Entrepreneurs need to know the business structure basics for operating in Canada. Several business structures are available, each with different financial implications that must be considered. Establishing your business as a sole proprietorship, a partnership or a corporation will affect the type of funding you are able to raise, your own personal liability, how the business is taxed, and more.
This article covers sole proprietorships and partnerships. For information on corporations, see Business structures and financial implications: Corporations and holding corporations.
If you start a business on your own without incorporating it, it will be a sole proprietorship and there is little distinction between you and your business.
As the owner and the business in a sole proprietorship are one and the same from a legal perspective, there is no separation or “limited liability” personally from the business’ debts or liabilities. This means that you are personally liable for any obligations which arise from your business’ operations. If the business is sued, you can be forced to use your personal assets, including your home, to settle any debts. The concept of being one entity also means that a sole proprietor only has the ability to raise as much capital as banks or other lenders (including family and friends) are willing to loan the individual.
In terms of tax, the profits (or losses) that your business generates are taxed on your personal tax return, at the same rate of tax that you pay personally. This is beneficial in the early years of a business if it is not yet profitable and you have other sources of income. For example, if the business has losses in a year of $10,000 and you have other income of $60,000, then you will personally only have to pay taxes on $50,000 of net income.
Beyond the need to track your income and expenses, there is minimal financial administrative work involved to structure as a sole proprietorship. However, it is possible that you will have to register for GST/HST and you will also need to register for payroll taxes, if you have employees.
Being in a partnership is similar to having a sole proprietorship in many ways, except that you are now in a contract with, and working with, one or more partners.
As with a sole proprietorship, partners are personally liable for their business’ actions because they co-own the business’ assets and liabilities. As a result, you can be held liable for the actions of your partners, as well as your own. One of the benefits, however, is that you can borrow as much capital as banks and other lenders are willing to lend to you and your partners, collectively.
Again, as with a sole proprietorship, the profits (or losses) that the business (partnership) generates are to be reported by you on your personal tax return and your portion will be taxable to you personally.
Depending on the size and type of the partnership, you may need to produce financial statements, or a partnership return. This tax return will include “slips” for each of the partners that will allocate the income to each of you, based on how you have agreed to split the income in your partnership agreement. As with all forms of business structures, it is possible that you will need to register for GST/HST or payroll taxes.