Starting a new business or taking over an existing one comes with a lot of interesting and exciting prospects for the future. However, with the potential to increase your income and obtain your dream job in your field of expertise comes a great deal of fiscal, administrative and legal responsibilities. The stipulations for these vary depending on what country you live in and, more specifically, the region in which your business is located. The legal structure of your business plan should be secure, in-depth, and binding. In order to accomplish this, you need to make sure that you select a suitable business structure that adheres to the needs of your company.
When and Why You Should Incorporate Your Business in Canada
Deciding whether or not to incorporate your Canadian business is a huge step that depends on a number of essential factors. The first thing you need to understand is that incorporation is just one of many legal structures for businesses in Canada. Learning the difference between all of them takes a great deal of time and experience.
Legal Structures for Businesses in Canada
The federal government of Canada has mandated that any new or existing small, medium, and large businesses must be registered under a specific legal structure based on their fiscal earnings, size, and tax bracket delineation.
There are a series of different types of legal structures for organizations in Canada and each one is subject to certain regulations and restrictions according to the province or territory in which your company is located. Selecting the most appropriate business structure that pertains to your business helps you determine the following:
- Tax liabilities
- Your specific responsibilities as a business owner
- Personal liabilities
- Amount of asset protection required
- Ongoing costs and volume of required official paperwork
Business Structures for Small Businesses in Canada
Depending on the success, economical standing, and special circumstances of your business, you can choose to classify it as one of the following legal structures: sole proprietorship, partnership, or incorporation. The type of classification you choose for your business should be determined based on a number of mitigating factors.
If you’re a first-time or inexperienced business owner, then it might be wise to seek out the advice of a business professional with a prominent legal background who has renowned experience working with companies similar to yours.
Basically, this means that you’re the one and only owner and operator of your business. As such, all major decisions must be made by you and you’re entitled to 100% of the profits since there are no shareholders or partners involved. You may also be eligible to receive certain tax breaks in times of financial hardship or while you get your feet wet.
- Being classified under a small tax bracket
- Complete control of decision making
- Entitled to all profits from business
- Simple and cost-effective registration process
- Business owner assumes all burden of responsibility for company
- Your personal and professional financial accounts are the same, which means any debts or claims incurred can be made against your personal assets
- Managing a business on your own is extremely challenging
Incorporation means that your business is legally considered a separate entity and isn’t affiliated with or connected to your or your partner(s)’s personal assets. That means none of the shareholders are legally liable for paying off any debts incurred by the business through their own personal assets.
- In the event of a death or retirement, ownership can be legally transferred from one individual to another
- Limited liability
- The company can continue to exist without the original owner’s presence
- It’s a separate legal entity, which means no personal assets are required
- Easy to raise capital for the business
- Taxes are usually lower for incorporated businesses
- Corporations are subject to strict legal standards and regulations
- Corporate records must be extremely detailed, and all legal documents must be unequivocally filed with the federal and municipal government every year or as requested
- Conflicts could arise between shareholders
- Proof of residency and citizenship of business owners may be required in some cases
Entering into a partnership means that you now have other proprietors who also have some level of stake in your business. It could be a general partnership with one or more individuals in which everyone has an equal share or a limited partnership in which the other proprietors are merely shareholders or investors without any tangible authoritative clout. Legal contracts will need to be drawn up so that all parties involved are on the same page in terms of what their role is within the structure of the business and just how much weight their respective positions hold.
- Relieves some of the pressures of running a business on your own
- Costs and responsibilities of running the business can be split as you and your partners see fit
- Significant tax advantages come into play if the business and all partners involved fall below a certain tax bracket
- Legally, you and your business are joint entities
- Unlimited liabilities amongst all partners, meaning any debts incurred by the business on a whole can be taken out of all your personal assets
- Incompatibility between partners, which can lead to conflict
- All partners are equally financially and legally liable for decisions made by their colleagues on behalf of the business regardless of authorization
How Canadian Business and Enterprise Services (CBES) Can Help You
If you’ve never owned or operated your own business before, then there’s no doubt you’re going to need a little bit of extra legal advice in getting started. The first step is choosing the right business structure that works for your company, but many entrepreneurs are unsure of where to begin and what they need to make their business successful. Canadian Business and Enterprise Services (CBES) can help you get organized and provide legal advice on how you should set up your business. Contact us today to learn all about how we can help you start your new small business!