There are a variety of business structures available to businesses operating in Canada, including sole proprietorships, partnerships, cooperatives and corporations. The majority of businesses in Canada are operated either as a sole proprietorship or through a corporation.
A sole proprietorship is the simplest structure under which one can operate a business. In a sole proprietorship, there is there is no legal distinction between the owner and the business. The advantage of sole proprietorships is that there are little to no set-up or operating costs, and minimal ongoing regulatory requirements. However, the owner of a sole proprietorship is personally liable for all debts and liabilities incurred by the business, including obligations to customers, suppliers and employees, liabilities stemming from warranties and product liability claims, and debts owing to lenders and other creditors. In addition, it can be difficult for a business that operates as a sole proprietorship to obtain financing or attract outside investors.
In contrast, a corporation is considered a separate legal entity from its owners (i.e., its shareholders) and provides limited liability protection. Except for certain limited exceptions, the shareholders of a corporation will not be liable for any act, default, obligation or liability of the corporation in their capacity as shareholders. In the event the corporation becomes bankrupt or insolvent, the creditors of the corporation will typically not have recourse against the shareholders or their personal assets.
In addition to limited liability protection, corporations offer several additional benefits, including:
- Corporations are taxed separately from their shareholders and may be subject to lower tax rates.
- Corporations may offer certain tax planning options not otherwise available to individuals or other business structures.
- Shareholders of a corporation may be able to take advantage of the lifetime capital gains exemption upon the sale of the corporation. The lifetime capital gains exemption is available to individuals who realize gains on the shares of a qualified small business corporation. The available lifetime capital gains exemption for 2017 is $835,716.
- Corporations typically are able to more easily raise capital from investors or obtain financing from lenders than sole proprietorships or other business structures. In addition, investment in the corporation can be structured to limit investors’ role in the management and operation of the business.
- Corporations may have better access to government grants and programmes.
- Corporations may choose a financial year other than the calendar year.
The cost of incorporating and administering a corporation will depend on the corporate structure, the jurisdiction of incorporation, the jurisdiction(s) in which corporation operates and nature of the business of the corporation. In addition, corporations are required to maintain certain records, make certain corporate and regulatory filings (typically on an annual basis), and prepare and file corporate income tax returns. The costs and administrative requirements of incorporating and administering a corporation, however, do not typically outweigh the significant advantages offered by incorporation.
If you have any questions about the benefits of incorporation, please do not hesitate to contact us. We would be pleased to discuss whether incorporation is right for your business and answer any other questions you may have regarding the incorporation process.