Business Structures
Business Structures
In Canada, several business structures are available, each with their own pros and cons. Here are the most common:
It's important to consider the unique implications of each business structure before making a decision. Seeking professional advice from lawyers and accountants is recommended to ensure the chosen structure aligns with your specific needs and objectives.
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Definition: An unincorporated business owned and operated by a single individual.
Pros:
Simple and inexpensive setup
Full control and decision-making
Direct access to profits
Cons:
Unlimited personal liability
Difficulty in raising external funding
Limited continuity
Limited payment flow (via payroll)
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Definition: A business structure where two or more individuals or entities share ownership and profits.
Pros:
Shared management and resources
Easy to set up
Income flows to personal tax returns
Cons:
Unlimited personal liability
Potential for disputes
Impact of partner departure on continuity
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Definition: A separate legal entity from its owners, offering limited liability and potential tax benefits.
Pros:
Limited liability protection
Ability to raise funds through shares
Credibility and growth
Multiple payment flows (eg. payroll, dividends, loans)
Cons:
Complex and costly setup and maintenance
Stricter regulatory requirements
Double taxation
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Definition: An association of individuals or businesses working together to meet common needs.
Pros:
Democratic control and decision-making
Shared risks and benefits
Access to grants and funding
Cons:
Complex to establish and operate
Potential conflicts in decision-making
Limited transferability
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Definition: A partnership structure that provides limited liability protection to partners.
Pros:
Limited liability for partners
Flexibility in management and profit sharing
Personal asset protection
Cons:
Required professional liability insurance
Varying registration and regulatory requirements
Potential disputes among partners
Liability for own negligence or misconduct
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Corporation - Recommended Business Structure
This is the most optimal business structure which unlocks access to inter-corporate dividends taxed at 0%.
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Setup an operating company (1) where the daily transactions of your business are managed.
Then setup a Holding company (2) which is a shareholder of the operating company (1). From here, you can transact tax-free dividends from your earnings (1) into your Holding (2).Continue to pay yourself a payroll through your operating company (1) to take advantage of corporate tax benefits from payroll deductions, and pay yourself in dividends to your Holding company (2) which will be subject to less taxes than paying yourself directly in dividends.
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To setup a corporation, you should consider a minimum of $1,000 setup fees for incorporating documents, legal fees and accounting.
The rule of thumb is between $150K-200K in revenues, once you hit this mark it is advised to to set up a corporation, otherwise, the cost of operating a corporation is tedious and not worth the corporate benefits.
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Once you make over $30K of revenues, you will need to register your sales tax number with the government (GST/HST), this can be done through you as an individual or a corporation.
Do not do this before, otherwise you will be charging avoidable taxes to your customer, and you will be expected to file sales tax to the government.
Learn more about payment mechanisms and tax-efficiency strategies.
