Klarissa Jeiel: Where Law Meets Design

Different Types of Business Structures in Canada

There are different types of business structures in Canada to start a business. Learn more about them here to make an informed decision.

If you’re thinking of starting a business, there are different types of business structures available to you. In Canada, there are three main types: sole proprietorship, partnership, and corporation. Each business structure has its own advantages and disadvantages. Read below to find out what these different business structures are and why you might choose one over another.

1. Sole Proprietorship

This is the simplest form of business structure and the most common one in Canada. Creating a sole proprietorship does not require registration or any filing of documents with the government. Although, depending on the type of business you are operating, you might need to get a business license. If you are a sole proprietor operating under a business name other than your own, you might also have to file a declaration of trade name.

Sole proprietorship is beneficial because it is the easiest of all three business structures to set up. It also provides certain tax benefits because as a sole proprietor, you are taxed at the individual level and any losses of the business can be offset against your income.

But keep in mind that a sole proprietorship is not a separate legal entity. You are the business and the business is you. This means that you will be liable for any debts incurred by the business (creditors can go after your personal assets).

2. Partnership

A partnership is created when two or more individuals or two or more corporations do business in common with the objective of making a profit. Like a sole proprietorship, it is not a separate legal entity so each partner is personally responsible for their actions and the actions of other partners and for any debts incurred by the business.

Three Types of Partnerships

There are three different types of partnerships: general partnership, limited partnership and limited liability partnership.

  1. General Partnership – a general partnership is comprised of general partners that have unlimited liability (i.e. each partner can be held personally liable for the wrongdoing of another partner or debts incurred by the business).
  2. Limited Partnership or LP – a limited partnership (not to be confused with a limited liability partnership below) is comprised of at least one general partner and any number of limited partners. Each partner in a limited partnership has different rights and responsibilities. A general partner is usually personally liable for the debts of the business while a limited partner is personally liable only to the extent that they have invested in the partnership. Unlike a general partner, a limited partner cannot manage or attach their name to the business.
  3. Limited Liability Partnership or LLP – a Limited Liability Partnership is similar to a General Partnership but it provides partners with limited liability protection. This means that partners in a Limited Liability Partnership are not personally liable for the negligence, wrongdoing, or misconduct of another partner unless they are the ones who commit the act or were involved in some way. In some provinces like Alberta, this type of partnership is only available to certain professions. For example, lawyers and accountants.

Partnerships are easier to set up and less expensive to run than Corporations. There are also fewer filing fees and maintenance costs associated with a Partnership and they are just as easy to dissolve as they are to set up. But one of the biggest drawbacks to a partnership, like a sole proprietorship, is liability. A Partnership does not provide protection for its partners in the same way that a Corporation does for its shareholders. Another drawback is that a Partnership relies on the continued membership of the partners so the death or incapacity of a partner generally results in the partnership being dissolved. The exception to this is the death of a limited partner in a limited partnership

3. Corporation

A corporation is a separate legal entity from its owners so it provides owners with limited liability protection. This means that the owners of a corporation generally will not be held liable for the debts or wrongdoing of the corporation. This is the biggest advantage that a corporation has over a sole proprietorship and partnership. In Canada, there are two ways to incorporate a business: provincially and federally.

Federal incorporation allows you to conduct business in any Canadian province and protects your corporation’s name throughout the country. Provincial incorporation allows you to conduct business only in the province you choose to incorporate your business in and protects your corporation’s name only in that province. To conduct business in other provinces as a provincial corporation, you have to register your corporation in those provinces. If your business is incorporated provincially and you want to learn more about doing business in other provinces, check out this article.

There are clearly benefits to incorporating federally. But if you intend to only conduct business in one province, it is usually less expensive and time-consuming to incorporate your business provincially.

Conclusion

Different business structures come with their own benefits and drawbacks. When choosing which business structure is right for you, consider things like the costs of setting up the business, ongoing maintenance costs, tax implications, and liability protection. Once you’ve chosen your business structure, the next step is to register your business!

Related: How to Register Your Business in Alberta