The notion that every business begins with a great idea can inspire the entrepreneurial spirit in just about anyone, but it doesn’t quite capture the full story.
To transform your idea into an actual company, you’ll need to register your business.
Other critical details about how your business will operate
This content should not be construed as legal or tax advice. Always consult a lawyer, accountant or tax professional regarding your specific legal or tax situation.
Choosing a business structure
The three most common types of business you can register in Canada are:
Sole proprietorship
Incorporation
General partnership
The type of structure you choose will determine business ownership, liability and taxation.
If you run your own business as an individual and work for yourself, you can set up a sole proprietorship.
Under thisstructure, you keep all your business’s profits after you’ve paid tax on them.
The main thing to note about setting up sole proprietorship is that you are personally responsible for any losses your business makes.
Ownership: One person
Owner liability: Full personal liability
Taxes: You will have to file a personal tax return every year.
Pros:
The setup process is simpler than with a corporation.
It costs less to set up sole proprietorship than a corporation.
All business profits come directly to you.
You answer to no one when it comes to making business decisions.
Cons:
You are liable for all company debts, so if you get into hot water, your personal finances can be at risk.
You have to renew your registration every five years.
Your business name is not protected.
Incorporation
The main difference between a corporation and a sole proprietor is that when you run your business as a corporation, it’s seen as a separate entity to you and/or the people who run it.
Your personal finances are protected if your business goes bankrupt.
Once you’re sure incorporation is the business structure for you, you’ll need to decide between provincial and federal incorporation.
Provincial incorporation means you can only conduct business in the province you have incorporated in.
Federal incorporation means you can operate across the country, although you’ll often have to incorporate in the main province you plan to operate in, as well.
Ownership: Shareholders
Owner liability: Limited
Taxes: The corporation pays corporate taxes separately from taxes paid by directors and shareholders. A tax return needs to be filed every year.
Pros:
Your personal liability is limited.
You may have better access to funding.
A few more tax perks are available to incorporated companies.
Cons:
It’s much more complex and time consuming to set up as a corporation than a sole proprietor.
It costs more to establish a corporation than it does to set up as a sole proprietor.
Forming a general partnership is the easiest way to establish a business when there is more than one owner or entity involved.
As with sole proprietorship, general partners are liable for any losses incurred by the business.
It’s also possible to set up a limited partnership in which a single general partner has unlimited liability (and a bigger share of the earnings) while the other partner or partners have limited liability, although this isn’t as common a choice.
Ownership: Two or more people or entities
Owner liability: Full personal liability
Taxes: Each partner in the business has to file a personal annual tax return that reflects their share of the general partnership. Each partner must also file a financial statement called a Statement of Business or Professional Activities (or the equivalent in certain industries like farming or fishing).
Pros:
Less paperwork than with a corporation.
Less expensive to set up than a corporation.
You receive all of the profits directly.
Cons:
Some personal liability for losses, depending on whether it’s a general or limited partnership.
With two or more people at the helm, any disagreements can be tricky to resolve.
How to set up as a sole proprietor
This is the easiest and least expensive type of business structure. Many Canadians start out here.
Step 1: Choose a name
As a sole proprietor you don’t legally need to choose a business name, as you can trade under your legal name. However, if you want to run your business under a name that differs in any way from your legal name, you’ll need to register that name as a ‘trade name’ with the province you’ll be operating from.
If you’re operating under your legal name, you generally don’t need to register that name with the province, especially if you’re earning under $30,000 a year. However, as each province has slightly different rules, it’s worth double checking your province’s official websites or consulting an expert for advice.
If you’re operating from Newfoundland or Labrador and these areas only, you don’t need to register your business name at all as a sole proprietor.
Before registering a new business name, you’ll need to make sure your desired name isn’t being used by someone else. You can do this using the Government of Canada's paid-for business names and trademarks search tool, Nuans.
Sole proprietors have to file a T1 income tax and benefit return to the Canada Revenue Agency every year.
At the same time, they have to submit a T2125 Statement of Business of Professional Activities, which will help the CRA calculate your gross income and losses.
Setting up as a corporation
This choice is general more complex and expensive than setting up as a sole proprietor.
Step 1: Choose a name
Before choosing a company name, you’ll need to make sure the one you want isn’t already in use. You can do this using the Government of Canada's business names and trademarks search tool, Nuans.
By this time, you will have decided if you want to incorporate at the federal or provincial level.
Incorporating your business at the federal levels takes three stages, once you have done due diligence with your business name.
Create your articles of association
These articles establish the structure of your corporation. Some businesses choose ‘basic incorporation,’ which is a sort of templated option that simplifies this step.
Other businesses decide to customise these articles to outline specific elements like share structure and business restrictions in more detail.
Establish an office address and first board of directors
You must have a physical address to incorporate in Canada, although it can be your home address. Those who don’t wish to make their home addresses public often opt for a virtual address.
Pay the fee
You can submit your incorporation online at the online filing centre. Incorporation fees start at around $200.
When you incorporate federally, you get step three done for you.
To find out how to incorporate provincially, visit the website of the province you want to incorporate in:
If you want to operate in an extra province or two, you’ll also need to register as an extra-provincial or extra-territorial corporation in those jurisdictions.
Step 3: Get a federal business number and corporation income tax account
Every incorporated company needs a business number and corporation income tax account. You can apply for one of these through the Canada Revenue Agency.
How to set up a general partnership
Setting up an unlimited general partnership is very similar to setting up as a sole proprietor.
Partners need to choose a name and register that name with the province they are in then ensure they are aware of their tax obligations.
Both partners need to file annual personal tax returns.
According to BDC, you can register your general partnership either provincially or federally. In some provinces, you will automatically receive a federal business number, while in others you’ll need to register directly with the federal government. Registrations can be done online.
Generally, if you’re earning more than $30,000 per year, you’ll also need to register for a GST/HST account. And if you hire employees, you’ll need a payroll account, as well.
Extra considerations for all business types
Once you’ve registered your business, you’ll want to double check you have all your other paperwork in order.
Ask yourself:
Do I need any licenses or permits – for example to play music, prepare food, sell alcohol, or trade in a public place? Different provinces have different rules, but the BizPal website will help you search for any permits that apply to you by location and industry.
Will I benefit from joining local business groups? Starting a business is much easier when you know others who are going through the same things. Consider connecting with small business owners in your area — you can share insights about the customers in your community, run cross-business promotions and strengthen your business’ ties to your area.
In addition, look for local resources such as grants or webinars on topics helpful for entrepreneurs. These can give your business a competitive advantage in the form of financial resources or valuable knowledge.
