A small disclaimer: The information we’re sharing with you is not legal advice. We’re simply letting you know about some of the legal implications involved in starting a small business.
Every business needs to be registered, but there are different options depending on how your business is structured (and some rules and options only apply in specific provinces or territories; make sure you do some research on your area’s rules). You can always change the structure of your business later, but this can take up a lot of time and money, so it’s best to choose what suits you right from the beginning.
The main types of business structures are
- Sole proprietorships
- Corporations (LTD, CORP, INC)
A sole proprietorship is the quickest and easiest type of business to set up; it also has the lowest set-up costs. What this means is the business is all yours – you receive all the business profits directly. However, it also means you are personally liable (legally responsible) for the business, so if anything goes wrong, you’re on the hook because you won’t have any separate legal status from your business. It also means you pay personal income tax rates on the net income from your business. The name of your business is also not legally protected. A sole proprietorship is a non-incorporated business structure.
You might decide to start your business with someone else. A partnership means a relationship between two or more people, or other corporations, trusts, or partnerships, where you join up to have a business or to trade together. Each person (or group) involved contributes skills, money, labour, or property to the partnership and shares the profits or losses in the business (usually based on a specific partnership agreement). Legally, like a sole proprietorship, the profits and losses pass to the owners, so each partner is still personally responsible for any debts, lawsuits, etc. You’re also financially responsible for any business decisions made by your partner(s). It’s relatively easy and low cost to form a partnership.
There are different levels of partnerships.
Limited Liability Partnership (LLP)
A corporation is a legal structure that separates a business from its owner/operator. When you incorporate your business, you become a shareholder (as does anyone else who invests in the business), and you’re not personally liable for any of the debts, actions, or obligations of the corporation. Management is, however, responsible to the shareholders of the business. It can be expensive to set up a corporation, and you have to keep very detailed corporate records and must file documentation annually with the government. You might also need to provide proof of citizenship or residency. The advantages are it’s often easier to raise money for a business when it’s a corporation (compared to other business structures), and tax rates can be lower. You’re also not personally liable if anything goes wrong.
You can incorporate your business on a provincial/territorial level or on the federal level. Incorporating on a federal level means you can do business using the same business name in all provinces and territories, though you might still need to register your business in individual provinces/territories, depending on their rules. There are different types of corporations, like private and public corporations, so you’d also need to choose the best type for your situation.