Embarking on the entrepreneurial journey in Canada is thrilling and starting a business right means understanding the different types of structures available and ins and outs of what they might require.
If you're wondering what it takes to start a business right, our business team has you covered.
What are the different type of business structures?
In Canada, there are several types of business structures that individuals and entities can choose from, each comes with its own advantages and disadvantages. The most common type of business structures are discussed briefly below:
- Sole Proprietorship: this is often the chosen structure for small businesses starting out as it is the simplest form of entity and has little legal complexity. The main advantage of this structure is you retain full control and responsibility over all aspects of the business. Further, all the benefits flow through the individual and losses and expenses may be deducted from your personal income. The downside is that the owner is personally liable for all debts and obligations of the business. This means that the assets of the owner are exposed to creditors in the event of the business being sued.
- Partnership: A partnership is formed when two
or more individuals or entities come together to carry on a
business with a view to making a profit. In Canada the provinces
retain exclusive jurisdiction over these types of entites, as such,
provincial legislation is a factor in deciding on the partnership
you will form. Partnerships are not recognized as a taxable entity,
instead the profit and loss of the business flow to the partners on
a proportionate basis based on an agreement and tax is paid through
the partners personally.
- Some advantages are that it is inexpensive to set up a partnership agreement, you have shared responsibility for the liabilities, and you can have complimentary skill sets in the business. Some of the disadvantages can include your personal assets are not protected as with a sole proprietorship, you can become liable for debts you didn't incur and finding the right partner can be difficult. The most common types of partnerships are as follows:
- General Partnership: General partnerships are normally formed by agreement between parties to carry on the business. Each partner is liable for the debts and obligations of the business on an unlimited basis. It's also possible that a partnership is formed without a written declaration.
- Limited Partnership: A limited partnership is made up of at least one general partner and any number of limited partners. The general partner retains the control and management of the business and limited partners must not participate or they will lose their limited status. Liability of limited partners is limited to the capital contributed to the partnership.
- Limited Liability Partnership (LLP): This type of structure is only available in a few provinces and provincial legislation reserves it for professionals such as doctors, accountants, and lawyers. The intention of this structure is to allow professionals to pool their resources without being liable for one partner's professional negligence if it occurs. Partners of LLPs on the other hand are still generally liable for the business obligations of the partnership.
- Corporation: In Canada corporations have the
legal abilities of a natural person and can own property, carry on
business, borrow and loan funds and sue and be sued. The major
reason business owners seek to incorporate is that it provides
protection of their personal assets from business liabilities.
Corporations are normally composed of three different types of
people, namely, directors, officers, and shareholders. Each type
has different defined roles in Corporations. Some disadvantages to
this type of entity is they are costly to set up, maintain and
dissolve; there are increased administration requirements; and
taxation becomes more complex. Corporations can be further
classified into:
- Private Corporations: Usually owned and operated by a small group of individuals, or families. Private Corporations are most often used to run businesses for profit and hold real estate or investments. With Private Corporations, especially with small ones, it's common to see the directors, officers and shareholders be one person.
- Public Corporations: These Corporations offer shares in the business by listing them on a stock exchange for the public to purchase. Each public corporation that offers securities to the public is regulated by the provincial securities commission in which it sells its securities. Taking a business public helps the Corporation raise capital to invest in future operations, expansion, or acquisitions. The major drawback is the process will impose restrictions on management, introduce public disclosure requirements and open the company to regulatory constraints.
- Non-for-profit Corporations: Non-for-profit Corporations or NFPs are legal entities whose purpose is not to gain profit for its members. The major difference from for profit corporations is NFPs have members not shareholders. While members can still benefit from the Corporation, the main purpose of these entities is to achieve the goals it defines in its governing documents. Any profit made by the entity must be used towards its goals. NFPs purpose can be a wide range of social, educational, religious, literary, or charitable objectives.
- Cooperatives: A cooperative is a unique type of business model that shares similarities with NFS and Private Corporations but has some key differences in how they are organized and carry on their purpose. The main difference is in that their primary purpose is to provide for a specific need of its members whereas an NFP's purpose will be broader and serve the greater community. Cooperatives can also be non-for-profit, but they also have the ability to incorporate with share capital to offer shares to potential investors.
- Joint Ventures: A Joint Venture is best described as a temporary partnership between two or more parties for the purpose of completing a specific project or task. Whereas a partnership is a business venture with the aim of making a profit, Joint Ventures can be for other purposes such as research and development. There is no current statute that governs this category but is typically governed by a contract between private parties.
- Branch Offices or Operations: Foreign Corporations may conduct business within Canada through what is known as a Branch Office. These entities must first obtain a license to carry on business in the province in which it seeks to open an office, otherwise there are penalties. The definition of carrying on a business can vary depending on the province. With a Branch Office, parent companies remain liable for debts, obligations, and other liabilities for its Canadian operation.
- Registered Charities: These are organizations that are formed to operate exclusively for charitable purposes. These can be either a corporation or an association. Registered Charity is a precise term which refers to the organization being registered under the Income Tax Act. To qualify the organization is required apply and be approved by Canada Revenue Agency for charitable status. The charitable purpose must fall into one, the relief of poverty, the advancement of education, the advancement of religion or some other purposes that benefit the community.
Each structure has its own legal and tax implications, and the choice depends on factors such as the nature, location, liability concerns, tax considerations, and the number and relationship of owners. Before deciding and moving forward with a structure for your business it's advisable to obtain legal and tax advice.
All the categories have their own legal registration requirements and depending on the nature of the business may have specific licensing and permit needs. or instance, opening a daycare means playing by provincial childcare rules, while doctors, lawyers, and CPAs need specific licenses to practice. It pays to research your industry's standards and maybe even chat with a Business Law Canada pro if you need a hand.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.