Tax Advantages and Disadvantages of Different Business Structures in Canada

Business Structures in Canada

If you decide to start your own business in Canada, you need to decide which kind of business structure is best suited to your needs.

Different business structures offer unique advantages and limitations that you should be aware of.

There are 4 types of business structures, each with their own tax structures:

  1. Sole Proprietorship
  2. Partnership,
  3. Corporation
  4. Co-operative.

Below is a description of each business type and some of the benefits and potential drawbacks.

1. Sole Proprietorship

With a sole proprietorship business, you are the sole owner and wholly responsible for all debts, obligations, and taxes related to your business.

Many self-employed tradespersons, contractors and farmers operate as a sole proprietorship.

Because you are the sole owner, you keep all the profits and you are also personally liable for the business.  

There are advantages and some downsides to running a sole proprietorship. On the plus side, it’s easy and inexpensive to register and you have total control over all decision making.

There are also some tax advantages if the business is not doing well, such as deducting losses for your personal income and a lower tax bracket if profits are low.

On the other hand, with a sole proprietorship, there is unlimited liability; if the business has debts, claims can be made against your personal assets to pay them off.

Income is also taxable at the personal rate; if the business is profitable, it could put you in a higher tax bracket.

2. Business Partnership

The Canada Revenue Agency considers a business partnership to be a non-incorporated business that is created between two or more people.

Each partner contributes to the business, whether that takes the form of money, labour, skills, or property. Because each partner contributes, they all share in the profits and losses of the company.

In a general partnership, all partners are liable for the debts of the partnership.

In a limited partnership, a person can be part of the business without being involved in its operations. Limited partnerships tend to be restricted to a group of professionals including accountants, doctors, and lawyers.

A business partnership has many advantages: it is easy and inexpensive to form, start-up costs are shared with the partners, and there is an equal share in the profits and assets.

When it comes to taxes, a partnership does not pay income tax and does not file an income tax return. Instead, each partner files an individual income tax return to report their agreed-upon share of the partnership’s profits or losses.

There are also some important items to be mindful of if you’re considering a business partnership. There is no legal difference between you and your business; unlimited liability means personal assets from all partners can be used to pay off business debts. You are also financially responsible for any business decisions made by your partners.

3. Corporation

A corporation is another type of business structure. Incorporation is a form of business authorized by federal, provincial, or territorial law that allows the business to operate as an entity separate from its shareholders.

Shareholders of a corporation are not personally liable for debts or other obligations or acts of the corporation.

Incorporations are ideal for businesses looking to operate in one or more provinces. In addition to limited liabilities, incorporated businesses might also enjoy lower tax rates when compared to partnerships and sole proprietorships.

Despite all the positives, there are some things to consider if you want your business to be incorporated.

It’s more expensive to set up a corporation. On top of that, extensive corporate record keeping is required, including documentation filed annually with the Canadian government.

4. Cooperative

A cooperative is owned and controlled by an association or group of members and can be set up as a not-for-profit or for-profit organization.

While a cooperative is the least-common business type in Canada, it is a good model for groups (people or businesses) that decide to pool their resources and provide access to common necessities.

Cooperatives operate in a wide variety of sectors, including agriculture, food, social services, retail and wholesale, energy, recreational services, and finance.

Cooperatives are owned and controlled by their members, who each have one vote. There is limited liability with a cooperative and equal profit distribution.

Like all business types, there are taxation regulations that need to be followed, including paying GST/HST on taxable goods and services.

The Canada Revenue Agency considers a cooperative that is a legally incorporated business to be a corporation for income tax purposes and for GST/HST.

Connect with your Local Tax Consultant to learn more

FBC, Helping Small Business Owners File Their Tax Returns

As a business owner, it’s important to understand the differences between a sole proprietorship, partnership, corporation, and co-operative. Each one has its benefits and limitations, and the type of structure you choose could have big implications for how you operate your business and pay your business taxes. That’s why it’s important that you talk to the tax professionals at FBC.

FBC has worked with small business owners since 1952. Over the last 65 years, we have helped tens of thousands of clients from coast-to-coast with their business planning, tax preparation, and financial planning.

The tax professionals at FBC also understand that your tax and business needs are unique. That’s why FBC is the only firm in Canada to offer integrated tax services on a year-round Membership basis.

For a fixed fee, Members get access to our tax planning, tax preparation, consultation, bookkeeping, and financial planning services. FBC also provides all new Members with a review of their previous three years’ tax returns.

For more information on FBC and the services we offer, call us today at 1-800-265-1002 or submit an online form and an FBC tax specialist will contact you at your earliest convenience.

"Being with FBC for 20 years I enjoy peace of mind from the service and knowledge provided by the local tax consultants."
- Walter Duyvestyn, Sunderland, ON