When you start a small business in Canada, you have the option to structure your business in one of three ways. You can be a sole proprietor, enter into a partnership or run a corporation by incorporating your business.
If you are already operating a business or have been looking into starting one for a while, you may have heard the many benefits of incorporating, such as limited liability, lower tax rates, and the lifetime capital gains exemption.
In many instances, choosing to incorporate can be very beneficial. But it all depends on the type of business you are running, where you operate and what your goals are.
So, let’s take a quick look at the characteristics of each business structure.
A sole proprietorship is owned by one person and that person:
With sole proprietorships, the Canada Revenue Agency sees the business and owner (called the sole proprietor) as one and the same. That means that a creditor or someone taking legal action against the business can go after all your assets, whether business or personal. You must also file your business taxes with your personal taxes, which means the business income is taxed using personal rates.
A partnership is a business owned by two or more people. The owners of the business choose how profits are divided and are both liable for debts and legal actions against the business. Like a sole proprietorship, legal liability extends to personal assets and well as business assets.
Partners of the business file their share of income and expenses on their personal income taxes and are then taxed at the applicable personal rate.
Unlike sole proprietorships and partnerships, corporations are a separate legal entity. This means that owners, in most situations, are protected from being personally liable for debt or legal actions against the business. Corporations can be owned by an individual or have multiple shareholders.
Sole Proprietorship |
Partnership |
Corporation |
|
Ownership |
1 owner |
2 or more owners |
1+ owners; usually owned by multiple shareholders |
Gains and Losses |
All profits go to the single owner |
Earnings are split between partners |
Shareholder dividends |
Liability |
Owner carries liability |
Partners usually share liability |
Separate legal entity; shareholders aren’t usually liable |
Tax |
Owner is taxed on personal income tax return |
Owners are tax on their income tax returns |
Corporation is taxed as a separate “person” |
Benefits of incorporating
The main benefits of incorporating are that corporations:
To determine which structure is best for your unique situation, contact us today to speak with our team of professionals.