When you’re starting a business in Canada, choosing the right structure is one of the most important decisions you’ll make. The business structure you select will influence everything from taxes to legal liability to how much paperwork you’ll need to handle. In this blog, I'll break down the different options and share some insights on how to decide which one might be right for your business journey.

Sole Proprietor

A sole proprietorship is the simplest and most common form of business structure, especially for small business owners. In this setup, you and your business are considered one and the same. That means any profits go directly to you, but so do any debts or legal liabilities.

Pros:

• Easy and inexpensive to set up.

• You have complete control over business decisions.

• Tax simplicity: business income is included on your personal tax return.

Cons:

• Liability, meaning your personal assets can be at risk.

• Limited opportunities for growth and raising capital.

Corporation

A corporation is a separate legal entity from its owners (also called shareholders). This means the corporation can enter into contracts, own property, and be sued — all independently of the individuals who own it.

Pros:

• Liability protection for shareholders (your personal assets are typically protected).

• Easier to raise capital through the sale of shares.

• Potential tax advantages, such as the ability to retain earnings at a lower tax rate.

Cons:

• More expensive and complex to set up and maintain.

• Ongoing legal and regulatory requirements, including annual filings.

• Separate tax filings for the corporation and personal taxes.

Unincorporated Partnership

An unincorporated partnership involves two or more people running a business together. Each partner shares the profits, losses, and legal responsibilities as agreed upon. The pros and cons are mainly the same as a sole proprietorship, shared across the partners.

Pros:

• Easy to establish, and costs can be shared.

• Flexibility in business operations.

• Income is taxed on each partner's personal tax return.

Cons:

• Liability for each partner (both are responsible for business activities and debts).

• Potential conflicts between partners with more threat of personal impact.

• Harder to attract investors or funding compared to a corporation.

Incorporated Partnership

An incorporated partnership is a corporation owned by more than one person. This is a hybrid of a corporation and a partnership where the partnership becomes a legal entity that can own property, enter contracts, and file taxes separately from the partners. The pros and cons are mainly the same as a corporation, shared across the partners.

Pros:

• Limited liability for partners.

• The partnership itself pays taxes, with profits distributed to partners, which are taxed as personal income.

• Professional flexibility with more legal protection.

Cons:

• More complex and costly to establish compared to an unincorporated partnership.

• Ongoing regulatory and filing requirements.

• Still challenges to navigate between partners/shareholders.

Professional Corporation

A professional corporation is a special type of corporation available to professionals such as doctors, lawyers, occupational therapists, and accountants. It operates similarly to a regular corporation but is subject to specific provincial or territorial professional regulations. It is basically that person (a professional) but gives them a tax advantage.

For example, and occupational therapist cannot open a regular corporation in Ontario to provide occupational therapy services, rather, they must open a professional corporation. Their professional corporation cannot offer physiotherapy services because they are not a physiotherapist. To offer physiotherapy, they would need to open a separate business for that purpose.

Pros:

• Limited liability protection, although professionals are still personally/professionally liable for malpractice.

• Potential tax advantages for the owner, such as the ability to retain earnings, pay dividends, and keep funds in the corporation at a lower tax rate.

Cons:

• Expensive to set-up as costs are required to first set up the professional corporation, then to ALSO register that professional corporation with the professional regulator.

• Same cons as having a regular corporation including taxation costs etc.

Non-Profit

A non-profit organization operates for social, educational, religious, or charitable purposes and doesn’t distribute profits to its members, directors, or officers. In Canada, these organizations are typically incorporated at the provincial or federal level.

Pros:

• Exemption from paying income tax on profits.

• Eligible for various government grants and funding.

• Ability to distribute profits for social good.

Cons:

• Must meet stringent regulations and requirements.

• Cannot distribute profits to members or directors.

• Fundraising can be a challenge.

• Often results in lack of competitive wages to staff and executives.

Charity

A charity is a specific type of non-profit organization that has been registered with the Canada Revenue Agency (CRA) and is eligible to issue tax receipts for donations. Charities must operate for charitable purposes, such as relieving poverty, supporting marginalized groups, advancing education, or other purposes beneficial to the community.

Pros:

• Ability to issue tax receipts for donations.

• Exemption from income tax.

• Access to grants and donations from the public and government.

Cons:

• Extensive regulations and reporting requirements.

• Must meet strict criteria to qualify for charitable status.

• All activities must align with charitable objectives.

How to Decide Which Structure is Right for You

Now that you know the options, how do you decide which one is right for your business? Consider the following:

Liability

If limiting your personal liability is a concern, a corporation or professional corporation might be the way to go. For partnerships, you may want to incorporate to protect yourself from the possible fallout of a partnership “divorce.”

Taxation

Sole proprietorships and non-incorporated partnerships are taxed as personal income, while corporations pay corporate tax rates. Depending on your business goals and revenue, a corporation could offer tax savings.

Cost and Complexity

If you’re just starting out and want to keep things simple and low-cost, a sole proprietorship or partnership may be ideal. Corporations and professional corporations come with more legal and financial responsibilities and often make sense when revenues exceed personal taxation ideals.

Growth Plans

If you plan to seek investors or grow significantly, a corporation offers more flexibility for raising capital. Sole proprietorships and partnerships may have limited potential for large-scale growth.

Professional Considerations

If you’re in a regulated profession, incorporating as a professional corporation will give you the legal protections and tax benefits specific to your area of practice.

Making the Right Choice for Your Business

Remember, it’s always a good idea to consult with a legal or tax professional when choosing your business structure. What’s right for your business today may not be right as you grow and evolve. At Julie’s Business YOU, I help clients make strategic decisions that align with their goals and personal circumstances. If you need support navigating this choice or any other business challenge, reach out. I’m here to help.