I commonly get asked by aspiring entrepreneurs about which business structure they should select to operate their small business under. The answer depends on several factors which I will outline below in this blog post, as each type of business structure has various pros and cons. In Canada, there are three main business structures which are Sole Proprietorships, Partnerships, and Corporations.
The easiest and most common business structure is a Sole Proprietorship which is an entrepreneur who operates a business under his/her personal name or a registered business name. As a Sole Proprietor, in the eyes of the legal and tax authorities, the entrepreneur and their business are one and the same.
+ Sole Proprietorships can be set-up quite quickly and at a lower cost than a Corporation
+ The entrepreneur can easily withdraw profits from their Sole Proprietorship for personal use
+ Net Losses from the Sole Proprietorship can be deducted against other sources of personal income
- There is no legal separation between the entrepreneur and their small business
- The profits earned by a Sole Proprietorship are generally taxed at a higher personal tax rate than Corporations
- Sole Proprietors pay both the employee (4.95%) and employer (4.95%) portion of CPP on their Net Income
A Partnership is when two or more entrepreneurs join together to operate a business under their personal names or a registered business name. As a Partnership, in the eyes of the legal and tax authorities, the partners and their business are one and the same.
+ Partnerships can be set-up quite quickly and at a lower cost than a Corporation
+ Partners can pool their resources and share the business risk of operating a Partnership
+ Partners can deduct their portion of Net Losses from the Partnership against other sources of personal income
- Partners are personally responsible for the liabilities of the Partnership
- There is the risk for disagreements among the Partners on how to operate the Partnership
- If there are only two Partners and one Partner dies, then the Partnership can cease to exist
A Corporation is a legal business structure which can have many different shareholders as owners of the business. A Corporation is a separate legal entity from the shareholders in the eyes of the legal and tax authorities.
+ Corporations provide their owners (i.e. Shareholders) with limited liability
+ Ownership stakes in a Corporation are easier to transfer
+ The combined corporate tax rate for a Canadian Controlled Private Corporation (CCPC) is 12.5% in Saskatchewan
- Corporations are more time intensive and costly (i.e. $1,000 to $1,500) to set-up properly
- Separate accounting and tax records must be kept for the Corporation
- Proper record keeping (i.e. Corporate Minute Book) must be performed for the Corporation
The decision on which business structure to select for a new small business is an important one and aspiring entrepreneurs should seek the professional advice of an Accountant and/or Lawyer to analyze the facts of their situation and assist them in making the right decision. By taking the time upfront to properly select the right business structure, it can save a lot of money and headaches further down the road. If you have any questions or comments on this blog post, I can be reached via email at email@example.com or via phone at (306) 713-2477.
Jordan N. Brown, CPA, CA
President, Lift Accounting
(Disclaimer: This blog post is for informational purposes only and is not, nor can it be interpreted or relied on as professional advice.)