There’s so much to do to start a new business: decide what you’ll sell, who is likely to buy it and how you’ll price and deliver it. Another item to add to your to-do list? Reviewing the types of business structures available and choosing the one that makes sense for your business.
There are four main types of business structures. Each has an impact on your tax rate and annual paperwork.
And then there are the areas you may not want to think about, such as personal liability if the business fails or is sued. This should also figure into your choice of business structure.
The 4 most popular types of business in Canada
Most Canadians choose one of these four business structures.
- Sole proprietorship.
- Partnership.
- Corporation.
- Cooperative.
Keep in mind that your first choice isn’t permanent. You can change structures as your business grows and your needs change.
It’s not real until it’s legal
Selecting a business type is one of the first steps you’ll take toward lifting your business off the ground. Seeking legal counsel is a good idea, as lawyers can brief you on the pros and cons of each structure and help you choose one that is appropriate for the type of business you wish to start.
Now let’s take a look at the different types of business and dive into the pros and cons of each.
1. Sole proprietorship
This is the least complicated type of business. Simply put, you’re the one at the helm, the captain steering the ship. It’s you and only you.
Pros
- You’re 100% in charge of your business.
- The profits are all yours — enjoy!
- It’s inexpensive to register your business.
- There are tax advantages for the business during hard times. For example, when profits slip, you may qualify to enter into a lower tax bracket.
Cons
- If the business doesn’t do well, you feel the hit (professionally and personally).
- If debt strikes, your personal assets can be targeted to pay it off.
- Raising capital on your own isn’t easy.
- If your business becomes extremely profitable, it could put you in a higher personal tax bracket.
As the sole proprietor, you’re the face of the company. This is where your professional and personal reputations collide. This can be seen as both a pro and a con, as it may be difficult to set boundaries and avoid burnout if every social event becomes a networking opportunity.
Related: The 2019 small business tax changes you need to know about
2. Partnership
In a partnership, you have support from two or more people who believe in what you’re doing and are working just as hard as you are to make the venture a success.
Pros
- You and your partner(s) contribute financial resources. It’s a shared responsibility.
- Profits and assets are equally shared.
- Managerial responsibilities are split.
- There’s a tax advantage if the business loses money. Partnership shares can be included on your individual tax return.
Cons
- You and your partner(s) are liable for the business. Your personal assets can be seized to pay off debts.
- Business decisions have to be worked out with your partner(s). Any differences in opinion could slow the growth of your business if the decision-making process turns turbulent.
- If one or more partner(s) go rogue and break contracts/agreements, all partners are financially responsible.
3. Corporation
If you incorporate your business, you’re creating a buffer between the business and your personal assets. You should definitely seek legal counsel if you’re contemplating this route.
Pros
- Unlike sole proprietorship and partnerships, your personal liability is limited.
- You can transfer ownership so the business you started can continue without you.
- Raising startup funding is easier.
- Possible decrease in taxes.
Cons
- Corporations are closely regulated and record-keeping is paramount, as you will have to file documents annually.
- Conflict could occur between various stakeholders.
- When compared to other types of business, it can be expensive to establish a corporation.
Wondering about how corporations are taxed? Read the Corporate Tax Canada Guide for details about preparing and filing your taxes.
Related: Creating a business succession plan
4. Cooperative
A cooperative is a different type of animal altogether.
Take Mountain Equipment Co-operative for example. As explained on their website, “Everyone who shops here is a member and an owner, and our business structure is designed around values, not profit.”
Pros
- Owned and operated by its members.
- Profit is evenly distributed.
- Every member has a vote.
- Liability is limited.
Cons
- It’s collaborative and the decision-making process is thorough.
- Differences of opinion can delay growth.
- Arduous record-keeping is required.
A cooperative begins with like-minded people who share the same objective. Here’s a 10-step guide on how to launch your cooperative.
Then there are the hybrids
Toronto’s Carrot Common is a welcome anomaly. It’s a community-minded corporation and a partnership.
According to its website, “Carrot Common is a demonstration of how different types of partners can successfully create a project that can have community development as one of its major goals, and at the same time build a successful business venture and promote organic foods.”
So don’t feel limited by the traditional options; make your business structure suit your vision. Just be sure to consult with a lawyer before you open your doors.
Types of business: recap
There four main types of business: sole proprietorship, partnership, corporation and cooperative.
A few tips on finding the right one for you:
- Seek legal counsel early on to make sure you understand the legal issues of your chosen business structure.
- Become a part of a Canadian Chamber of Commerce to network and learn firsthand what advantages and challenges certain types of business have.
If the types of business listed here don’t fit your framework, look at businesses that have taken different routes to achieve their desired goals. Keep in mind that anything is possible and tomorrow is a new day!
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