territory where your business operates and the nature of your specific business.

 

The General Partnership in Canada

General partnership is the most frequently encountered form of partnership. In this type of partnership, every partner bears joint and several responsibility for the partnership’s debts.

 

The Limited Partnership in Canada

In a limited partnership, individuals can contribute to a business without actively participating in its operations. As a limited partner, your responsibility towards the company and its debts is only limited to the amount you invest. To maintain your status as a limited partner, it is necessary to refrain from taking part in the management of the business or representing the company, otherwise you would become a general partner. (Note that in certain provinces, only specific types of businesses are permitted to function as limited partnerships.)

 

The Limited Liability Partnership in Canada

Limited liability partnerships in Canada are typically restricted to professional groups such as lawyers, accountants, and doctors. These partnerships are regulated by specific provincial laws. For example, in Ontario, only lawyers, chartered accountants, and certified general accountants are eligible to establish a Limited Liability Partnership.

 

Advantages and Disadvantages of a Partnership in Canada

A partnership has the authority to enter into contracts and borrow funds independently, relieving some of the legal responsibilities that a sole proprietorship would have to bear.

However, the true advantage of a partnership lies in the collaborative relationship between its partners, rather than the legal structure of the company. The most successful partnerships are those where partners possess complementary skills and have a mutual understanding when it comes to decision-making. If one partner possesses abilities and strengths that the other partner lacks, a partnership can truly be a perfect match.

Partnerships also enjoy the same tax simplicity as sole proprietorships. They are not required to file separate income tax returns or pay separate income tax. Instead, the financial information from the partnership is combined with the personal income of the partners to calculate their overall tax liability. In other words, if you opt for a partnership as your form of business ownership, you will still use the T1 income tax form to file your taxes.

Nevertheless, in a general partnership, one partner can be held legally responsible for all debts and obligations incurred on behalf of the business by another partner. As a partner, you could also be held accountable for any wrongful actions or omissions committed by other partners during the regular operations of the company, which can be a significant disadvantage.

Additionally, people often overlook the fact that partnerships can become the messiest and most contentious form of business ownership when it comes to dissolution. If you decide to establish any form of partnership, it is crucial to have a partnership agreement in place. The article “10 Questions Good Partnership Agreements Need to Answer” provides guidance on the aspects that should be covered in such an agreement.

Many individuals feel uneasy about assuming personal liability in both sole proprietorship and partnership business ownership structures. If you find yourself in this situation, it may be worth considering incorporating your business.

 

Advantages and Disadvantages of the Corporation in Canada

A corporation, also known as a limited company, is a separate legal entity from its owners or shareholders. This means that individuals within the company cannot be personally held responsible for the company’s debts, obligations, or actions. Shareholders, on the other hand, are only accountable for the unpaid portion of the shares they own.

Although this limited liability is advantageous, establishing and running a corporation is costly and complex, particularly if you intend to incorporate your business at both the federal and provincial levels, which requires a completely separate process.

Federal incorporation grants a company the privilege to operate under its corporate name across Canada, while provincial incorporation allows a company to operate under its corporate name within a specific province.

The steps for forming a corporation in Canada are outlined in the guide “How To Incorporate Your Business in Canada.”

Corporations are indeed more expensive to manage as they must submit annual income tax returns to the Canada Customs and Revenue Agency (CRA), the provincial Ministry of Finance, and possibly other provinces where the corporation conducts business.

However, the decision to form a corporation may be the most suitable choice depending on the nature of your business and your business plans.

 

The Cooperative Form of Business Ownership in Canada

A cooperative is a business that is legally established and owned by its members. It has the ability to enter into contracts using its corporate name. The liability of individual members in a cooperative is limited to the value of the shares they hold.

To structure your business as a cooperative, it must meet the requirements set out in the Canada Cooperatives Act. This means your business must be organized and operated as a cooperative. For detailed information on the functioning of a cooperative and its distinctions from other types of businesses, you can refer to the Incorporation Kit for Cooperatives provided by Industry Canada.

 

Structure Your Business Even Before You Name It

Choosing the type of business ownership has far-reaching ramifications, impacting various aspects such as the financial costs associated with establishment and operation, as well as tax planning. It is a crucial decision that should be made prior to selecting a business name.

Nevertheless, it is important to recognize that this choice is not permanent and can be modified if circumstances change. Numerous small businesses, initially operating as sole proprietorships, eventually evolve into corporations. Therefore, select the most suitable form of business ownership based on your current situation, and reassess your decision as your business expands.

 

CBES is here to assist you; feel free to contact us for expert guidance.

 

 

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