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How to choose the right business structure for your company

Choosing the right business structure in Canada often comes down to taxes, liability and who is involved in making decisions.

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By

Stacie Hurst

Edited by

Romana King

Updated

Fact checked

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 is an example of a business structure?

There are four main forms of business structure in Canada: Sole proprietorship, partnership, corporation and cooperative.

An example of a sole proprietorship is any self-employed individual who runs a business serving customers. This can include a landscaper, painter and even a financial planner. Partnerships are similar to sole proprietorships, except the business is owned and operated by more than one person. An example of a corporation is any large business that files a T2 tax return, such as BCE, a large telecommunications corporation based out of Quebec. While not as common, cooperatives do exist in Canada. For example, The Canadian Press is a national newswire service that operates as a cooperative, as does the Canadian University Press.

What are the 4 types of business in Canada?

Business structureHighlightsOwnershipLiabilityType of tax filing

Sole proprietorship

Symbol of outward arrows surrounding a person

Simple to setup; limited paperwork1 ownerOwners are personally liablePersonal tax return (T1)

Partnership

Symbol of three people staying connected

Best for testing new ideas with other business owners

Includes:

  • General
  • Limited
  • Limited liability partnerships (LLPs)
2+ ownersGeneral partnerships:
  • All owners are personally liable

Limited Partnerships and Limited Liability Partnerships (LLPs):

  • General partners (managers) are personally liable, limited partners (investors) are not
Partnerships can be formed by joining two or more people, corporations, trusts or partnerships, so the type of tax filing varies:
  • Personal tax return (T1)
  • Corporate tax return (T2)
  • Trust tax return (T3)

Corporation

Symbol of one person in front of two people

Best for scaling businesses and protecting personal assets from legal liability

Includes:

  • Canadian-controlled private corporations (CCPCs)
  • Other private corporations
  • Public corporations
  • Crown corporations
1+ ownersBusiness is liableCorporate tax return (T2)

Cooperative

Symbol of people having a conversation

Best for people who share similar social or economic needs and who want to operate a business democratically.

In Canada, all cooperatives must be incorporated.

1+ ownersLimited depending on members’ specific roles (and other factors) as outlined in either federal or provincial legislation depending on how the co-op is incorporated:
  • If federally incorporated: Canada Cooperatives Act
  • If provincially incorporated: each province has its own co-op legislation
Depends on whether the cooperative is classified as a for-profit, not-for-profit or charity under the federal Income Tax Act:
  • For-profits and not-for-profits file T2 tax returns
  • Charities file T3010 tax returns

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 profits as income on their personal taxes.

Pros and cons of sole proprietorships

  • Complete control over business and profits
  • Only pay personal income tax, not business income tax as well
  • No or low-cost to form
  • Fully responsible for debt and lawsuits
  • Hard to get funding
  • You’re responsible for all the work
Business loans for sole proprietors

How a partnership works

A partnership is a business owned by two or more people, corporations, trust 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 gets completed.

How taxes work

The type of tax return that needs to be filed depends on which entities joined to form the partnership – individuals, corporations, trusts or other partnerships. Either a T1 (personal), T2 (corporate) or T3 (trust) income tax return will get filed.

Pros and cons of partnerships

  • Flow-through taxation
  • Potentially more initial capital to get up and running
  • Shared work and responsibilities
  • Joint liability for debts
  • Sharing profits
  • Less individual control over business affairs
  • Possible disagreements
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Why do some business structures require personal tax returns?

Unlike a corporation, a sole proprietorship is not considered a separate legal entity from its owner. The owner (or sole proprietor) is the business. Business revenue is therefore reported on the owner’s personal tax return.

In Canada, a partnership is considered a “flow-through entity,” which means the partnership itself is not taxed on income it receives. Rather, it passes income on to its owners who are charged income tax. This is to avoid “double taxation,” where both the business entity and its owners are charged income tax on the same revenue.

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 disbanding of directors, death of the owner or 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. Tax benefits include the small business tax deduction, tax credits and deferrals, extended tax deadlines and capital gains exemptions on income given to shareholders in the form of shares.
  • 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 its 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.

Pros and cons of corporations

  • Personal protection with limited liability
  • Easier to raise capital and get financing
  • Perpetual entity until liquidated
  • Lengthy and expensive process to become incorporated
  • Possible double-taxation
  • Tightly governed

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:

  • Housing. Individually-owned or collectively-owned units
  • Consumer. Banking, food, gas, telecommunications, child care, retail etc.
  • Investments. Avoids investing in unfamiliar businesses on large, prominent stock exchanges in favour of investing in local business interests.
  • Community service. Usually supports a social aspect of the community such as recreation facilities and community centres.
  • Multi-stakeholder. Allows people with multiple skill sets or interests (building, financial management, scientific research etc.) to unify in pursuit of a common business goal.
  • New generation. Mostly used to infuse agricultural businesses with large capital investment and stabilize the price of agricultural products.
  • Producer/marketing. Helps producers benefit from economies of scale through group purchasing, access to member resources and the ability to promote a larger, more unified brand.
  • Worker. Employees own the cooperative, making it easier to fill in leadership gaps left by retiring business owners. Sometimes used as an alternative to partnerships.

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, and charities must file a T3010 Registered Charity Information Return.

Pros and cons of cooperatives

  • Higher managerial accountability
  • Allows individuals to pool resources and achieve business goals
  • Limited liability based on members’ roles
  • Governing laws can be complex and varied
  • Less structured than other types of businesses
  • Cumbersome managerial processes

Which business structure is right for me?

Choosing which structure to use for your business depends on your long-term financial goals. Keep the points below in mind when making your choice. Check out the Government of Canada website to learn more about different types of businesses.

  • Legal liability. Are you willing to be completely personally liable for any debt your business incurs? Or would you rather take on limited liability, or share it with a business partner? Deciding how much liability you want to take on will help narrow down which structure is best for you.
  • Taxes. Your business structure determines how much you pay in taxes. Depending on which structure you choose, you may be faced with double-taxation (corporate and personal income) or just flow-through taxation (in which the business won’t be subjected to corporate income tax).
  • Administrative costs. Structures like corporations have more extensive paperwork and record-keeping requirements, which can eat up a lot of time and money when forming a business. Those who are starting a business on their own may consider a sole proprietorship for that reason, as it generally has less reporting requirements than other structures.
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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. For more information, check out the Finder guide on business banking.

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.

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