Business Structures

Sole proprietorship

A sole proprietorship is a business owned by an individual, where the owner works for themselves rather than being employed by a company. In this setup, the individual takes on all the legal and financial responsibilities for the business. While a sole proprietor can be a freelancer managing a one-person show, they also have the flexibility to subcontract or hire other people.

A sole proprietorship is one of the three common ways to organize a business, alongside general partnership and incorporation. Each of these structures comes with its own set of operational, accounting, tax, and legal requirements.

Sole proprietorships are popular among new businesses due to their informal and easily created nature. However, there's a catch – the proprietor is personally liable for all aspects and debts of the business. As a sole proprietor, the owner takes on personal responsibility for any issues, while in a corporation, the company itself bears the legal responsibility, with some exceptions.

• Does not exist as a separate legal entity. 

• Owner has total control.

• Profits are paid to the owner.

• The owner is responsible for all debt

Partnership

A general partnership is formed by two or more owners, serving as the default business structure for multiple owners, much like a sole proprietorship is the default choice for solo entrepreneurs.

The participants in a general partnership can be individuals or corporations, or a mix of both. Creating a general partnership is straightforward and cost-effective, with no formal documents required. The essentials include a registered trade name, a tax number for tax obligations, and a designated bank account.

At the start, it's crucial for partners to clarify their respective roles, ownership shares, capital contributions, as well as establish guidelines for profit distribution and operational procedures within the business. This initial planning helps set the foundation for a smooth and well-defined partnership.

• Does not exist as a separate legal entity

• Each partner is liable for all assets and liabilities of the partnership.

• Profit is divided according to a partnership agreement.

• It’s important to have a Partnership agreement in place as it’s this that determines the control of the business

Corporation

Incorporation is the process of establishing a distinct legal entity owned by its shareholders.

This formalization creates defined ownership shares, introducing a legal and tax separation between the company and its shareholders. This setup provides tax benefits, as owners typically receive salaries as employees of the corporation.

Incorporation also offers some protection for the company's name and limited liability for its debts. While officers and shareholders may change, the corporation persists until it undergoes dissolution.

Typically, incorporation occurs under a charter in the operator's home province. However, for companies operating across multiple provinces or internationally, or those seeking enhanced credibility, federal incorporation is an option, albeit more complex and expensive.

Corporations are obligated to maintain detailed records and annually report their financial status to authorities, necessitating the auditing of financial statements by a chartered accountant.

• Corporation is treated as a separate legal entity from its owner. 

• Corporation = shareholder ownership controls the business.

• Owners can collect dividends or be paid on payroll.

• Debt & Assets are owned by the corporation.