Canadian Business Structures - Finding the right fit for your small business

Small businesses are a driving force to the success of local economies – and as of 2021, small businesses (those with 100 employees or less) make up 98.1 % of all businesses in Canada.

Not only that, but these small businesses contributed to almost 40% of total Canadian exports, while employing 10.3 million people.

In recent years, a lot of Canadians have pivoted their careers, with many setting their eyes on entrepreneurship and/or opening their own small businesses!

Whether the timing is finally right, or you’re presented with a can’t miss opportunity – figuring out what kind of business and how you want it to grow is the first step.

There are a lot of things to consider when you’re in the early stages of establishing your business, including figuring out the products or services you’re going to offer and how to choose the business structure you’re going to operate under.

There are some important key differences between incorporating, entering into a partnership, and becoming a sole proprietor that you’ll need to understand as you decide on your business structure.

The most straightforward business structure is a sole proprietorship – which is defined as an unincorporated business owned and run by an individual that does not have separate legal status from the business.

What this means is that in the eyes of the government, you are your business, and your business is you. In this regard, any net income produced by your business is included when filing and paying your personal taxes each year.

A sole proprietor is held completely responsible for the direction of the company as well as all profits and losses. With this structure you assume all risks from a legal standpoint, which extends to your personal property and assets.

If you choose this route, you can either operate your business using your first and last name, or register under a business trade name that exemplifies the nature of your business, such as Mario’s Pizza & Pasta. In this example, if Mario wants to open a restaurant, he should consider registering a trade name to leverage branding opportunities.

Having an idea of what industry you want to break into is beneficial as it factors in to how to choose the best structure for your business. With that in mind, if you plan to start a consulting or freelance business, using your actual name can add awareness to who you are and what you do while you establish yourself within the industry.

For example, Lacey is a photographer, and after working on a few shoots she recognizes the importance of making it easy for potential clients to search for and contact her. Since her clients only know about her business based on her name and image, she can use her name to build her business and exposure when people recommend her by word of mouth to friends and family.

Another reason you may want to register as a sole proprietorship under your own name would be if you want to have full control of the business, but you are unsure of how fast your company is going to grow and want to start on a smaller scale. However, registering under a trade name can also allow you to maintain control while also keeping day to day cash flow, bills, and invoices separate from your personal accounts and finances.

For sole proprietorships operating under a business trade name, you’ll need a separate bank account to process payments and cheques payable to your business. If you’re operating using your given name you can bill clients as such using personal accounts.

Going back to our examples – Mario would need to open a separate account for billing, while Lacey can bill clients using her own name to her personal account.

Benefits of sole proprietorship:

• Least expensive form of ownership, low start-up costs.

• Most freedom from regulation.

• Simple to start and dissolve.

• Complete control over the company, including decisions and profits.

• The least working capital required.

The second business structure we are going to touch on is entering into a partnership.

This is defined as a union between two or more individuals, trusts, partnerships or corporations, that jointly own and operate a business together.

When it comes to tax time, the ‘partnership’ doesn’t pay income taxes on their earnings as an entity, rather each partner includes their share of income or loss on a personal, corporate, or trust tax return.

All members of the partnership are responsible for contributing funds, labor, skills, or assets to the partnership. They are also collectively responsible for the direction of the business, how it operates, and all profits and losses.

A partnership structure can be beneficial when considering if having others involved is necessary to increase resources or contacts, have support in important decision-making processes, or create opportunities to scale quicker.

A pretty clear reason to choose this type of set up would be you if already have a partner or partners interested in starting this journey with you. If this is the case, you should understand how to define a written business agreement.

This includes agreeing on the division of roles, responsibilities, and share of income generated to avoid potential conflicts in the future. A partnership agreement also includes additional items such as what to do if a partner decides to leave, or if an additional partner joins. All of these terms need to be agreed upon in advance to protect the partners involved in the business.

For example, Jeremy and Tina both have a dream of opening a barber shop since graduating barber school together. After discussing their business idea at length they enter into a verbal agreement and decide to pool their money to start ‘Swivel ‘n’ Fade Barbers’, a trade name they chose together.

They register their business as a partnership and define how they are going to run things day to day, long term, and their roles and shares of revenue.

In addition to each of them working shifts on the floor cutting hair, they decide Jeremy will take on the administrative and accounting duties, while Tina would focus on branding and client care.

Another reason for entering a partnership would be if an individual, corporation, partnership, or trust joins an already established business.

Going back to our example, a few years after they launched ‘Swivel ‘n’ Fade Barbers’, Jared, a colleague of Tina’s, expresses interest in joining the barbershop as a partner.

When opening the shop, Jeremy and Tina wrote into their partnership agreement that if this situation arose, each partner would be able to meet with the candidate, review all qualifications, and voice if they had any concerns.

It was stipulated in writing that ultimately both parties had to be in full agreeance if additional partners were to join. After the three met and discussed the scope of the venture, both partners agreed to bring Jared in as a new partner, with a new agreement to be set to define his involvement.

Benefits of Partnerships: 

• Partners own all business assets personally

• Managerial/operational duties shared

• Limited regulation

• Less expensive to establish than a corporation

• Initial investment capital comes from both partners

• All profits and losses are shared by partners

The third and last business structure we are going to go over is incorporating, or becoming a corporation.

A corporation is defined as a separate legal entity that can enter into contracts and own property in its name, separate from any owners – it can have a lasting existence by the transferring of ownership.

This business structure requires a company to be established before incorporating, but both sole proprietorships and partnerships have the ability to take this step.

When forming a corporation, owners transfer all money, assets, services and property to the corporation for shares in the company. Any owner of these shares is known as a shareholder.

Shares can be bought and sold without affecting the existence of the corporation – the entity will continue to exist unless it declares bankruptcy or amalgamates.

A few benefits of incorporating include operating under a unique name across Canada or globally, and the fact that corporate taxes are generally lower than personal income taxes.

To incorporate, you must first come up with a word name (made up of letters and symbols) or a numbered name (made up of numbers and your business name) that will become your corporate name.

This allows the government to identify your business for tax purposes, as corporations are required to file a T2 corporate income tax return. 

Benefits of Corporations:

• Corporations are taxed separately from their owners.

• Limited Liability gives shareholders some legal protection personally from possible lawsuits.

• Corporations have the same rights as a real person, including owning property, getting loans, and entering into contracts.

• Continuous existence - with other business structures, a business stops existing when the owner dies.

At the end of the day, you’ll need to choose your businesses structure based on the options available to you – and understanding the differences between them will help to streamline your process.

In addition, as you strike out on this new adventure – understanding the liabilities, legalities, and how you’re allowed to operate within Canada will ensure you can make informed decisions going forward.

Joining your fellow Canadians in entrepreneurship can be a daunting opportunity, but small businesses are resilient. They continue to grow in importance as a backbone of our communities while we navigate through economic recovery.

For further information regarding business structures and operating a company within Alberta please visit the following resources sites:

Setting up Your Business – canada.ca

Starting a Business in Alberta – alberta.ca