Choosing the right business structure is one of the first decisions entrepreneurs make. The structure of a business affect how it is taxed, financed, managed, and even how it expands. In Canada, several legal structures exist, each with its own advantages, drawbacks, and legal implications. Understanding these options is critical for making an informed decision. Moreover, if you have experience with business structures in a foreign jurisdiction, understanding the differences between Canada and that jurisdiction is key to planning the success of your business.
Sole Proprietorships
Many people in Canada carry on small businesses without any formal legal organisation. If a person carries on a business alone without formal organisation, the business is called a sole proprietorship. This is the simplest form of business in Canada as it is owned and operated by one individual with no legal distinction between the owner and the business.
There is a minimal amount of registration required, which generally translates to low start-up costs. Keep in mind, each municipality or province in Canada have differing requirements for registration, business licencing, permitting, etc. For example, generally, if a person is doing business using a business name other than the person’s own, the person must register this name with a provincial or municipal authority.
Profits of the business are taxed as the businessowner’s personal income, and losses from the business can often be applied against other sources of personal income. The owner, however, is personally liable for all debts and obligations of the business, meaning that personal assets can be at risk.
Partnerships
A partnership involves two or more individuals or corporations carrying on business together for profit. Legislation in Canada contemplates three forms of partnerships, 1) general partnerships, 2) limited partnerships, and 3) limited liability partnerships; the latter two being created by statute and do not come into being until certain statutory requirements, such as filings with the applicable registrar, are fulfilled. In the absence of such filings and other requirements being met, the law deems a partnership as a general partnerships.
Similar to sole proprietorships, there are several advantages and disadvantages to carrying on business in partnership, such as the simplicity of set-up, the ability to deduct business losses against other personal income, and potential unlimited personal liability for the obligations of the business.
Although it is not necessary to have a written partnership agreement, it is almost always a good idea to have one as a written agreement has considerable advantages over an oral one, particularly in the event of a dispute between the partners. Moreover, obligations imposed by legislation, such as the equal sharing of profit amongst partners, may be varied by agreement.
Unlike corporations, however, a partnership can be automatically dissolved in certain circumstances, such as by agreement amongst the partners (e.g. with notice, by expiry of a set term, death or bankruptcy, events that make it unlawful for the partnership to continue).
Corporations
A corporation is a separate legal entity from its owners (shareholders). It can own property, incur debt, and enter into contracts. Incorporation offers limited liability protection to its shareholders and operators, and may provide tax advantages depending on the business’s income level and reinvestment strategies.
In Canada, corporations can be incorporated provincially or federally, each of which can be registered extra-provincially elsewhere. Corporations are taxes separately from its owners, for example its profits are taxed at corporate tax rates, and dividends distributed to shareholders are taxed personally, though integration mechanisms reduce double taxation.
Because corporations are created and governed by legislation, Canadian corporations can differ significantly from those in foreign jurisdictions. For example, US C-corporations closely resemble Canadian corporations in structure and taxation, while Canada does not have an equivalent to the US S-corporation.
Societies and Non-Profit Organisations
A society or non-profit corporation is established for social, charitable, or community purposes rather than profit. These entities can operate provincially or federally in Canada.
Non-profits can be exempt from income tax but must adhere to strict Canadian reporting and purpose restrictions. Charitable organisations must register with the Canada Revenue Agency (CRA) to issue tax receipts.
Choosing the Right Structure
Choosing the appropriate business structure often depends on your goals, the balancing of risk and benefit, and other market or taxation considerations. Understanding the distinctions between business structures and how each are governed will help ensure compliance, optimise taxation, and set the path for sustainable business development and growth.
The primary business structures in Canada are sole proprietorships, partnerships (general, limited, and limited liability), corporations, and societies or non-profit organizations. Each has unique legal, tax, and liability implications that entrepreneurs should evaluate before registering their business.
A sole proprietorship is the simplest form of business where one person owns and operates the business. There is no legal separation between the owner and the business, meaning the owner is personally responsible for all debts and obligations.
Yes, if you operate under a name other than your personal name, you must register the business name with the appropriate provincial or municipal authority. Registration requirements and fees vary by province and municipality.
Profits from a sole proprietorship are taxed as personal income of the owner. Business losses can usually be deducted against other personal income, potentially reducing the overall tax burden.
Canada recognizes three types of partnerships:
General Partnership – all partners share profits and liabilities.
Limited Partnership (LP) – includes at least one general partner and one or more limited partners with restricted liability.
Limited Liability Partnership (LLP) – protects partners from certain liabilities, commonly used by professionals such as lawyers and accountants.
