Small Business: Canadian Business Structures Explained

Four Common Canadian Business Structures Explained

When starting a business it is important to adequately explore the options available. Will it be owned and operated by one or by many? Will it be incorporated or not?

The process can be a little unnerving, for that reason we have provided a detailed summary of the various Canadian Business Structures available:

 

Canadian Business Structures Dissected:

1. Sole Proprietorship (Single Owner)

In this structure, you as an individual own 100% of the profits created. However responsibity for all business related obligations including debts, are also yours.  A creditor can issue a claim against not only your business assets, but also your personal assets, in order to fulfill a debt.

Pros:

  • This is the easiest form of business to begin, you simply need to register your business name provincially (note that this does not apply for Newfoundland and Labrador)
  • It is quite inexpensive in comparison to other options.
  • You have sole control over the direction and decisions of the business.
  • The number of regulatory commitments is minimal.
  • The amount of capital required is greatly reduced.
  • All of the profits belong to you.
  • There are tax advantages, including deduction of losses from your personal income and a lower tax bracket.

Cons:

  • No limit to liability, in other words ALL of your assets (including personal) can be taken to pay off your business debts.
  • If your business is profitable you may find yourself in a higher tax bracket (income is taxable at your personal rate).
  • The burden of start-up capital is carried solely by you.
  • As sole owner, vacation time and absenteeism may affect your business.

Partnerships are a second option for business start-ups

2. Partnerships (Two Owners)

Partnerships allow the benefit of multiple owners, without having to incorporate your business. Partnerships allow for combined financial support. Partnerships mean you will be splitting profits. Keep in mind that you may not always see eye to eye and a business agreement is highly recommended.

This business agreement should be drawn up with the aid of a lawyer in order to ensure:

  • First and foremost to ensure you meet the requirements for a partnership.
  • That your interests are protected.
  • The terms surrounding profits, growth, job details and absolving of partnership etc. are clearly defined.

The option exists to form a limited liability partnership, wherein you or your partner can choose to not take part in the control or management, but remain liable for debts.

Pros:

  • Partnerships, again, are relatively easy to start-up.
  • Work load and requirements are split up.
  • Tax advantages in that the income of the business is split between you and your partner when submitting your individual tax return.
  • Financial requirements, including start-up capital are shared.

Cons:

  • As with Sole Proprietorship, your personal assets can still be seized to pay of business debts.
  • There is no legal separation between you and your business.
  • Finding a suitable partner is difficult.
  • Business can result in many conflicts between partners and can result is damaged relationships.
  • You are responsible for your partners business actions. Their broken contracts, unfulfilled orders etc. are your issue as well.

3. Cooperatives (Multiple Owners)

The least common of business types, a cooperative is owned by an association of members.  This type of business is appropriate in situations where three or more people or businesses are determined to pool resources. They may choose to do this in provide access to common needs. Things like product deliveries, services, sales, employment, marketing etc.

Pros:

  • Liability is shared
  • Multiple resources.
  • Work load and requirements are split up.
  • Democratic decision making.

Cons:

  • Member conflicts based on business.
  • Member conflicts based on personalities.
  • Decisions can take time to make.
  • All members my play an equal part to succeed.
  • Thorough records and reports must be kept.
  • Additional capital is less likely to be offered.

More information

Want more information on this? Check out these links:

4. Corporations (Legal Separation Of Personal & Business)

Incorporating your business at either a provincial or federal level  is a third option. By incorporating a business, you are creating a legal separation between it and its owners (or shareholders). This means you are not responsible, personally, for business debts, business obligations, or corporate actions.

This is not a decision to take lightly and should be made only with proper legal counsel.

Pros:

  • Financial liability is limited.
  • The business becomes a separate legal entity.
  • Transferable ownership.
  • Continuous existence.
  • Capital is far easier to raise.
  • Incorporated businesses can be subject to lower taxes.

Cons:

  • High regulations on corporations.
  • Incorporating can be expensive.
  • Paperwork. Corporate records must be kept. This includes shareholder and director. meetings, and annually filed documentation with the government.
  • Issues with residency of director.
  • Shareholders and director conflicts.

More information:

Thinking of incorporating or simply want to know more? Visit Guide to Federal Incorporation

Transition Marketing Services. Our passion is educating and equipping small business owners with the tools and strategies to succeed. We have made it our priority to know Specialized Marketing. We keep up to date on what is new, what is available and what makes the most sense for businesses of all sizes and backgrounds. We recognize that every Small Business is unique, and their Marketing needs to be as well. Visit us at our website and let us know how were doing or if you have any questions. TRANSITION MARKETING SERVICES – Small Business Marketing Specialists.

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