As an entrepreneur, the first big hurdle when it comes to starting a business is deciding what business structure you want to adhere to. Different business organizations have different legal and financial responsibilities that go with them. The type and amount of work and money required to get started can also vary, so it’s an important decision to make.
Choosing the right business structure for your new entrepreneurial endeavour will determine how you interact with your business, your administrative and accounting requirements, how much you’ll pay to get started, and what the future of your business may look like.
As a brand new business owner, it’s important you know the different types of business structures that exist in Canada:
What is the most common type of business organization?
There are four main types of business organizations in Canada to choose from:
- Sole proprietorship
- General partnership
Each serves its own purpose and has benefits and drawbacks you’ll need to consider. Here’s a quick overview of the four most common types of business organizations in Canada:
1. Sole proprietorship
Sole proprietorship is the most common form of business organization in Canada. Many small business owners start out with sole proprietorships and later become incorporated because the process for registration as a sole proprietor is simple, fast, and cheap, compared to some of the other options.
Sole proprietorships offer more flexibility than a corporation and less paperwork, but that doesn’t mean they’re necessarily the best pick for your business. Perhaps the biggest disadvantage is that there is no legal or tax separation between the business and the operator. They are the same “person” in the eyes of legal and tax authorities (i.e. the CRA), which means that if the business falls into legal or financial trouble, so does the individual.
The flipside to this business coin is that sole proprietorships present additional opportunities for tax management. If the business generates a loss, other income from other sources can be applied to help mitigate it. Income tax is also altogether simpler with this form of business organization, banking is more straightforward, and there are usually lower fees.
Those who choose to start their entrepreneurial journey with a side hustle or looking to generate passive income often begin as sole proprietors, especially if they’re working on a part-time basis. It can be a great starter option for small businesses.
2. General partnership
General partnerships are very similar to sole proprietorships except that there are two or more operators instead of a sole owner.
There are no formal legal requirements to form a partnership in Canada. Partnerships usually see a contractual agreement between the partners that governs the sharing of revenue, expenses, and tasks that the business requires. Beyond that, businesses need a bank account, registered trade name, and tax number. Partners typically use the agreement and percentages that govern their respective payments to also dictate their income and expenses for tax purposes.
A business partnership can see similar advantages and disadvantages to that of a sole proprietorship. They have less heavy financial reporting obligations than a more formal business structure, like a corporation. On the downside, each partner takes personal responsibility for tax and legal matters related to the partnership, and the decision-making process can be more challenging because there are more seats at the table.
When it comes to partnerships, it’s important to carefully consider your counterparts and ensure they have the same overall business values, goals, and vision as you.
A corporation is a legal entity separate from the person who owns it. It creates an extra legal barrier between you and your business entity that you can’t get as a sole proprietor or with a general partnership. This is one of the reasons why it’s a popular form of business organization choice for entrepreneurs.
Corporations are typically private or public. Public corporations are owned by shareholders and are publicly traded. However, most corporations remain private throughout their lifetime and single-person corporations are a popular choice for entrepreneurs just starting out.
With any style of corporation—including single-person—entrepreneurs are separate from any legal issues and business debts, though you aren’t 100 per cent clear of liability. There can still be personal liability involved with this type of business organization. However, the added distance truly can be an advantage.
Beyond that, corporations can be passed from one individual to another (sole proprietorships cannot), which means that an exit strategy can be put in place. You can also raise capital from external parties, including financial institutions and investors. There are other financial and tax benefits, as well, that can make spending the extra money upfront worth it for many entrepreneurs.
However, these added benefits do come with a few drawbacks. One of the biggest for new entrepreneurs is the added cost of registering a corporation. There are also more administrative requirements, like keeping minute books and adhering to more financial rules and regulations.
Many entrepreneurs find starting a corporation right off the bat to be more daunting than simply registering for a sole proprietorship or partnership. But incorporating a business doesn’t have to be as hard as it sounds (and Ownr can help!).
In Canada, co-operatives are run jointly by it’s members, who, in turn, share the benefits and profits. They are registered corporations that serve a variety of functions but often fit into the following four categories:
From the outside, co-operatives look very similar to corporations. For example, in a grocery co-operative, its members and co-owners may also work at the store. There could be restrictions on who can purchase from the store, or a co-operative might give special discounts to members.
Much like you’d see in a corporation, the members of the co-operative have a say in how the business is run. However, unlike in a corporation, their voting power is equal and not determined by the number of shares they hold.
In Canada, co-operatives need to be incorporated under a federal, provincial or territory Act. This can be a good business organization for a business owned by a group of like-minded people who want to build something impactful together.
How to select the business structure for you
Not every business is the same, which means you need to put tho