Jesse Lowe, CPA, CA, Manager
If you’re considering starting your own business, there is a lot you need to know before you get started. Canada Revenue Agency (CRA) defines a business as “an activity that you intend to carry on for profit and there is evidence to support that intention.”
Once you’ve determined that you would like to start a business, you need to determine how you’d like to structure the ownership. Your three most common options are:
- Sole proprietorship
- Partnership
- Corporation
Each business structure is distinct in its own way. It’s important to fully understand each in order to correctly choose which is best for you.
Sole proprietorship
A sole proprietorship is a business owned and operated by one individual. It is not considered a separate legal entity, but rather an extension of the owner. All of the profits are the owner’s to keep; however the owner is also responsible for all of the business’s debts and obligations. All income earned from the proprietorship is reflected on the owner’s personal tax return.
Some advantages of a sole proprietorship include:
- Low cost of starting the business;
- Full control of decision making;
- All profits go directly to the owner; and
- Any losses can be applied against other sources of income.
Some disadvantages of a sole proprietorship include:
- Unlimited liability; and
- Potential for the business’s profits to put the owner into a higher tax bracket.
While no legal action is required when establishing a sole proprietorship, you may be required to obtain certain licenses and permits for its operation. Check CRA’s website (http://www.cra-arc.gc.ca/bsnsss/menu-eng.html) for more information.
Partnership
A partnership is a beneficial structure if two or more people wish to start a business together. There is less of a financial burden than a sole proprietorship because all of the partners would share the financial responsibilities. A partnership can sign contracts, obtain trade credit, and borrow money; however, when a partnership is small, a personal guarantee from the partners may be required by creditors.
Partnership income is reflected on the owner’s tax return. However, there may be requirements for the partnership to file a partnership tax return.
Before going forward with a partnership, it is highly recommended you seek the assistance of a legal professional to have a partnership agreement drawn up to protect everyone’s interests. The agreement may include terms for profit sharing and what to do in the event you wish to dissolve the partnership.
Some advantages of a partnership include:
- Start-up costs shared equally among the partners;
- Share in profits, assets, risks, and responsibility of work; and
- Any losses can be applied against other sources of income.
Some disadvantages of a partnership include:
- No legal difference between you and your business;
- Potential for profits to put the owner into a higher tax bracket;
- You don’t have full control; and
- Potential for conflict between partners.
There are different kinds of partnerships that exist. A separate article specifically about partnerships will be available shortly for your reference.
Corporation
A corporation is an incorporated business and a legal entity separate from the owners and shareholders. Shareholders will not be held personally liable for debts and obligations of the corporation. A business can incorporate at the federal or provincial level.
Some of the advantages of a corporation include:
- Limited liability;
- Transferable ownership;
- Separate legal entity; and
- Taxes may be lower for incorporated businesses.
Some disadvantages of a corporation include:
- Startup costs;
- Extensive books and records must be kept;
- Potential for conflict between shareholders and the Board; and
- Separate taxable entity.
Consult your GGFL accountant for information on the steps required to incorporate your business.
Starting a business is a big decision and could be the beginning of your long-term retirement plan. Our experienced staff can guide you in the direction that best fits your needs and long-term goals.
