There are four recognized types of businesses in Canada: sole proprietorships, partnerships (including general, limited, and limited liability partnerships), corporations, and co-operatives. Three of these you have definitely heard of (sole proprietorships, partnerships and corporations), and one of which you’ve likely heard of but may have not associated with being a type of business (co-operatives). Whichever one you choose is based on your business needs and the type of business you are setting up.

This week, YBE will explore each of these types, including defining them, how you set one up, and laying out the pros & cons.

Sole Proprietorship

What is it?

According to the Canada Business Network (CBN) and Canada Revenue Agency (CRA) (the people you and/or your parents pay your taxes to), a sole proprietorship is where you as the business owner are solely responsible for the business and its operations, even if you have employees or contractors.

There is no legal difference between you and your business. All profits that the business makes is yours to keep, and all losses incurred are yours as well. At the same time, if the business gets into any legal issues (i.e. with creditors or client lawsuits), they can go after your personal and business assets.

How do I start one?

  1. Register & determine the availability of your desired business name (see Registering Your Business and Its Name in Canada for more info).
  2. Register for the necessary permits, licenses and taxes your business needs (varies by province and municipality).
  3. Open up a separate bank account for your business transactions (including separate business cheques, debit card and credit card).
  4. Start operating your business!

What are the pro’s to having one?

  1. Relatively easy and inexpensive to establish.
  2. Filing business income (your profits and/or drawings) is done on one line of your personal income tax return.
  3. If your business doesn’t do so well, it lowers your overall personal income, which in turn puts you into a lower tax bracket.
  4. All decisions are made you and you alone.
  5. Depending on the type of business you will be running, the startup capital may be minimal.

What are the con’s to having one?

  1. By law, your business is just an extension of yourself, which means that you are personally on the hook if things go south.
  2. The income you earn is considered taxable income, so if the business has high profits, this could push you into a higher tax bracket.
  3. All of the decision-making rests on you, and you will often be wearing every “hat” (i.e product development, accounting, marketing, sales, custodial, etc.), which can be daunting and exhausting.
  4. If you are suddenly unavailable (i.e. sick or away) or otherwise incapacitated, your business cannot continue without you.
  5. It can be difficult to attract potential investors if it is only you and no other backers/people with vested interests.

Partnership

What is it?

According to the Canada Business Network (CBN) and Canada Revenue Agency (CRA), A partnership is a non-incorporated business that is created between two or more people.

In a partnership, your financial resources and those of your partner(s) are combined, and then invested into the business. How you split the investment, profits, decision-making and ownership is dependant on the legal agreement that is recommended to be in place.

There are three different types of partnerships: General Partnerships (each partner is equal in sharing profits and liabilities); Limited Partnerships (where a person can invest/contribute to the business, but they are only liable to the business and creditors for the amount that they invest and are not involved with the day-to-day management), and; Limited Liability Partnerships (In Canada, a limited liability partnership is only available to specific groups of professionals, such as lawyers, accountants, and doctors, and these agreements are governed by specific provincial laws).

How do I start one?

  1. Register & determine the availability of your desired business name (see Registering Your Business and Its Name in Canada for more info).
  2. Register for the necessary permits, licenses and taxes your business needs (varies by province and municipality).
  3. Complete a partnership agreement (I very much advise this).
    • This agreement includes, at a minimum: the business name & description, the effective date of the agreement, the names/addresses of all partners/involved parties, the duties and responsibilities of each partner, the extent to which each partner will be involved in the business, how the partners will make business decisions, and how/when the partnership can be dissolved.
    • Other items that can be discussed in the agreement include (but are not limited to): capital contributions required by partners, the method of profit distribution, ownership of partnership assets, transfers of partner interests, admission of new partners, bankruptcy, incapacitation or death of a partner, insurance, dispute resolution, confidentiality, accounting methods and partnership records, banking arrangements, signing authority for cheques, leases, other documents, and auditor or accountant of partnership.
  4. Open up a separate bank account for your business transactions (including separate business cheques, debit card and credit card).
    • Make sure that you get all of the business’ signing authorities to sign off on and approve the opening of this account and all of its transactions to make ensure accountability.
  5. Start operating your business!

What are the pro’s to having one?

  1. It is fairly inexpensive and easy to establish a partnership.
  2. A partnership can sign contracts and borrow money, which can lessen a bit of the liability placed on the individual partners.
  3. Start-up costs are incurred by multiple people, which eases the individual burden.
  4. Equal share in management responsibilities, profits, and assets.
  5. If profit is low or if there is a loss, then that can lead to lower net incomes to report on you and your partners tax returns.

What are the con’s to having one?

  1. By law, your business is just an extension of yourself and your partners, which means that you are personally on the hook if things go south.
  2. Depending on the type of partnership, and what is laid out in the agreement, there is still unlimited liability (which means that creditors can still come after your personal assets to pay off debts).
  3. Finding a suitable partner can be sometimes difficult.
  4. There is the potential for conflict between partners (which is why it is crucial to discuss this in the agreement).
  5. Depending on the partnership, you are still on the hook for any and all decisions made by your partners (i.e. broken contracts, bad debts, etc.).

Corporations

What is it?

A corporation (which can be created at either the federal or provincial level), is a legal entity that is separate from its shareholders (yourself and other investors). As a legal entity, it is responsibly for bearing the responsibility for its debts, obligations, and actions.

How do I start one?

  1. Select a Corporate Jurisdiction, which will determine if you will operate in a specific province (register with that province) or nationally (register with the federal government).
  2. Select a Corporate Name and determine its availability.
    • Check with your Corporate Jurisdiction on regulations for choosing a name. In general, they need to be different from that of already existing businesses and trademarks, can be in one language or officially bilingual (English and French), and end with a legal element of either Limited (Ltd.), Incorporated (Inc.), Corporation (Corp.), Limitée (Ltée.), or Incorporée (Inc.)
  3. Complete the Articles of Incorporation and file/register it with the appropriate government agency.
  4. Purchase a Corporate Seal and Minute Book, which involved keeping certain corporate records (i.e. the Articles of Incorporation, all corporate bylaws, shareholder meeting minutes, directors meeting minutes, resolutions from each, a list of the directors, a list of securities, transfer agreement registries, shareholder agreements, and all forms filed with the government).
  5. Complete, establish and publish By-Laws, organizational minutes, and issue shares.
  6. Obtain all other necessary permits and licences needed to operate the business.
  7. Open up a separate bank account for the corporation’s transactions (including separate cheques, debit card and credit card).
    • Make sure that you get all of the business’ signing authorities to sign off on and approve the opening of this account and all of its transactions to make ensure accountability.
  8. Start operating your business!

What are the pro’s to having one?

  1.  Limited liability for shareholders (which is you and the other people you are working with).
  2. It is a completely separate legal entity.
  3. Ownership is transferable, so a corporation can exist long after the original shareholders have either moved on, become incapacitated or died.
  4. It is easier to raise capital as a corporation, as there are more signs of longevity and stability.
  5. Taxes may be lower for an incorporated business, and you only claim the wages/salary drawn and income from shares on your personal income tax.

What are the con’s to having one?

  1. Very highly regulated.
  2. It is incredibly expensive to set up and register.
  3. There is a legal requirement for an extensive amount of corporate records, many of which need to be documented and filed annually with the government.
  4. There may be a need to prove the validity/existence of bona-fide directors to ensure that they are not mere placeholders.
  5. There is the possibility of conflict between shareholders (part owners) and directors (those that make the decisions on behalf of the corporation).

Co-operative

What is it?

A Co-operative is owned and controlled by its members. There is no distinction between a director and a shareholder, as they are one and the same. It can established as a non-profit or for-profit organization, depending on the desire of the members. This is the least common type of business in Canada, although sometimes different individuals and/or businesses can come together to pool their resources and provide easier access to their common needs (i.e. delivery and sales of products and/or services).

How do I start one?

  1. Assemble a group of interested people and identify the need of the co-op.
    • Needs can include: instability of work, unavailability of certain products and services, and better working conditions through shared enterprise.
  2. Identify what professional help is needed to launch (i.e. a co-operative developer, feasibility consultant, expert advisors, financial and legal consultants, etc.).
  3.  Conduct a pre-feasibility study.
  4. Hold an organizing meeting.
  5. Conduct a viability study.
  6. Organize the association.
  7. Plan out the operation of the enterprise.
  8. Plan and organize startup financing and cover all bases of the legal aspects of the enterprises operations.
  9. Recruit and train staff.
  10. Hold the first General Meeting with the members.

What are the pro’s to having one?

  1. It is owned and controlled by the members.
  2. All members have an equal share and all decisions are made democratically.
  3. There is limited liability for the members against the enterprises debts, obligations, and actions.
  4. Profit generated by the Co-operative is evenly distributed amongst its members.
  5. Being in a Co-operative can mean improved market access for the individuals and/or businesses involved.

What are the con’s to having one?

  1. Because all decisions need to be made by all members, the decision-making process can be drawn out and lengthy.
  2. All members must participate in order for the enterprise to succeed, which can be difficult if some only participate half-heartedly.
  3. There is the potential for conflict between members.
  4. Same as a corporation, there is a need for extensive record-keeping, as there is a need for all members to be kept abreast of all of the goings-on, finances, and legal obligations that the Co-operative is faced with.
  5. Due to the equal profit-sharing, there is less incentive for members to make additional capital or non-financial investments than their colleagues.

It is important to note that it is possible for businesses to change their type over the course of its existence (always consult with a lawyer who specializes in this area before making this decision). Many large corporations nowadays have their roots in sole proprietorship and partnerships, including: Apple (which has been all of the common three during its existence, which started with Steve Wozniak building his first computer), Amazon (started by Jeff Bezos in his garage), and Google (which started out as a partnership between Larry Page and Sergey Brin).

I hope this helps you with deciding what type of business you will have, and has given you some insight into how your business can adapt and evolve over the years from one type to the next if you so desire! I know it’s got the wheels turning about in my head for sure!