|Choosing the right form of business ownership is important because the form of business ownership you choose will determine how your business is organized, how the money that flows in and out of your business is handled, and how your business is taxed. There are three types of businesses most commonly used in Canada are: Sole Proprietorship, Partnership, and Company or Corporation.
Sole Proprietorship is the simplest form of business as it is owned and operated personally by the owner. It is easy to set up and may only require registration of the business name. It can be changed to a company or partnership at a later date.
Legally, as a sole proprietor, you are personally responsible for all the liabilities and obligations your business incurs. This means that if the business fails, any of your assets, as well as your personal assets, can be seized to discharge the liabilities owing.
Sole Proprietorship – Any income or losses are claimed on the owner’s personal tax return each year. Business deductions are permitted
How to register your business.
Sole proprietorship and Partnership – Can operate under the name of the owner(s) or under a trade name. If the business name is different than that of its owner or indicates the involvement of more than one person (i.e. & Company) the name must be registered. The fee for registration of a trade name is $30
Easiest form to set up, owner solely controls the business.
Unlimited liability, can be hard to raise capital.
Corporation is a separate legal entity having an existence separate and apart from the business person that created it. A company can be formed under the Provincial Company Act or the Canada Business Corporations Act. Incorporation that is done provincially, giving a company the right to operate under its corporate name in a particular province. Federal incorporation gives a company the right to operate under its corporate name throughout Canada.
The company’s continuance depends only on the filing of annual returns and annual meetings of shareholders and directors. The Company Act allows a company to be owned by just one person. If more than one person is involved in the business, a Unanimous Shareholder’s Agreement is recommended to establish the operational rules between the shareholders including dispute resolution and share evaluation. It is wise to consult with a lawyer to ensure that the company is set up in a manner that meets your business’ present and future needs.
The extended liability protection is one of the main reasons that businesses choose incorporation. Theoretically, no member of the company can be held personally liable for the debts, obligations, or acts of the company. A shareholder is only liable for the unpaid portion of shares owned.
How to register your company
If you choose federal incorporation you need to go through the procedure of incorporation through Corporations Canada. (Corporations Canada administers the CBCA (Canada Business Corporations Act). If you choose provincial incorporation, you need to contact the appropriate Provincial Registrar. Some of the provinces have their own Web sites which offer online provincial incorporation.
Corporation – A corporation must be registered with the Registrar of Companies. The basic cost for filing the forms is between $300 and $355.
Any name you choose should be unique and distinctive. You do not want a name that is similar to or could be confused with an existing name. It also should be descriptive of your business. You must also add a legal designation such as “Ltd.” or “Inc.” to advise the public that you are operating as a limited liability company. If you do not choose a name, the Registrar of Companies will assign a number to your company.
The Company pays taxes on corporate earnings after the business deductions are made. Money taken out of the company in the form of share dividends or wages by the shareholders is claimed on their personal tax returns. Tax advantages include the Small Business Tax rate on the first $200,000 of income for qualifying companies.
Limited liability, easier to raise capital.
Expensive form of business to set up, involves a lot of ongoing paperwork.
Partnership is similar to the sole proprietorship except there are two or more owners running the business together and sharing profits. Set up costs can be limited to registration of the partnership but the creation of a Partnership Agreement is recommended to establish the rules the partners will use to operate the business. These rules may include decision-making procedures, allocation of profits and losses, strategies for a partner that may wish to leave the business and methods of dispute resolution. CAUTION: The courts may find that a partnership exists even if the parties did not intend to create a partnership if two or more individuals are operating a business together with a view towards profits. Partnerships are regulated by the Partnership Act.
Partnership – A Partnership Agreement can allocate the profits or losses in any ratio agreed to between the partners but if there is no Agreement, the profits must be allocated equally. Business deductions are taken by the partnership before the income is distributed to the partners and claimed on their personal tax returns.
However, General Partnerships are not the only types of partnership arrangements that can be formed. In Canada, there are two other types of partnership:
A Partnership Agreement can allocate the profits or losses in any ratio agreed to between the partners but if there is no Agreement, the profits must be allocated equally. Business deductions are taken by the partnership before the income is distributed to the partners and claimed on their personal tax returns.
Shared risk, shared management.
Risk of conflict between partners, shared decision making