Sole proprietorship or Corporation - What is the best business structure for you.

Businesses can be registered as Sole proprietorship or Corporation or partnership. Choosing the right business or legal structure is purely dependent upon your present needs.  We have put together a guide below on pros and cons of each business structure so that you can decide for yourself based on your needs.

Sole Proprietorship
You're an individual and the sole owner of the business, but you can employ staff. You're responsible for all decisions and losses in your business, and you report the business income in your personal tax return.

Key Features:

Cost - cheapest structure to set up and run
Setting up process - easy
Owner - you
Responsibility for business decisions - you
Responsibility for losses - you
Report business income - on your individual tax return
Tax rate - you pay your individual tax rate on any business profit
Risk of losing assets - yes
Separate business bank account needed – no

Partnership
Partnership is nothing but a sole proprietorship with more than one owners, called partners. You and your partners carry on a business together and share income, losses, and control of the business. The partnership can employ staff, but the partners in the partnership are not considered employees.

Key features

Cost - low cost to set up and run
Setting up process - relatively easy
Owner - you and your partners
Responsibility for business decisions - you and your partners share
Responsibility for losses - you and your partners share
Report business income - each partner reports their profit share in their personal tax return
Tax rate - all partners pay their individual tax rate on their share of any business profit
Risk of losing assets - yes
Additional administration - if partners' shares aren't equal, a partnership agreement is required
Separate business bank account needed – yes

Corporation
A corporation is a separate legal entity from you, and has at least one shareholder (owner) and one director (who runs the business). Income and losses belong to the company. Companies can employ staff.

Key features

Cost - higher cost to set up and run
Setting up process - more complicated
Owner - shareholders
Responsibility for business decisions - the director(s)
Responsibility for losses - generally, the corporation is responsible
Report business income - on the corporation tax return
Other income - if you're a shareholder you pay your individual tax rate on any share dividends
Tax rate - the corporation pays tax on any profits at the corporation tax rate, which is substantially lower than person tax rates.
Risk of losing personal assets – Risk is very limited to shareholders and directors.
Business Tax file number (TFN) needed - yes
Additional reporting - yes, annual tax returns through a tax accountant and other requirements.
Separate business bank account needed - yes

 

A busines may start as a sole proprietorship and later, when it grows, change to a Corporation. Some other business types are set as a corporation to satisfy its requirement: https://www.canada.ca/en/revenue-agency/services/tax/businesses/small-businesses-self-employed-income/setting-your-business.html#bsnss_strctrs