Selecting a Business Structure

The right structure for your business will depend on a number of factors including legal considerations, the location of the business and taxation. Canada has three basic business structures:

• Sole Proprietorship
• Partnership
• Corporation

In addition, there are variations of the basic business structures:

• Joint Venture
• Branch Office
• Subsidiary

Sole Proprietorship

A sole proprietorship is the simplest form of a business organization to start and to maintain. It is a non-incorporated business entirely owned by one person. Its liabilities are the personal liabilities of the business owner.

As the business owner you undertake the risks of the business for all assets owned. It does not matter whether the assets were for personal use or part of your business. You include the income and expenses of the business on your personal tax return.

Related Link

• Canada Revenue Agency: Sole Proprietorship
  Tax shelters, business income and expenses, government grants

Partnership

A business partnership exists between people who operate a common venture. Each person contributes money, property, labour, or skills, and expects to share in the profits and losses of the business. It is important to note that you can have a partnership without a written contract. Related Link

• Canada Revenue Agency: Partnership
  Defining a partnership, business income and expenses, forms

Corporation

The corporation is the most popular business structure in Canada. It is a separate legal entity and can enter into contracts and own property in its own name, separately and distinctly from its owners. Since a corporation has a separate legal existence, it has to pay tax on its income, and therefore must file its own income tax return.

A corporation can be created under two jurisdictions:

• Under provincial law - If the business will operate in only one province, the company is incorporated provincially.
• Under federal law - Companies that plan to do business across Canada must be incorporated under federal law and sometimes under provincial law. Some types of business, such as banks, are subject to industry-specific legislation.
  
  

Joint Venture

A joint venture exists when two or more people agree to contribute goods, services or capital to one business enterprise. Canada has no specific laws governing joint ventures. Currently, joint ventures are governed by the contract between the parties involved.

A joint venture contract should outline the terms of collaboration. It defines the contributions of everyone involved, the management structure and the sharing of profits. A lawyer can provide legal help with your joint venture. You can also contact us for assistance.

Branch Office

A foreign incorporated enterprise may decide to establish a branch office because of some of the unique tax benefits related to this business structure. Before a foreign company can open a branch office it must obtain a licence or otherwise register in the province(s) where the branch office will “carry on business”.

To carry on business in Canada
The definition varies from province to province. A typical definition is

• if the business has a resident agent, representative, warehouse, office or place where it carries on its business in a province or
• if it holds an interest in real property located in a province other than by way of security
• if a province has chosen to regulate this specific type of business

A corporation does not carry on business in or a province if

• it takes orders for or buys or sells goods, wares and merchandise or offers or sells services of any type, by use of travellers or through advertising or correspondence.
• It is important to note that there are penalties for failure to obtain a licence where required.

Frequently asked questions for this section:

• What are the different business structures available for establishing a business in Canada?
• What are the types of corporations?
• Can a foreign corporation conduct business in Canada through a branch operation?
• What is a joint venture? How is a joint venture different from a partnership, for taxation purposes?

The information below is brought to you directly from the Canada Revenue Agency.

Types of corporations

Types of corporations

There are different types of corporations for tax purposes, and you have to select the one that accurately describes your corporation type at the end of the tax year. The corporation type determines whether or not the corporation is entitled to certain rates and deductions. Make sure you know which type applies to you.

A change of corporation type may result in significant tax consequences. For example, certain calculations on the return depend on whether the corporation was a private corporation or a Canadian-controlled private corporation (CCPC) throughout the tax year, at any time in the tax year, or at the end of the tax year.

Forms and publications

• T2 Corporation Income Tax Guide (T4012)
• IT391, Status of Corporations

Subsidiary

A foreign corporation can expand into Canada by incorporating a separate subsidiary corporation under Canadian Federal laws or any of the provincial statutes governing corporations. Subsidiaries are treated the same as a branch operation. A business licence or registration may be required from any province where the company carries on business.

Related Links:

• Types of corporations
  Explains the different types of legal corporations that exist for tax purposes.
• Canadian-controlled private corporation (CCPC)
  Requirements to be considered a Canadian-controlled private corporation.
• Other private corporation
  Requirements to be considered a private corporations.
• Public corporation
  Requirements to be considered a public corporations.
• Corporation controlled by public corporation
  Tax information for Corporation controlled by public corporation.
• Other corporation
  Tax information for other corporation