3. Decide on the ownership structure for your business
There are four types of business structures in Ontario and each of them serve different legal and tax needs.
Sole proprietorships
A sole proprietorship is a business owned by one person. It is the easiest and most common way to start a business. As your business grows, you can choose to incorporate later.
Pros
- You have full control of your company
- It is easy and more affordable to set up
- You can deduct losses and expenses from your personal income
- You earn all the profits
Cons
- You are responsible for all debts and losses
- Creditors can take your personal assets and your business to pay debts
- Your business name is not protected
- Your income is taxable at your personal rate
You will need to register your sole proprietorship if you are not using your own name as your business name. If your business has employees, facilities, or offices in Ontario, you must register provincially.
Partnerships
A partnership is a business owned by two or more people.
Pros
- It is easy and more affordable to set up
- Partners can contribute to costs and provide different skills to the business
- Debts and losses are shared between partners
- Expenses and losses can be included on your tax returns
Cons
- All partners are responsible for all debts and losses
- Finding the right partner and agreeing on business decisions can be harder
Corporations
A corporation is a legal entity that keeps the business separate from the business owner. You can choose to incorporate federally or provincially, and each option comes with its own pros and cons. If you choose to register your business provincially, you can always change to federal incorporation later.
Before you incorporate, consult a lawyer or professional advisor.
Pros
- You have limited liability
- You can transfer ownership
- You have more access to capital and grants
- Your business name is protected (if you register federally)
Cons
- It costs more to set up a corporation
- The tax rules for corporations are more complex
- You will need to provide annual filings and corporate records
Co-operatives
A co-operative is a corporation that is organized and controlled by its members. It can be set up to operate for profit or as a not-for-profit. Just like a corporation, it can be registered provincially or federally, and each option comes with pros and cons.
Pros
- You are not responsible for all debts and losses
- Decision making is democratic (one member, one vote)
Cons
- It takes longer to make decisions
- All members need to participate to succeed