STARTING A BUSINESS

Starting_a_business

When starting a company, it is key to select a legal structure that works for your business.

This is done based on tax law considerations and other factors you as a business owner may find important. There are three types of legal structures for a business: Sole proprietorship, partnership (which is a form of proprietorship) and incorporation.

The Canada Revenue Agency defines a business as an activity that you intend to carry on for profit and there is evidence to support that intention. A business includes:

  • a profession
  • a calling
  • a trade
  • a manufacture
  • an undertaking of any kind
  • an adventure or concern in the nature of trade.

Sole Propriotership

A sole proprietorship is the most common structure available to a business owner. The individual is the business and is not incorporated. Personal liability for a sole proprietor is unlimited.

A sole proprietor receives all of the benefits which flow from the business. A Canadian sole proprietor cannot be employed by the business, although the business can employ others.

A sole proprietor includes any income from the business as direct income on his/her income tax return.

Partnership

A Partnership is very similar to a Sole Proprietorship. The one exception is that it involves two or more people carrying on business together. Depending on the partnership agreement, the partners can hold an equal stake in the business.

A partnership is an association or relationship between two or more individuals, corporations, trusts, or partnerships that join together to carry on a trade or business. Each partner contributes money, labour,

property, or skills to the partnership. In return, each partner is entitled to a share of the profits or losses in the business. The business profits (or losses) are usually divided among the partners based on the partnership agreement. Like a sole proprietorship, a partnership is easy to form. In fact, a simple verbal agreement is enough to form a partnership. The partnership is bound by the actions of any member of the partnership, as long as these are within the usual scope of the operations.

The relevant legislation can be found here:

Partnerships Act, RSO 1990, c. P.5 – Ontario

https://www.ontario.ca/laws/statute/90p05

Limited Partnerships Act, RSO 1990, c L.16

https://www.canlii.org/en/on/laws/stat/rso-1990-c-l16/latest/rso-1990-c-l16.html

A partnership by itself does not pay income tax on its operating results and does not file an annual income tax return. Instead, each partner includes a share of the partnership income (or loss) on a personal, corporate, or trust income tax return.

Incorporation

There are two types of incorporation in Canada; provincial and federal incorporation.

Some of the benefits of incorporation are:

  • Limited liability: potential loss limited to amount invested in the corporation.
  • Perpetual existence: corporation continues on after the death of the individual.
  • Tax advantages: accountants will recommend incorporation once revenues reach a certain point.
  • Raising capital: corporate form of business organization easier to raise capital through the sale of shares.

Depending on your business, an individual may wish to incorporate provincially or federally.

Federal incorporation of your business gives you the right to do business all across Canada under the same business name. This applies even if another company is using a similar name in another province.

Under provincial incorporation, you can only operate your business in that province and have no name protection outside that particular province.

From a tax perspective, a corporation must file a corporation income tax return (T2) within six months of the end of every tax year, even if it does not owe taxes. It also has to attach complete financial statements and the necessary schedules to the T2 return. A corporation usually pays its taxes in monthly instalments.

The relevant legislation can be found here:

Canada Business Corporations Act (federal)

http://laws-lois.justice.gc.ca/eng/acts/C-44/

Business Corporations Act, R.S.O. 1990, c. B.16

https://www.ontario.ca/laws/statute/90b16

Corporations Act, R.S.O. 1990, c. C.38

https://www.ontario.ca/laws/statute/90c38

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