Sole Proprietorship, Partnership or Corporation? Choosing a Business Structure in Canada
Choosing a business structure is one of the first decisions you make as a founder, and one of the most important. It affects your personal liability, how your income is taxed and reported, how much paperwork you take on, and how you register. There is no single right answer. The best choice depends on your risk, your expected income, whether you will have partners or investors, and your plans for growth.
This overview explains the three most common structures in plain language, so you can have a more productive conversation with your accountant and lawyer before you register.
Sole proprietorship
A sole proprietorship is the simplest way to start. You own and run the business yourself, and the business is not a separate legal entity from you.
Liability: You are personally responsible for the business's debts and obligations. That risk can extend to your personal property and savings.
Taxes: You report business income or losses on your personal (T1) income tax and benefit return, usually with Form T2125.
Registration: If you operate under your own legal name, you generally do not need to register a business name. If you use a different name, you register it as a trade name with the province. In Alberta, this is done through an authorized Corporate Registry service provider (a registry agent). In Saskatchewan, it is done through the Corporate Registry operated by ISC.
A sole proprietorship often suits low-risk businesses, side businesses and founders who are testing an idea before investing more.
Partnership
A partnership is two or more people or businesses carrying on business together.
Liability: In a general partnership, partners share responsibility for the partnership's obligations, and the partnership can be bound by the actions of any partner acting within the usual scope of the business. Limited partnerships and limited liability partnerships also exist, but they have their own rules and eligibility requirements.
Taxes: The partnership itself does not pay income tax. Each partner reports their share of the income or loss on their own return. Some partnerships, such as larger partnerships or those with corporate partners, must also file a partnership information return (T5013).
Registration: Partnerships generally register with the province where they operate.
If you go into business with someone else, have a lawyer prepare a written partnership agreement. It should cover contributions, decision-making, how profits are shared, and what happens if a partner wants to leave.
Corporation
A corporation is a separate legal entity. It can own property, sign contracts and continue to exist when its owners change.
Liability: Shareholders are generally not personally responsible for the corporation's debts. In practice, lenders and landlords often ask small-business owners for personal guarantees, and directors can be personally liable for certain obligations, such as unremitted payroll deductions and GST/HST.
Taxes: The corporation files its own T2 corporation income tax return no later than six months after the end of each tax year, even if it owes no tax. How you pay yourself, through salary, dividends or a mix, is a decision to plan with your accountant.
Administration: Expect more paperwork, including corporate records, annual returns, a separate bank account and separate bookkeeping.
Provincial or federal incorporation?
You can incorporate under provincial law or under the federal Canada Business Corporations Act.
Provincial incorporation (Alberta example): You file through a registry agent or another authorized service provider. Unless you choose a numbered company, you need a NUANS name search report, which reserves the proposed name for 90 days. Your package includes Articles of Incorporation, a Notice of Address, a Notice of Directors and a Notice of Agent for Service. The service provider charges a government fee and a service fee.
Federal incorporation: You file with Corporations Canada, and you can do it online. At the time of writing, the online fee to incorporate is $200, and the online annual return fee is $12. A federal corporation can carry on business across Canada, but it must also register as an extra-provincial corporation in each province where it carries on business and keep up with that province's filings as well.
If you expect to operate mainly in one province, a provincial corporation is often simpler. If you plan to operate in several provinces, compare the options with your advisors.
Five questions to ask before you choose
How much personal risk does the business carry through contracts, debt or potential claims?
Will you have co-owners or outside investors, now or later?
Do you expect the business to earn more than you need to take out personally?
Will you operate in more than one province?
How much administration are you prepared to handle, or pay someone to handle?
It is possible to change your structure later, for example by moving from a sole proprietorship to a corporation. However, the change involves extra steps and costs, such as transferring assets and contracts. A short meeting with a CPA and a lawyer before you register usually costs far less than restructuring later.
How First Global Citizen can help
We explain your options in plain language, prepare the information you need, and handle name searches, registrations and government accounts on your instructions. These include the Business Number, GST/HST and payroll accounts. When you need legal or tax advice, we can coordinate with independent lawyers and CPAs, with your consent. Our fees are fixed and agreed in writing, and government and registry fees are charged at cost.
Learn more on our Business Setup page or book a free consultation.
This article is general information only. It is not legal, tax, accounting or financial advice. Fees and requirements can change, so confirm current details with the relevant registry or government agency, and consult a qualified professional about your situation.
Comments