Starting a business can be an exciting but overwhelming step to take for many entrepreneurs. Setting up your business in Canada can feel challenging, and not knowing which type of business structure to implement can create additional stress. Knowing the differences between the types of business structures available to you can help you set up your business for success in the long run.
This blog post will introduce several of the most common types of business structures in Canada and will set out some benefits and drawbacks of each.
Sole Proprietorships
A sole proprietorship is a type of business owned and operated by one person. This type of business structure is common in small companies, with only one owner making the business decisions.
Sole proprietorships are easy to set up, which makes them an attractive option for small businesses. Sole proprietorships do not require incorporation; therefore, the owner has much more control than you would under a partnership or a corporation.
However, a potential downfall of a sole proprietorship is that the owner is personally responsible for any liabilities, such as debts or legal action, against the business.
Partnerships
Partnerships are businesses that are created and owned by two or more individuals. Together, these individuals “share” the business, including its profits and losses. You may not be required to incorporate depending on the type of partnership you choose. However, it is wise to create a partnership agreement to determine how the partners will work together, how profits and losses will be allocated, and address other relevant matters.
General Partnerships
General partnerships look a lot like sole proprietorships in that the partnership is not required to incorporate. Like a sole proprietorship, the partners in a general partnership are also liable for the business’s debts and obligations. The increased liability in a general partnership is a potential downfall of this business structure.
Limited Partnerships
In a limited partnership, one general partner acts much like a sole proprietor in that they are personally liable for business affairs. In addition to the general partner, a limited partnership will include several limited partners. The limited partners are not exposed to the same level of liability as the general partner, although they do contribute to the capital and, in return, their liability extends to the amount of capital they have contributed to the business. A downside of this type of partnership is that limited partners have limited ability to make business decisions.
Limited Liability Partnerships
Professionals, such as law firms, accounting firms, and doctors typically use limited liability partnerships. To create a limited liability partnership in Ontario, the partners must meet the following requirements under the Partnerships Act:
- The professionals’ governing act must permit them to create a limited liability partnership to practice the profession;
- The professionals must maintain a minimum amount of liability insurance (as set out by the professionals’ governing body); and
- The partnership must register a name under the Business Names Act.
In a limited liability partnership, each partner’s liability is limited to the amount they have put into the business. However, the partners have greater control over how the partnership is governed and how the profits are shared compared to a limited liability partnership.
Corporations
Corporations are legal entities that are distinct from their owners. In essence, the corporation is a “person” unto itself and possesses many of the same legal rights and responsibilities as an individual. This means that the corporation’s owners, the shareholders, are not liable for the company’s debts and obligations.
Corporations are also a great way to set up a lasting business. For example, when a sole proprietor dies or chooses not to continue with the business, the business dissolves. With a corporation, however, the business survives.
To create a corporation, you will need to incorporate. This means that you need to determine the type of corporation you want to set up, choose a name, and create and file your corporation’s Articles of Incorporate and other governing documents. This process can become complex and generally is accompanied by more financial obligations than a sole proprietorship or corporation would require. Therefore, it is recommended that you work with an experienced business lawyer to assist you with the incorporation process.
Private Corporations
Private corporations (or “privately-held” corporations) tend to be smaller corporations where stocks are held internally and are not traded. These types of corporations are common where the founders or management are the owners of the corporation and want to retain more control over business decisions.
Public Corporations
Public corporations tend to be larger corporations with significant revenue and shares that are traded on the open market. These types of corporations tend to have many shareholders but must meet the many regulations and requirements imposed on public companies.
Not-for-Profit Corporations
Not-for-profit corporations play specific roles or provide specific services to communities and are designed not to profit from their business. Individuals seeking to create a not-for-profit corporation must meet specific standards and cannot issue ownership shares in the corporation.
How Do I Register a Business in Ontario?
Regardless of the type of business structure you choose, you will need to register your business online in Ontario.
Firstly, you must search the Ontario Business Registry to determine whether your chosen business name is available. From there, you can create an account and register your business online. Different fees will apply for registration depending on the type of business structure you have chosen. You will then receive a business identification number that you can then use to incorporate, if required, and register for a Canada Revenue Agency account.
Final Notes on the Types of Business Structures in Canada
Depending on your business goals, the types of business structures in Canada provide many different opportunities to set up a business. Determining which type of business structure to use can be an arduous task, and if you create a corporation, additional administrative steps and costs will be required.
It is important to bear in mind that the type of business structure you choose will also dictate your ongoing business obligations, which is why it is critical to work with a skilled business lawyer who can seamlessly lead you through the process.
The Business Lawyers at Bader Law Advise Clients on Business Structures and Shareholder Disputes
The business law team at Bader Law provides tailored business organization advice to our clients, including corporate restructuring, licensing and shareholder disputes. We work closely with our clients to understand their needs and help them determine the legal structure for their business to help reduce liability and maximize profit. If you have questions regarding your business structure or require assistance with incorporation, call us at 289-652-9092 or contact us online.