Having a great business idea is one thing; taking it from a plan on paper to a living, breathing entity is not as straightforward as it may seem. A lot of thought and effort need to go into planning and starting a business, and it’s extremely difficult to know how every decision you need to make can affect you and your business years down the road – especially if those decisions require knowledge and foresight that weren’t part of your training, education or experience.
You must choose a business structure, for example, when registering a business in Canada with the CRA. The structure you choose has an immediate and continuing effect on how you pay taxes and how much you pay. This decision alone could end up costing you thousands of dollars unnecessarily in a matter of a few years.
If you’re starting a new business, consult the experts at Taxpage.com. With their guidance, they’ll help you choose the right structure, and tax plan specifically for your business needs to save it the vital resources it needs at startup.
Here is some basic information on the three main business structures that are registered in Canada, with a brief description of each.
Registering Your Business
These are the three main business structure options for setting up and registering your business with the CRA. Each has its own legal and financial advantages and disadvantages:
- Sole proprietorship
There are several factors that can influence your decision on which structure to choose, including the type of business you’re in, your personal financial situation and how you run your business are just a few of the factors that should be considered as part of your decision.
A Brief Outline on the Benefits and Downsides of Each Business Structure
These are some of the advantages and disadvantages of each business structure:
A sole proprietorship is the most straightforward business structure and the easiest business to register with the CRA. It also requires minimal bookkeeping and registration fees at startup. Unfortunately, a sole proprietorship doesn’t provide any legal separation between you and your business. In other words, if your business is involved in a lawsuit, you could be personally liable for debts and judgements made against the business.
Other disadvantages include that it can sometimes be harder to get investments in your business as a sole proprietorship, you pay more in taxes, and those taxes will increase if/when your business starts becoming successful.
A partnership is a business shared by two or more people. It’s also relatively easy to set up and register. Partnerships allow the owners to share their resources and financial obligations. Similar to a sole proprietorship, a partnership doesn’t file its own taxes; each partner files reports their return to the CRA individually.
Disadvantages of operating a business as a partnership include:
- As with sole proprietorships, partnerships don’t protect the partners from personal liability.
- Each partner’s personal tax rate increases when the business becomes successful.
- Disagreements between partners can create financial chaos for the business.
- Most significantly, each partner is fully liable for all debts and expenses of the partnership
Of the three structures, incorporating a business with the CRA is the most complicated to complete. A corporation, however, offers the most legal and financial protection to its owner(s) because it is a completely separate entity on its own. Tax rates for corporations are also lower than they are for sole proprietorships and partnerships.
On the flip side, however, business losses by a corporation apply only to the business and can’t be used to reduce personal income tax obligations like they can for sole proprietorships and partnerships