Entrepreneurship 101: Business Entities In Canada
Entrepreneurship offers a number of advantages and perks. It awards you the liberty to create your own opportunities, and ultimately design your own future. You have the opportunity for control, flexibility and freedom. Starting your own business, although challenging, can be very rewarding.
So you got yourself an idea, you nurtured it, established a plan, did the work, and now you’ve got your own business. But how should you structure it?
In Canada there are 4 different ways to structure your business; Sole Proprietorship, Partnership, Corporation, and Cooperative. Each method of establishing and registering your business has its advantages and disadvantages. Which can range from profit sharing, to liability, to managerial control and taxes.
This is a the most basic form of business in Canada, wherein one sole owner receives the business profits, but is responsible for all of the business debts. This is referred to as unlimited liability, which means personal protection against liabilities is not afforded. So while you are solely entitled to all business earnings, any losses, obligations, and other liabilities are also entirely yours.
This can be a bit risky.
Your business’s activities, for tax purposes are seen as an extension of your individual activities. This means that creditors are entitled to make a claim against your personal assets if your business is not profitable and assets do not cover all losses.
However, with larger liability often comes greater control.
A sole proprietorship offers more autonomy as owners have total managerial control, all decisions are made by the owner, and the regulatory burden is generally low. However, it is important to note that generating capital on your own can oftentimes be difficult.
Start-ups require minimal capital to begin business operations, which makes sole proprietorship generally simple to establish. There are also tax advantages if your business doesn’t generate much profit, including but not limited to; lowering your tax bracket, or deducting business losses from personal income tax.
This situation is ideal for small entrepreneurial starts up, local community endeavors or shoestring budget businesses which carry virtually no debt and run on a small financial plan with low amounts of income and expenditure. An example of an ideal sole proprietorship would be a small Mom and Pop store, operated and staffed by the families members, and intended to support the family rather than raise large profits or gains.
If you intend to establish a business with a partner, but do not want to have your business incorporated, a partnership may be best for you.
A partnership is established by combining the financial resources of each intended partner and establishing terms of the partnership in a legal agreement. A contractual agreement will have a predefined set of principles that have been negotiated such as distribution of profits, legal liability, and debt responsibility.
When establishing a business partnership, it is crucial to ensure your protection in the instance of a partner dispute or, in the event of a dissolution of the partnership. Partnerships are not separate legal entities, and are subject to liabilities, even to other members of the partnership.
A limited liability partnership must have at least one managing partner who bears responsibility for the partnerships actions. This form of partnership offers certain legal protections. Including, but not limited to personal asset protection from business debts and other liabilities, including liability from another member.
In some provinces, there are laws prohibiting non-licensed professionals from establishing an LLP. while in others, LLP’s can be established by licensed professionals and businesses.
A corporation, or incorporation is a legal entity that is separate and distinct from its owners. It can be a profit or not-for-profit company.
Corporations possess many of the rights and responsibilities of individual persons. For example, a corporation can enter into legal agreements, sue and be sued, hire employees, own assets and is required to pay taxes. Corporations offer limited liability. Meaning shareholders (through dividends and/or the appreciation of stock) have the right to participate in the company’s profits, but are not held personally liable for the company’s debts.
When a business incorporates, it becomes a separate legal entity, it can have continuous existence, capital is easier to raise, and ownership is transferable. This makes business a little safer.
However, due in part to limited liability (among other advantages) corporations are closely regulated, more expensive, and have a higher regulatory burden than sole proprietorship’s, and partnerships. It is also important to note that corporate regulations vary province to province.
A co-operative, is the least common form of business entity. As opposed to being owned by shareholders, a cooperative would be owned by an association of members. This can be in the form of a group of persons or businesses.
Co-operatives are usually established when a group seeks to pool their resources in order to gain access to common needs. Skills, knowledge, and capital become a shared set of resources. Profits are distributed amongst the association’s members, and liability remains limited.
The decision making process in this form of business entity is often prolonged because co-operatives are democratic in nature. One member receives one vote, not one vote per share. This business model offers a method for employees to contribute in ways that other models don’t. Employees are engaged in the business processes.
Whether you are registering a new business, or considering changing the legal status of your business. The information above will provide a great working foundation.
Further information on starting your own Canadian business can be found here:
By: Amberly Martin
Project Manager at Generation Digital Corp.