How to Choose the Right Business Structure
Before you start your business, it’s important to understand the different business structures in Canada, so you can find the right business type for your entrepreneurial dreams. We break down the pros and cons of the four most common business types in Canada, as well as the steps you’ll need to take to set up each.
A sole proprietorship is the simplest business type. As the sole owner, decisions are with you only. Here’s what to consider when setting up a sole proprietorship:
Pros and cons of a sole proprietorship
- Straightforward and easy to register your business (Ownr can help with this!).
- Low start-up and ongoing administrative cost.
- You can declare business expenses on your personal tax income form.
- Fully liable for any and all debts your business may incur.
- Raising capital or obtaining financing as a sole proprietorship is more challenging.
- Your business looks less professional as it is not a separate entity.
How to set up a sole proprietorship
As the simplest business type, a sole proprietorship is also easier to set up. Here are some of the steps you’ll need to consider when setting up a sole proprietorship:
- Choose a unique business name – Decide on a name that’s distinctive, but still describes your business. To make sure no one else has already registered a business with the name you have your heart set on (and so you don’t open yourself up to legal action) you need to check with the government’s database. To conduct a name search, there’s usually a cost associated with each search (separate from your registration fee).
Did You Know: Ownr includes unlimited name searches.
- Register your new business – You’ll need to register your business with the province or territory you plan on doing business in. You’ll need a business address and a description of your business. Ownr’s online platform can help you register easily and quickly, at an affordable price.
- Apply for licenses, permits, and/or sale-tax numbers. You also need to apply for any appropriate licences (e.g. permits to sell food, occupational licence) and sale tax number (e.g. GST/HST) if applicable.
- Do you need to renew your business licence? – Depending on which province you register in, you may be required to re-register your business. When to renew varies depending on the province, so please be sure the check for the province you registered in. You won’t receive a reminder, so add it to your calendar.
A partnership is a type of business, consisting of two or more individuals that own a business together. There are three types of partnerships: general partnerships, limited partnerships, and joint ventures. Here’s what to consider when setting up a partnership:
Pros and cons of a partnership
- Each partner contributes in terms of finances, labour, or skills.
- Each partner shares the burden of liability and losses to the business.
- You’re not in the business alone.
- You need to share the profit with the other partner(s).
- One or more partners may decide to leave the business.
- There’s no liability protection from the actions of fellow partners.
How to set up a partnership
- Name your business – Choose a distinct business name, just like we mentioned above in the sole proprietorship section.
- Register your business – General partnership registration is straightforward. Most businesses need to register with the provinces and territories where they plan to do business.
- Apply for any licenses, permits, and/or sale-tax numbers (GST/HST), as described above.
Unlike a sole proprietorship, a corporation separates the owner from the business. It’s essentially a legal entity of its own and has rights similar to a person as far as liability and protection of your business assets.
Pros and cons of a corporation
- Unlike a sole proprietorship, you won’t be held responsible for the debts of the corporation.
- A corporation can raise money from an angel investor or venture capitalists, which can be used to grow your business.
- As the owner of a corporation, you can determine when and how you receive income. Corporations could be taxed at a lower rate and its income is separate from your personal income. All these may translate into tax savings.
- More complex tax filing. You’ll also need to file two tax returns each year; one for your personal income and one for your business
- As a corporation, you won’t receive personal tax credits, meaning every dollar earned is taxed
- Compared to a sole proprietorship or partnership, setting up a corporation usually costs you. And its ongoing management is usually more complex and time-consuming.
How to register as a corporation
- Choose a unique business name – First, choose a name that reflects your business or brand, then search to see if it’s available.
- Decide whether to incorporate federally or provincially – Incorporating your business federally gives you wider rights to carry out business across Canada, and it’s not necessarily more expensive than incorporating provincially.
- Complete Articles of Incorporation, also referred to as a certificate of incorporation. It’s meant to establish the legal existence of a corporation and is required to file your application.
- Prepare the Minute Book – This is a corporation’s official record of documents and activities. This is mandatory for corporations but not included in the registration with the government.
Did You Know: Ownr offers unlimited business names searches, an official name search report (called NUANS), Articles of Incorporation, and a digital Minute Book at a fraction of the cost compared to a lawyer.
A cooperative is an incorporated business that is democratically controlled by people with common needs. There are different types of cooperatives in Canada, including consumer, producer, worker, and multi-stakeholder.
Pros and cons of a cooperative
- Cooperatives are democratic by nature and often socially conscious.
- Everyone is entitled to one vote, regardless of their financial investment.
- Your employees are more likely to be invested in the company (as they are co-owners).
- This business model isn’t as profitable for founding members.
- Typically, partners receive only a percentage of the profits and the rest is reinvested back in the company.
- Financing and start-up loans may be more difficult to obtain.
How to set up a cooperative
You can create a cooperative by filing an application with Corporations Canada. The following information is required to file your application:
- Cover letter including contact information of the person filing the information, clearly stating the type of cooperative
- Produce a NUANS (Newly Upgraded Automated Name Search) report. It checks your preferred business name against the government’s comprehensive database to make sure it’s distinct.
- Complete and sign Articles of Incorporation (Form 3001)
- Complete and sign Initial Registered Office Address and First Board of Directors (Form 3002)
Establishing a nonprofit business in Canada is a similar process to setting up any other business. Nonprofits provide a product or service designed to benefit their community. Examples of nonprofits include a community organization, social or sports club, or charity.
Pros and cons of a nonprofit
- Profits enrich the community.
- Nonprofits can apply for funding from government grants, or sponsorships.
- As a nonprofit organization, your employees are more likely to want to work there, as they believe in the company’s mission.
- Members or founders don’t benefit from profits.
- Increased paperwork, maintaining records and making them available to directors.
- Securing investors may be more challenging, as profits are funneled back into the organization.
How to set up a nonprofit
You can set up a nonprofit federally or provincially in Canada. To follow is information required to file an application federally:
- Produce a NUANS (Newly Upgraded Automated Name Search) report that is not older than 90 days old. It checks your preferred business name against the government’s comprehensive database to make sure it’s distinct.
- Complete and sign Articles of Incorporation (Form 4001)
- Complete and sign Initial Registered Office Address and First Board of Directors (Form 4002 Form)
This article offers general information only, is current as of the date of publication, and is not intended as legal, financial or other professional advice. A professional advisor should be consulted regarding your specific situation. While the information presented is believed to be factual and current, its accuracy is not guaranteed and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the author(s) as of the date of publication and are subject to change. No endorsement of any third parties or their advice, opinions, information, products or services is expressly given or implied by RBC Ventures Inc. or its affiliates