Part I: Business Structure

Congratulations, you have decided to start your own business. One of the first decisions you need to make is what structure you are going to use for your business. This has important implications for how you register your business and how you report business income and expenses for tax purposes. In this blog, we will briefly discuss four differences (setup, cost, liability, and tax filing) between the three most common business structures.

The three basic types of business structure are:

1. Sole proprietorship
2. Partnership
3. Corporation

 

SOLE PROPRIETORSHIP

Cost & setup

A sole proprietorship is the simplest and least costly business structure to use. There is no application or registration required unless you choose to operate under a name other than your personal name. You can register a trade name at a registries office for approximately $50.

Liability

A sole proprietorship is not a separate legal entity so you are personally liable for any debts or obligations of the business. This puts all of your personal assets at risk of creditor or legal actions against your business. To minimize your risk exposure you should ensure that you have adequate professional and/or commercial liability insurance appropriate to your business.

Tax filing

For income tax purposes you simply file your T1 Personal Income and Benefit Return with your business income and eligible expenses on form T2125 as self-employment income or form T776 as real estate rental income. If your annual revenue exceeds the small supplier limit of $30,000 then you are required to register for GST/HST.

Summary

A sole proprietorship is a simple business structure to setup and use and is most often utilized by self-employed professionals and tradespersons. The major drawbacks include the personal liability and the lack of tax planning strategies. However, it is possible convert a sole proprietorship into a partnership or corporation as your business grows.

Sole Proprietorship
Setup:	No application; Register Trade Name if applicable
Cost:	Less than $50
Liability:	Unlimited
Tax filing:	T2125 or T776 form with T1 Personal return; GST/HST if applicable

 

PARTNERSHIP

Cost & setup

A partnership is similar to a sole proprietorship, except that there is more than one individual and/or corporation that share in the profits and risks or debts of the business. Each province has exclusive jurisdiction over partnerships and a Declaration of Partnership is required to be filed. A partnership will also need to register for a business number with the CRA. The cost to register a partnership is usually the same as a trade name (approx. $50), but additional legal fees will be incurred to prepare additional documents such as a partnership agreement. A properly structured partnership agreement is important to provide guidelines on how income and expenses are allocated between the partners and how the partners are expected to act on behalf of the partnership.

Liability

A partnership is not a separate legal entity and each partner is personally liable for all debts or obligations of the partnership incurred by any of the partners. Liability of investors can be limited through a limited partnership (LP), which has at least one general partner and one or more limited partners. The general partner is responsible for managing the partnership and is exposed to unlimited liability. However, the limited partners do not participate in managing or controlling the partnership and they are liable only to the extent of the amount of capital they have contributed. A limited liability partnership (LLP) consists of partners carrying on practice in one or more eligible professions, such as accounting or law, and provides liability protection. A partner in an LLP is not generally liable for partnership obligations arising from the negligence, wrongdoing, or misconduct of other partners, employees, agents, or representatives of the partnership that occur in the ordinary course of carrying on practice in an eligible profession.

Tax filing

Since a partnership is not a separate legal entity, it does not file its own tax return. Instead a partnership is required to file a T5013 Partnership Information Return with the CRA annually. The partnership must also provide T5013 information slips to each partner to be reported on form T2125 as self-employment income on their T1 Personal Income and Benefit Return. If the partnership exceeds the small supplier limit of $30,000 in annual revenue, it must register for GST/HST. The partnership may also need to register for a payroll account with CRA in order to remit payroll source deductions for any wages or salaries paid to employees. T4 slips must be prepared and provided to employees for wages or salaries paid.

Summary

A partnership is also easy to setup, similar to a sole proprietorship. To minimize the increased liability risk due to the involvement of one or more partners requires a well prepared partnership agreement. In our experience it is well worth the additional cost. Although the personal liability is a major drawback of a partnership, for some professionals this is the only business structure allowed due to legislation that prevents publicly practicing professionals to avoid personal liability through a corporation.

Partnership
Setup:	Provincial registration; CRA business number
Cost:	$50 registration, plus any legal fees.
Liability:	Unlimited or limited
Tax filing:	T5013 Partnership Information Return and Slips; T2125 or T776 form with T1 Personal return; GST/HST if applicable; Payroll if applicable

 

CORPORATIONS

Cost & setup

A corporation is the most complex and costly business structure, but provides the most liability protection. A corporation must be registered either provincially or federally. If the corporation will have permanent establishments in more than one jurisdiction, it may be advisable to incorporate federally. All corporations must register for a business number with CRA. The cost to register a corporation can vary depending on the jurisdiction and whether a name search is required. The preparation of a minute book and a shareholders agreement can result in additional costs. From our experience, if there will be more than one shareholder it is highly recommended to have a unanimous shareholders agreement prepared. This document will provide clear guidelines for dealing with disagreements between shareholders and how to handle a buyout or sale of some or all the shares. The basic cost for incorporating with all of the required organizational documents starts at about $850, but can increase to several thousand if more complex organizational documents require a lawyer to prepare.

Liability

The shareholders of a corporation are liable only for the amount of capital invested in the corporation to purchase shares, unless a personal guarantee is signed to secure debt financing. However, directors and officers of a corporation can be held personally liable for company lawsuits in certain situations.

Tax filing

A corporation is a separate legal entity and is required to file a separate T2 Corporation Income Tax Return and the relevant Provincial corporate tax return annually. A corporation must register for GST/HST if the annual revenue exceeds the small supplier limit of $30,000. It may also be required to register for a payroll account if wages or salaries are paid to employees and source deductions are required to be remitted. T4 slips must be prepared and provided to employees for wages or salaries paid and T5 slips must be prepared and provided to all shareholders receiving dividends.

Summary

Although a corporation is the more complex and costly business structure of the three discussed here, in most circumstances it provides the best liability protection for the business owner. It also provides the most flexibility in optimizing compensation for the owner (to be discussed further in the next article in this series) and allows for additional tax planning strategies.

Corporations
Setup:	Provincial or federal registration; CRA business number
Cost:	Starting at $850 for registration, minute book, and legal fees.
Liability:	Limited
Tax filing:	T2 Corporation Income Tax Return; GST/HST if applicable; Payroll if applicable; T4 slips; T5 slips

 

YOUR NEXT STEP

To determine the best business structure for you and your business, please call us at 403-509-3290 or email us for a consultation. We can also assist you in preparing the appropriate registration documents and all of the required organizational documents necessary to get your business started.