How to choose the right business structure for your company

When setting up a business in Canada, you will need to determine the right business structure. To select the right business structure, you first need to consider the risks and benefits of each business type — as well as the time and cost involved. To help, here is a simple guide to explain the difference between each business structure, in Canada, along with some advantages and disadvantages of each type.

What are the 4 types of business structures in Canada?

How a sole proprietorship works

A sole proprietorship is a business run by one person where there is no legal difference between the owner and the business. This means you’re responsible for all debt or legal actions taken against the business.

How to set up a sole proprietorship

If you plan to run a sole proprietorship, you have to register your business with the province or territory in which you’ll be operating. The only exception is if you plan to run a business under your own first and last name (e.g. “Reggie Wilson’s window repairs “), in which case, you don’t have to register so long as you live in BC, Saskatchewan, Manitoba, Ontario, Quebec, New Brunswick, Nova Scotia, PEI, the Northwest Territories or Nunavut.

Even if your business is registered, keep in mind that there’s legally no difference between you and your business.

Remember to apply for licenses and permits

While there’s not a separate business structure for your business, you’re still required to apply for licenses and permits for your business. For example, you need a license from the Alcohol and Gaming Commission of Ontario if you’re starting a one-man brewery in Ontario. Otherwise, you risk facing a lawsuit or getting shut down.

How taxes work

Sole proprietors report all business income and expenses on their personal tax return (T1) using form T2125. They can deduct eligible business expenses like office supplies and vehicle costs to reduce taxable income, but must also pay both the employer and employee portions of Canada Pension Plan (CPP) contributions.

If annual revenue exceeds $30,000, they’re required to register and collect GST/HST, filing returns and remitting the tax collected.

While sole proprietors have until June 15 to file, any taxes owed must be paid by April 30. And, those who made more than $3,000 (or $1,800 in Quebec) the previous year may need to make quarterly installments.

Pros and cons of sole proprietorships

Open a business bank account

One way to help separate your personal finances from your business finances is to open a separate business bank account. Here are some of our top picks, but you can read our full guide to business bank accounts to learn more.

Digital access

Go to site

• Low $6 monthly account fee
• Unlimited online transactions
• Unlimited mobile and ATM cheque deposits
• Sole proprietorships and corporations accepted

Sign-up Offer

Go to site

• $500 sign-up offer
• Multi-currency global accounts
• FX & payout to 150+ countries
• For registered Canadian corporations only

Multi-currency

Go to site

• USD, GBP, EUR accounts
• Multi-currency credit card
• Pay bills in 37 currencies
• Avoid FX fees
• For registered Canadian corporations only

Setting up bank accounts for your business

Whether a sole proprietor or a corporation, one key task in setting up your business is to decide on the right bank account and services your company will require. In most cases, opening a business bank account will be sufficient; however, for businesses with more needs, you may need to consider other banking products and services, such as cheques, international deposits and payments, as well as access to business credit.

How a partnership works

A partnership is a business owned by two or more people, corporations, trusts or partnerships (yes, partnerships can join to form another partnership). All owners split control of the business — and share its profits and losses. There are several different types of partnerships:

• General partnership. All owners manage the business together and split the profits and losses. They’re legally liable for all debts and legal actions taken against the business.
• Limited partnership. A general partner manages the business and other “limited” partners provide funding, but don’t have their hands in day-to-day operations and aren’t liable.
• Limited liability partnership (LLP). Several general partners manage the operations of the business, but are legally protected from each other’s actions. How it works can vary by province.

How to set up a partnership

You can form a partnership by registering with your province or territory and writing up a partnership agreement. While not required, a partnership agreement outlines the terms and conditions of the partnership.

It should state the responsibilities of each partner, outline what types of roles each partner plays in day-to-day operations and describe how profits are split. It should also outline how the partnership deals with certain situations. Otherwise, it’s up to provincial law.

A partnership can be dissolved if one or more of the partners notify all the other partners of their intent to leave. A partnership can automatically dissolve if it was formed for a fixed term or to complete a specific project and the term expires or the project is completed.

How taxes work

Partnerships don’t pay income tax directly. Instead, they calculate their total income and then allocate profits or losses to each partner based on the partnership agreement.

A partnership may also have to file an information return (form T5013) if it has more than 5 members, is a tiered partnership (meaning one of its partners is in another partnership) or is specifically asked by the CRA.

Each partner then reports their share on their own personal or business tax return and is taxed at their applicable rates.

Pros and cons of partnerships

How a corporation works

A corporation works by completely separating legal liability from its owners — in fact, it’s its own legal entity. Corporate profits are divided between shareholders based on the percentage of the company they each own, but shareholders aren’t liable for a corporation’s debts.

Each shareholder gets one vote per share they own on major company decisions. The original owners — or shareholders — can eventually sell off the corporation to another set of shareholders by “going public.”

A corporation will exist forever if a firm end date hasn’t been decided. This means that the corporation can continue to operate despite any change in status, ranging from the disbanding of directors, the death of the owner or the sale of the company. A corporation can be dissolved if it amalgamates with another company, goes into bankruptcy or is ended by its members.

Once a corporation is liquidated and all assets are sold, any outstanding debts are paid and the rest is split between the shareholders.

How to set up a corporation

Corporations involve a greater amount of paperwork compared to other types of business structures, though exact requirements can vary depending on where you live.

Generally, you must file articles of incorporation with your province or territory, sell stock to the new company’s shareholders and elect a board of directors. The board of directors is responsible for coming up with the business plan and the general management of the corporation.

Corporations are often required to report company standings in the form of quarterly or annual financial statements.

Types of corporations

There are a few types of corporations that work differently — mostly when it comes to taxes:

• Canadian-controlled private corporation (CCPC). These businesses are based in Canada, predominantly controlled by Canadian residents and not listed on any stock exchange. The reason for these tight requirements is that CCPCs have a lot of tax advantages and are really meant to provide a way for private individuals, families and groups to manage their assets.
• Other private corporation. This category encompasses any privately-owned companies that aren’t classified as CCPCs.
• Public corporation. Public corporations are traded on a stock exchange. Anyone can get a controlling interest in a company by purchasing its shares. Public corporations can own other private corporations, which are known as their subsidiaries.
• Crown corporations. These are wholly owned by the federal or provincial governments but are structured and run like private corporations. These include the Bank of Canada, Canadian Council for the Arts, Canada Post Corporation, Royal Canadian Mint and VIA Rail Canada Inc, among many other companies.

How do taxes work?

A corporation is a separate legal entity, so it files its own corporate tax return (T2) and pays taxes on its profits at the corporate tax rate, which varies by province and corporation type.

CCPCs benefit from the small business deduction, which reduces the federal tax rate on the first $500,000 of active business income and may qualify for additional tax credits and grants.

Crown corporations are often exempt from federal or provincial taxes, with profits returned to the government or reinvested.

Pros and cons of corporations

How a cooperative works

Cooperatives can be formed by people who share a common interest in an enterprise such as a residential community, credit union or investment firm. Those who participate in a cooperative are its members and have varying roles. The exact type of role determines a member’s level of liability as outlined by the federal or provincial legislation by which the cooperative is governed (see “How to set up a cooperative” below).

There are 8 different categories into which cooperatives can fall:

How to set up a cooperative

Cooperatives must be incorporated, which can be done at either the federal or provincial level. Federal cooperatives are governed by the Canada Cooperatives Act and are formed by filing an application with Corporations Canada. One of the main benefits of incorporating federally is that it allows cooperatives to operate in multiple provinces and territories.

To incorporate at the provincial level, you must file with your province or territory’s appropriate corporate office. Each province and territory has its own legislation governing the formation of co-ops, distribution of liability and other matters. Check out Canada.ca for more information.

How taxes work

Cooperatives can be set up as for-profit, not-for-profit or even charitable entities. The type of tax return that must be filed depends on which entity the cooperative has chosen.

For-profit and not-for-profits must file a T2 Corporation Income Tax Return, but patronage dividends or refunds paid to members are generally deductible to the co-op and taxable to the members, which helps reduce corporate-level taxation.

Charitable co-ops must file a T3010 Registered Charity Information Return and are generally exempt from income tax on charitable activities.

Pros and cons of cooperatives

How to choose a business structure

1. Assess your business needs

Before choosing a business structure, consider your goals and circumstances. Think about how much personal liability you’re willing to assume, whether you want full control or are open to sharing decision-making and how your choice will affect taxation.

You should also consider whether you’ll need external funding, how you plan to grow your business and whether a more complex structure is justified by your long-term goals. This is important because different business structures affect your ability to raise capital, attract investors and manage growth efficiently.

2. Evaluate the pros and cons

Each business structure has advantages and disadvantages. Sole proprietorships are simple to set up and give the owner full control, but the owner is fully liable for debts.

Partnerships allow pooling of resources and shared responsibilities, but partners also share liability, and disagreements can occur.

Corporations offer limited liability and potential tax advantages, but they’re more complex and costly to set up and maintain.

Cooperatives provide member control and some tax benefits, but they require active member involvement and may be more administratively complex.

3. Consider legal requirements and tax implications

Different business structures have different legal obligations. For example, corporations and cooperatives must be incorporated either federally or provincially, while sole proprietorships and partnerships may only need provincial registration depending on your location.

Tax implications are different for each business structure as well. Sole proprietors and partners report business income on their tax returns, while corporations and some cooperatives pay corporate tax.

Understanding the legal and tax obligations for each structure can help you choose one that minimizes your tax burdens and prevents costly compliance issues later.

4. Plan for growth and financing

Think about how you want your business to expand in the future and whether your chosen structure can support it.

Corporations generally make it easier to raise capital from investors or banks, while sole proprietorships and partnerships face limitations.

If you plan to scale, enter multiple provinces or attract outside investors, a structrue with clear governance and liability protections may be more suitable.

Bottom line

Consider your legal responsibility, tax obligations and the work it takes to set up and maintain different business structures before you decide which one to choose. For most businesses just starting out, a sole proprietorship will be a good fit, at least for the first while as the business starts to grow. Then, as time goes and your business grows, you may need to reassess and register your business in a more suitable structure.

Frequently asked questions

• Who owns a corporation?

  A corporation is owned by its shareholders — the people who own company stock. Shareholders have one vote per share they own in the company, so the more shares they own, the more control they have over the company.

• Is an organizational structure the same as a business structure?

  No, the organizational structure of a company outlines the hierarchy of roles within the company. It defines who has the last word in decisions, how work is delegated and different employee roles. Unlike a business structure, your business’s organizational structure isn’t something that you need to register with your local government.

• What is a business formation?

  A business formation is another term for a business structure. The types of business formations include sole proprietorship, partnership, corporation and cooperative.

To make sure you get accurate and helpful information, this guide has been edited by Romana King as part of our fact-checking process.

Written by

Stacie Hurst

Associate editor

Stacie Hurst is an editor at Finder, specializing in loans, banking, investing and money transfers. She has a Bachelor of Arts in Psychology and Writing, and she has completed FP Canada Institute's Financial Management Course. Before working in the publishing industry, Stacie completed one year of law school in the United States. When not working, she can usually be found watching K-dramas or playing games with her friends and family. See full bio

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Rebecca Low

Writer

Rebecca Low is a writer for Finder. She has contributed to a range of digital publications, including income.ca, Indeed, and Expatden, writing on topics like personal finance, career development, and travel. See full bio