Choose the Right Type of Business Structure

Legal Business Structure Matters, So Choose Carefully

Starting a business involves making many decisions, and how you structure your business is one of the most important decisions you can make.

That’s because the structure you choose will impact how you’re taxed, your ability to raise money, whether you will have personal liability for business debt and more. For these reasons, it’s a good idea to talk with a lawyer, accountant or professional advisor before finalizing your decision.

Explore the pros and cons of the four main business structures and see why it’s important to make your new business official.

Content in this Article

Sole proprietorship
Partnership
Corporation
Co-operative
Compare business structures
Why you should register or incorporate

Sole proprietorship

If you want a simple and straightforward business structure, consider a sole proprietorship. You will own 100% of the business and can choose to operate under your own name, register a business name—or both. This structure is the easiest to set up.

Pros

Freedom to make all the business decisions
Low cost and easy to form
All profits earned belong to you
Can deduct losses/expenses from personal income
Can evolve into a partnership or corporation later

Cons

All the responsibilites and decisions fall on you
Unlimited liability—personal assets must be used to pay off business debts
Some investors require a business to be incorporated before lending money

Partnership

Have someone in mind you’d like to work with? Or maybe you’re great at your craft but need help running the business? That’s where a partnership comes in. It’s a type of business structure where you and one or more partners share responsibility and make business decisions together.

Pros

Partners bring unique skillsets and support
Fairly inexpensive to form
Profits and assets are shared among partners
If the business loses money, each partner can claim a share of the loss on their individual tax returns
Can evolve into a corporation later

Cons

Finding the right partner can be difficult
Each partner is financially responsible for the other partner’s business decisions
Unlimited liability—personal assets must be used to pay off business debts
Potential for conflict between partners

Corporation

If you want to protect your personal assets, expect your business to grow over time, or you plan to raise money, a corporation may be the ideal choice. Corporations are separate legal entities, which means your personal assets and the corporation’s assets are separate. It’s set up formally with a certain number of shares (which you determine). You and others are then allocated a percentage of these shares, which indicates the ownership structure of the corporation. You can get a salary (and maybe a dividend) from a corporation.

Pros

Personal assets and corporate assets are separate, protecting you personally from the company’s debt
A corporation can live on if you leave or sell the business
Portions of the company can be sold to raise money
Provides credibility and it’s easier to secure financing
Additional expertise and insight from shareholders

Cons

Regulated, with corporate records required
Possible conflict between shareholders and directors

Incorporate Your Business Using Ownr

Co-operative

A co-operative (also called a co-op) is a unique structure controlled by an association of members. The primary goal of a co-operative is typically to meet members’ common needs—not maximize profits. Often used by non-profits, it’s not a common way to structure a business, but it can work well if a group of individuals or businesses wants to pool resources.

Pros

Limited liability, the same as a corporation
Profits are distributed among the members
Democratically controlled

Cons

All members have equal control, which means making decisions can be time-consuming

Compare Types of Businesses

Responsive Table Example
	Sole proprietorship	Partnership	Corporation	Co-operative
Ownership	You own 100% of the business	Two or more people own the business	The business is a separate legal entity	The business is controlled by an association of members
Cost to Form	Relatively low	Depends; cost can be split with partners	More expensive than sole proprietorship or partnership	It depends
Limited Personal Liability	No	No	Yes	Yes
Tax Advantages	Simple tax structure Ability to deduct losses and expenses from personal income	Any shared losses can be included on your individual tax returns	Lower corporate tax rate May be eligible for tax and grant programs	Depends on how profits are shared
Transferable Ownership	No	No	Yes	Yes, with permission from board
Able to Hire Employees	Yes	Yes	Yes	Yes
Able to Issue Shares	No	No	Yes	Yes
Business Account Required	Yes	Yes	Yes	Yes

Why You Should Register or Incorporate

Making your business official by registering or incorporating your company shows that you are a serious business owner. In fact, it’s legally required if you choose a corporation as your business structure or you plan to operate a sole proprietorship under something other than your own name. In addition, if you think your business will earn over $30,000 in revenue each year, the law states that you must register or incorporate—and also register for GST/HST.

5 Benefits of Registering Your Business

5 Things to Consider When Incorporating Your Business

Register your business with Ownr. From sole proprietorships to complete incorporations, Ownr has the tools and resources you need to start and manage your business.

Business Structure FAQs

What is a business structure?

A business structure is the legal structure of your business or company, which helps define day-to-day operations, taxes, liability and more. In Canada, there are four main types: sole proprietorship, partnership, corporation and co-operative.

What’s the difference: sole proprietorship vs. corporation?

A sole proprietorship is a simple registered business where there’s only one owner. A corporation is its own formal legal entity that’s separate from its shareholders. There are more rules and regulations for corporations, and they may have more tax advantages.

Can I change my business structure later?

Typically, yes, but you will likely need to register for new business numbers and Canada Revenue Agency (CRA) accounts. Sole proprietorships can become partnerships if the number of owners changes. Both sole proprietorships and partnerships can evolve to become corporations. It’s a bit more complicated for corporations to change legal status.

How do I register a sole proprietorship?

The steps to registering a sole proprietorship vary based on your location. If your business will be located in Ontario, Quebec, Alberta or British Columbia, you can register with Ownr in minutes. You can also visit Canada.ca to see what’s required for your province or territory.

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This information is not to be taken as legal advice and RBC is not responsible for any actions taken.

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