Entrepreneurs starting and operating a business in Canada are faced with the choice of how they want to legally structure their business. There are four main options available to Canadian entrepreneurs: sole proprietorships, partnerships, corporations, and co-operatives. While each option has its advantages and disadvantages, this article will focus on comparing the two most prevalent choices for new entrepreneurs - sole proprietorship and corporation.
It is important to note that selecting which structure is best for your business is ultimately a very context-sensitive matter; you must consider the size and income of your business, the scope of operation (whether you intend to operate just in Ontario, in multiple Canadian provinces, or internationally), your business plan, and so much more. While the list below covers the most important points you need to know, it is not an exhaustive list. As such, it is always a good idea to get professional consulting before making the decision to incorporate.
A sole proprietorship refers to an unincorporated business operated by one person. Sole proprietorships appear in many industries, and common examples include various home-based businesses such as freelance writers, financial planners, and tutors. Other sole proprietors, such as caterers, housecleaners, and landscapers, operate in person.
In a sole proprietorship, you own the whole business. This means you are solely responsible for making business decisions, collecting profits, claiming losses, and everything else that goes into operating a business. It also means you assume all the risks associated with operating your business - and these risks extend to your personal property and assets.
Sole proprietorships are a common first step for new entrepreneurs as they are relatively easy to start up and operate. Remember that since you are the sole decisionmaker, incorporating your sole proprietorship is typically an easier process than the reverse.
Unlike a sole proprietorship, a corporation is a separate legal entity. Incorporation refers to the legal process required to form a corporate entity. Aside from the more common types of corporations we interact with on a daily basis, such as Amazon, many regulated professions can also incorporate, including lawyers, accountants, and most recently, real estate agents.
Canadian entrepreneurs looking to incorporate may do so through a federal incorporation or provincial incorporation. While both options allow you to operate in other provinces provided you registered with them, only a federal incorporation secures your name across Canada. However, federal incorporation may also be more costly than incorporating within your province.
With the exception of the above name protection, the pros and cons of incorporation remain largely the same whether you decide to go with provincial or federal incorporation.
The decision between a sole proprietorship and a corporation depend on many factors unique to you and your business. While incorporation provides many benefits, it also comes with additional costs and stricter compliance. Many new entrepreneurs opt to start a sole proprietorship first, but this does not mean that this is always the correct choice.
When and whether you incorporate is a complex but very important decision, and we hope this article helped give you an initial overview of the pros and cons of doing so. If you would like to get more tailored support to help you decide which option is best for you, get in touch today. We will happily work with you to determine what path is right for your business's success.