A business woman holding binders. Stock photo by Getty Images
So you’re ready to start your own business, but don’t know your “Inc.” from your “LLP.” Relax, we’re here to help.
In Canada, there are a few types of business structures you can choose from: corporations, sole proprietorships and partnerships. What business structure you choose depends on a variety of factors. For instance, for a business that has a lot of employees and for which you have to raise capital quickly, incorporation would probably make the most sense.
The main thing to keep in mind, is that the business structure you choose will dictate how much liability you carry, how expensive it is to set up your business, the way the decision making process works, and whether you have tax advantages or disadvantages.
Let’s have a look at these four factors for each of the business structures.
- Liability: the main advantage of a corporation is that it’s a separate legal entity that holds liability. That means the owner and the shareholders carry no personal liability for the business and cannot be sued. Only the corporation can be held liable by creditors.
- Set-up expense: the corporation is the most expensive business structure to set up. Provinces charge different fees to set up a corporation in their jurisdiction.
- Decision-making process: it can be difficult if the company is large, as a lot of shareholders will have to vote on decisions. In large corporations, you could even have decision-deadlock.
- Tax advantage or disadvantage: both. Unfortunately, shareholders are taxed twice — once at the level of a corporation and again at a personal level. However, some corporations enjoy lower tax rates. Whether you do or not depends on the type of corporation.
- Liability: you carry personal liability for losses. In fact, you carry unlimited liability and personal assets will be used to pay off debts if you owe creditors.
- Set-up expense: it’s quite cheap to set up a sole proprietorship. All you need to do is to register your business name with your province. Each province has their own governmental office for the purposes of business name registration.
- Decision-making process: this is the main advantage of a sole proprietorship as you are the only one making decisions and therefore have direct decision-making control. Unlike the corporation or partnership structure, you don’t have to consider shareholders or partners. You are the sole decision-making entity in your business.
- Tax advantage or disadvantage: depends on whether your business is profitable or not. If it’s not profitable, then you likely will be in a lower tax bracket and you will probably be able to deduct losses from income. If your business is doing well, you will be taxed at a higher rate.
- Liability: your liability is still unlimited, which means the partners are personally liable for losses. If you establish a limited liability partnership (LLP) then each partner carries responsibility for their own losses and negligence. However, only specific professions can create LLP’s.
- Set-up expense: these costs are relatively inexpensive and shared between the partners.
- Decision-making process: that depends on how well you get along with your partner(s). If the relationship is good, decision-making can be easy. If the relationship is difficult then it’s likely the decision-making will be difficult as well.
- Tax advantage or disadvantage: similar to sole proprietorship, except that the partners file their individual tax returns with their share of the partnership.