You are an entrepreneur! You have the energy! You have the passion! You know your product! You know it will sell! You can’t wait to get out and start selling!
Hold your horses…before you can legally start operating your business in Canada you need to register your business. Think of it like the birth certificate of your business. There are three different legal structures that you can choose from.
I have created a free downloadable document which explains the pros and cons of the different business structures in an easy-to-understand way.
You might say “Just give me the cheapest and easiest option and let me get started.” WAIT! Choosing your business structure is one of the most important decisions you will make as an entrepreneur. Saving a little bit of money now could cost you a lot of money in the future.
I want to help you choose wisely:
#1 Sole proprietorship
This is the easiest and fastest to set up. On average it costs $60 to register and it can be completed in a few days.
A sole proprietorship is ideal for people who are self employed or entrepreneurs that own very small businesses.
In a sole proprietorship the business and the owner are one in the same. This has a couple of important implications
- Taxes: Filing taxes are simple. The business’ net income is added to the owner’s personal income tax filing. However as the business becomes more profitable the business will pay taxes at a higher tax bracket.
- Unlimited liability: A sole proprietorship does not protect the personal assets of the owners. If the business is unable to pay its debts then the owner will have to use his/her personal assets to pay that debt: i.e. sell the house, sell the car etc.
- Selling the business: It is hard to sell a sole proprietorship because the owner and the business are one unit. The entrepreneur can only sell the hard assets of the company (the truck, the building, the tools, equipment, etc). They will not be able to take advantage of a special government program called the capital gains exemption. So the entrepreneur might end up paying a lot more money in taxes when selling their business.
This is the second easiest and fastest to set up. On average it costs the same as a sole proprietorship, $60, to register and it can be completed in the same amount of time.
A partnership is ideal for small businesses owned by two or more people. Many partnerships are created where each partner contributes half of the start up money and is expected to do half of the work. Some partnerships are created where the partners each contributes differently (money, labour, expertise, equipment). Partnerships can be a good option for business partners who are also life partners (married or common law).
Before registering a partnership all of the partners should agree on a partnership agreement. Think of it like a “prenuptial agreement.” This agreement will state:
- How much each partners owns (50% – 50% or 75% – 25%)
- What each partner agrees to contribute
- How much each partner will get paid
- How disagreements will be settled
- How new partners can enter or exit
- How the partnership will end
Ideally you should have your partnership agreement reviewed by a lawyer.
Like a sole proprietorship there is no legal separation between the owners and the business. This has a couple of important implications
- Taxes: The net income (or loss) of the business will be divided between the owners of the business. Each owner is responsible for declaring that income (or loss) as part of their personal income tax.
- Unlimited liability: A partnership does not protect the personal assets of the owners. In a partnership when one partner takes on a debt, all of the other partners are responsible for paying it. If the business is unable to pay its debts then ALL of the owners will have to use their personal assets to pay that debt.
- Selling the business: Like a sole proprietorship, entrepreneurs in a partnership are unable to take advantage of a the capital gains exemption. So the entrepreneur might end up paying a more taxes when they sell their portion of a partnership.
This is the most expensive and most complicated to set up. On average it costs $360 in Ontario to register provincially via online and it can be completed fairly quickly – in theory. If you are new to this, setting up your share structure might be a bit confusing and could potentially require you to seek advice from a professional. There are many low-cost options to register your corporation. Be careful, you get what you pay for.
Unless you are planning to operate all across Canada, have offices in different provinces, and require a more strict company name protection, you are better off incorporating provincially only. If you incorporate federally, just remember that you will also require to incorporate in the provinces that you are planning to do business in as well. So incorporating federally might seem like the cheaper option ($200) but you will also have to add up the costs of the different provincial corporations
A corporation can be used for a business of any size. The owners of the business are called shareholders. There can be one shareholder or many.
When a corporation is registered the business becomes a separate legal entity, your business almost becomes a legal person. This has a couple of important implications:
- Taxes: The business has to file taxes separately from the owner. Corporate tax rates are generally lower than personal income tax rate. This means that you have to keep a strict record-keeping and file your corporate taxes every year (this is separate from your personal taxes). The entrepreneur is then taxed again on the money that they take out of the business for their personal use, this is called double taxation.
- Limited liability: A corporation protects the personal assets of the owners. If the business is unable to pay its debts then the business will fail. However the owners are not legally liable to use their personal assets to pay for that debt – the business is.
- Selling the business: Selling shares in a company is very easy. That is what large companies do all the time on the stock exchange. When an entrepreneur sells shares in their company they can apply for the the lifetime capital gains exemption which is $850,000 per person – which means if you sell your company for that amount or less, you will not pay capital gain taxes.
Can I start as a sole proprietor and the move to an incorporated business? Absolutely – that’s always an option. It is a fairly simple administrative step that will most likely be handled by a lawyer. However, if you are opening in industries that are higher risk such as:
- Restaurant, food & beverage
I would highly recommend you incorporate from the beginning just to make sure your personal assets are protected in case of any unforeseen problems.
It is never a bad idea to bounce this important topic off with a corporate lawyer or a business advisor to make sure you feel comfortable about this decision.
If you have decided which structure is best for you, I came across a great tool that will let you register or incorporate your business at a very, VERY reasonable price.
Ownr is the simplest, most convenient way to make your business official: you can register or incorporate your business online in minutes. Ownr makes starting out easy, so you can focus on what you do best – your business. I’d like to offer an exclusive $50 off with promo code KARLA-35. Use the code KARLA-50 at checkout to redeem*. Get Started
*$35 off Ownr registration or incorporation. One promotion code per transaction, may be combined with other offers, but refund will not exceed total amount paid. Enter the code KARLA-35 at checkout on the Ownr payment page to receive promotional price. Offer may not be applied retroactively. Only available in Ontario, Alberta, and British Columbia.This offer may be modified or cancelled at any time.