Most Canadian businesses are sole proprietorships, partnerships or corporations. Each of these legal forms has specific implications for taxes, paperwork, administrative requirements, personal liability and the ability to get investors. They also vary in terms of the cost and complexity of setting them up.
Which is right for you? That depends on many factors. Some general considerations are outlined below. Consult a lawyer or accountant if you’re unsure.
A sole proprietorship is owned and operated by one person, either under their own name or a business name.
All business benefits, assets, liabilities and obligations belong to the owner. Whatever profit or losses the business incurs are considered the owner’s personal income and are taxed at (generally higher) personal rates.
A sole proprietorship is easy and inexpensive to set up. It’s the most common form of business ownership. It suits many servicebased businesses, but may not be ideal for businesses that need investors, have very high revenue projections, or face a high degree of risk.
There are two key kinds of partnerships:
In a general partnership, the partners manage the company and assume responsibility for its obligations, just as in a sole proprietorship.
In a limited partnership, general partners own and operate the business while limited partners act only as investors.
Partnerships are best among people who work well together, complement each other’s skills, and are comfortable sharing decision-making responsibilities.
Breaking up a partnership can be messy. Creating a solid partnership agreement at the outset protects everyone involved.
An incorporated business is an independent legal entity, separate from you. It can own property, hold rights, and incur liabilities. It files its own annual income tax returns and pays corporate, not personal, taxes.
A corporation has shareholders rather than owners. As a shareholder, you do not personally own the corporation’s assets or liabilities. That protects your personal assets, but also imposes more complex administrative, record-keeping and reporting requirements.
Incorporation is relatively costly (fees start at about $600) and you’ll need to have an accountant prepare your taxes. It’s a good idea to consult a lawyer and/or accountant before incorporating.