This post was originally published on this site

If you’re wondering what types of business you should start in Canada, you have something in common with John Molson, circa 1782. Not long after landing in Canada, he sensed an opportunity to meet the growing demand for grown-up beverages among the British colonists living in Montreal. He got to work, eventually registering a new name for his venture—Molson Brewery.

As you work to get your “brew” off the ground, one of the first things to do is to pick a type of business ownership structure and register your business. This is a critical decision: choosing the right kind of business structure determines everything from your liability to the way you report income and file taxes.  This article looks at the different types of business structures in Canada and provides advice on how to choose one that works best for you.

Types of Business Structures in Canada

There are three ways to structure your business in Canada: a sole proprietorship, a partnership, or a corporation. Let’s take a look at each option for the types of companies:

Sole Proprietorship

A sole proprietorship is an unincorporated business owned and controlled by one person. As a sole proprietor, the owner reaps all the benefits and shoulders all the risks involved with running the business. The money generated by your business is reported as income on your personal tax return. You don’t need to file a separate corporate tax return for the business. Business expenses and losses can be deducted from your personal income

In a sole proprietorship, you and your business are legally viewed as a single entity. While you get to make all the decisions and receive all the profits, you are personally responsible for any debts and liabilities. Sole proprietorships are exposed to an unlimited liability so if your business fails with significant debt, those obligations would be paid for through the sale of both your business and personal assets.

A sole proprietorship is the simplest type of business to start. You can operate under your own name or register a unique name in the province where you plan to do business. If you exceed $30,000 in annual revenue, you will need to register for the goods and services tax/harmonized sales tax (GST/HST).

A sole proprietorship is best for any individual who is working solo, makes under $30,000 a year, and doesn’t have plans to partner with any additional forms of business in the near future.


Partnership

A business partnership is formed between two or more entities that join together to operate a shared business. Partners can include individuals, corporations, trusts, or even other partnerships. Partnership agreements can be made verbally but are best captured in a written statement that records details including the distribution of the business’s profits and losses. There are two different types in Canada:

  • A general partnership is like a sole proprietorship.  Instead of a single owner, it’s a business arrangement between two partners who share the profits, risks, and unlimited liability. Partners are legally and personally liable for company debts.
  • A limited partnership is established between a general partner and a limited (aka “silent”) partner. The general partner manages the business while the limited partner contributes financially. General partners are fully liable for the debts of the business but can be entitled to a greater share of the profits. Limited partners are not involved in the daily operations and are only subject to a limited liability—one that cannot exceed their investment in the company.

Partnerships are registered in provincial jurisdictions and are treated similarly to sole proprietorships. Each partner reports income and pays their share of taxes on their personal returns. The tax filings requirements and the amount of liability each partner assumes depend on the type of partnership that is created.

Forming a partnership is the best option if you want to join forces with other kinds of business, but don’t want the complexity of a corporation (think: partnerships are much easier to establish, file taxes, dissolve than corporations).


Corporation

A corporation is a business that incorporates to create a new legal entity that is separate from its owners. Owners can transfer money or services to the corporation in exchange for shares and as a shareholder, owners are entitled to a distribution of profits in the form of dividends.

You can start a corporation by filing a legal set of documents known as the Articles of Incorporation. The Articles define the legal name, directors, and among other things, the types of shares available to shareholders. The shares can be used to raise investment and can be bought or sold independently of business operations. Incorporated businesses must submit corporate tax returns and you may need to make tax payments in installments throughout the year.

You can be incorporated as a private or a public corporation. Private corporations must have a majority of directors residing in Canada and cannot sell shares to the public. Public corporations can sell shares and securities on a public stock exchange but must operate within applicable Canadian securities regulations.

If you incorporate provincially, your company will be licensed to operate with name protection in the specified jurisdiction. Federally incorporated companies will allow you to operate anywhere in Canada with national name protection and formal global recognition. Incorporating federally will incur additional upfront registration expenses and will trigger ongoing corporate filing and annual audit requirements.

The corporation’s separate legal entity means that shareholders have limited liability (unlike a sole proprietorship or partnership) and are not responsible for corporate debts. In some cases, however, this limited liability may not extend to directors or protect shareholders from creditors.

Incorporation is the best option if you want to pay less tax, limit your liability, protect your personal assets, and borrow money at lower interest rates.

Last Words

The type of business you should start depends on what you feel best suits your purpose. Molson’s business structure evolved from humble beginnings into a partnership with his sons, and eventually into the Molson Coors Beverage Company we know today. Starting with a sole proprietorship or partnership works well for most new businesses and will afford you the time to weigh the benefits and complexity that come with incorporation.

Once you determine what type of business structure works best for you, you’ll want to start moving forward by putting some important elements in place. Think about how you will keep track of expenses and revenue. Is this something you can tackle or should you hire an expert—an accountant or a bookkeeper? Also, make sure you’ve got access to the funds you need to kick off your business. That may mean getting a loan or having a good business credit card on hand to help things get rolling, despite not having quite enough cash flow.