Picking an appropriate business structure is the first major decision that every Canadian entrepreneur needs to make. There are three main legal business structures in Canada: sole proprietorship, partnership, and corporation. Depending on your business goals and needs, one of these structures may be the right fit for you. Considering that sole proprietorships and corporations are Canada’s most commonly used business structures, we will focus on these two to help you better understand their differences.
Sole Proprietorship in Canada
Let’s say you want to register a business in Canada. The odds are you don’t even know if your business idea will work out. In this case, a sole proprietorship will be the go-to choice for you. Its registration process is simple, and you don’t have to worry about many legal requirements. In most provinces in Canada, you can simply register a sole proprietorship online through a provincial government website.
The registration process is fast and straightforward and shouldn’t take you more than 20-30 minutes. In the end, you will have to pay a relatively small registration fee with your credit card, and after that, you will become a rightful business owner. You can also use Ownr to register a sole proprietorship in Canada to save additionally on registration fees. Remember, you will always have an opportunity to change your business structure and turn your sole proprietorship into a successful corporation.
Advantages of Sole Proprietorship
As a sole proprietor, you stand alone in your business venture, which is both advantage and disadvantage. A sole proprietorship places full responsibility for all liabilities, debts, and profits on its single owner. It’s an ideal solution for those looking to keep their operations simple while still running their own enterprise. Professional legal fees associated with registration of sole proprietorship are lower, and in many cases, you can do everything yourself without paying accountants or lawyers.
When we talk about sole proprietorship vs incorporation in Canada, we shouldn’t forget about the taxation simplicity provided by a sole proprietorship. All business profits are treated as personal income for the proprietor and reported on their individual tax return, with taxes then calculated at that person’s rate — potentially resulting in significant savings
As a sole proprietor, you have full control over your business operations. You possess absolute authority over all aspects of its processes and can make decisions quickly without having to seek anyone else’s approval – granting you tremendous flexibility in how you manage your venture. Moreover, any modifications necessary for optimal performance or growth potential can easily be implemented with minimal fuss and as fast as possible. In general, sole proprietorship as a business structure is suitable for most small businesses in Canada, while corporations may be the better option for larger operations.
Disadvantages of Sole Proprietorship
While a sole proprietorship is easy to set up and provides full control over all business processes, you must be aware of potential disadvantages. You should understand that a sole proprietorship is not a separate legal entity. So, in the case of your death, it will also cease to exist.
Transferring or selling a business registered as a sole proprietorship to another individual can also be rather difficult. In addition, finding investors can be more problematic, as you won’t be able to issue shares. Plus, at a certain income threshold, taxes you pay as a sole proprietor can be much higher than corporate taxes.
Corporations in Canada
In contrast, incorporating your business involves creating a distinct legal entity. This process may be more complicated to execute and manage. However, it comes with several advantages that could prove particularly beneficial for large businesses or those wanting to attract investors.
Advantages of Incorporation
The importance of keeping shareholders’ personal assets separate from the corporation’s debts and obligations can’t be overstated, as it offers them invaluable protection via ‘limited liability.’ In other words, this means they won’t have to bear any responsibility for what their company owes, except for certain specific cases, such as when employee wages and vacation pay are unpaid. This is in addition to their responsibility regarding any deductions and remittances taken from employees, such as income taxes, EI contributions, CPP contributions, etc. Plus, there is personal liability for GST/HST collections that have been left un-remitted.
Another advantage of a corporation is its potential for growth. Corporations can easily raise capital by issuing shares, unlike sole proprietorships or partnerships. This makes it simpler to secure investments and finance expansion plans. Moreover, the ownership of a corporation is more flexible as shares can be sold with no hindrance to business operations. Thus facilitating an easy transition in ownership rights. Corporations are quite useful for estate planning as well, as ownership can be transferred to family members relatively easily.
Disadvantages of Incorporation
Setting up a corporation is more complex than other types of business entities. It requires compliance with certain legal formalities, such as drafting articles of incorporation and bylaws. These papers lay out the fundamental aspects of the company, its regulations in terms of functioning, and shareholders’ rights/obligations. You will also have to obtain a NUANS report to register a business name if you are incorporating your business.
Registering your business and running it as a corporation can be costly because of higher professional legal fees. You should always consult with a professional lawyer before incorporating your business to avoid potential negative consequences down the road. In Canada, you will spend from several hundred to thousands of Canadian dollars on legal consultation fees, depending on the complexity of your corporation and the type of business you are involved in, as many businesses require additional licenses and permits. More than that, you will likely need an accountant to help you file corporate tax each year. This can quickly add up to significant costs, as corporate accountants in Canada charge anywhere from $100 to $400 per hour.
Provincial vs Federal Business Registration in Canada
While sole proprietorships can be registered only provincially, incorporation can be provincial and federal. The main difference between provincial and federally incorporated businesses is that federally incorporated businesses can operate in different provinces without having to register the business in each one.
Surprisingly, the basic registration fee for federal incorporation is lower than the provincial one. So why one may need to incorporate provincially? The answer is simple: certain businesses can be incorporated only at the provincial level. So-called professional corporations associated with certain professional activities are regulated by provincial legislation. Some examples are professional engineers, lawyers, engineers, veterinarians, architects, and accountants.
Sole Proprietorship Vs. Corporation Registration Fees In Canada
The registration fees for sole proprietorship vs incorporation vary slightly across different provinces in Canada. We’ve compiled a table with registration fees for each province so you can better understand what minimum amount of money you must spend to register your business.
Note that you may have to pay additional professional fees and taxes. Certain provinces, such as Ontario, Alberta, PEI, Nova Scotia, and New Brunswick, require you to obtain a NUANS name search report. NUANS report fees vary across authorized NUANS members.
|Province||Sole Proprietorship Fees||Provincial Incorporation Fees||Federal Incorporation Fees||Business Name Fees|
|Ontario||$60||$300||$200 (+$20 annual fee)||$60 business name registration, $15 NUANS search|
|Quebec||$37 for standard and $55 for a priority service||$179 for standard and $268.50 for a priority service||$200 (+$20 annual fee)||Name reservation ($24 regular and $36 priority)|
|Nova Scotia||$68.55||$200||$200 (+$20 annual fee)||$61.05 for the Atlantic region search ($15.25 if you already have a NUANS report), 76.26 for the Federal (Canada-wide) search ($15.25 if you already have a NUANS report)|
|New Brunswick||$112||$262||$200 (+$20 annual fee)||$30 for a NUANS name search report|
|Manitoba||$60 ($120 for expedited service)||$350||$200 (+$20 annual fee)||$45 name reservation fee|
|British Columbia||$40 (additional $100 for priority service)||$350 (additional $100 for priority service)||$200 (+$20 annual fee)||$30 name approval fee|
|Prince Edward Island||$90||$215||$200 (+$20 annual fee)||$40 for NUANS report, $15 fee for business name publication|
|Saskatchewan||$60||$255||$200 (+$20 annual fee)||$50 for name reservation (for sole proprietorships) and $60 (for corporations), and $15 The Saskatchewan Gazette publication fee|
|Alberta||$55||$275||$200 (+$20 annual fee)||$45 for the NUANS report|
|Newfoundland and Labrador||Free. You are not legally required to register a sole proprietorship or partnership||$300||$200 (+$20 annual fee)||$10 name reservation fee|
Registering Business with Ownr in Canada
Ownr is an all-inclusive platform that simplifies the process of registering a business in Canada. Whether you’re looking to go solo with a sole proprietorship or form a corporation, Ownr makes it easy for users to navigate the business registration process. With an intuitive interface, they can conduct a name search and complete their registration in no time – all without spending too much on costly legal assistance.
Business registration fees are slightly cheaper on Ownr compared to provincial government websites. While Ownr is perfect for wannabe sole proprietors, it is better to seek professional legal assistance if you are incorporating.
Sole Proprietorship Vs. Incorporation Taxation In Canada
As a sole proprietor, you’re not legally separate from your business – so all the income it generates is classed as personal for tax purposes. Filing taxes can be straightforward but high earners may find themselves in an elevated bracket. Of course, to mitigate this, you can make sure to contribute to a Registered Retirement Savings Plan (RRSP). Doing so will help reduce your taxable income and provide financial security for the future.
You can deduct business-related expenses from your taxable income as a sole proprietor. Moreover, if things don’t go as planned and losses occur, these can be used to offset other personal earnings – which could prove invaluable in the early stages when most businesses are still unstable.
As a sole proprietor, you are liable to pay your personal income tax rate on any business earnings. In Ontario, if your combined taxable personal and business income is $49,000 a year, your marginal income tax rate would stand at only 20.05%. So, if you don’t earn that much and have just started a business, registering a corporation for tax purposes would not make sense.
However, assuming your taxable income reaches $250,000 as a sole proprietor in Ontario, your marginal tax rate would be no less than 53.53%. However, assuming the same $250,000 was generated within a corporation registered in Ontario, the combined federal and provincial corporate tax rate in Ontario stands at only 12.2%.
Seems lower, right? But here is the trick: though the income tax rate for corporations can be low, the government knows it will be able to tax this income a second time once the money leaves the corporation as salaries or dividends. However, this tax advantage can be helpful for companies that reinvest their profit in their business, or for sole owners who use this tax advantage for tax optimization. For example, some business owners will invest their corporate profits in the stock market from within their corporation to avoid paying taxes, or will opt to pay themselves in dividends to pay less in personal taxes.
Sole Proprietorship Vs. Incorporation Maintenance Fees
Running a sole proprietorship is quite straightforward and cost-effective. The only necessary expenses are the renewal fees for your business name, which differ depending on where you live but usually won’t break the bank. Additionally, sole proprietors must meet their tax obligations by filing an annual T1 personal income tax return every year.
On top of that, it’s essential to keep all financial documents related to your venture organized and, if applicable, renew any licenses/permits in order to stay up-to-date with regulations. The business owner usually handles accounting, so having a separate business bank account is better. Plus, you can get yourself a business credit card and enjoy benefits allowing you to save on business expenses and travel and build up your credit score.
Maintaining a corporation in Canada can be far more complex and costly than other business structures. Every tax year, corporations must submit annual reports to the federal or provincial government as well as T2 corporate income tax returns — which require expertise if they’re to be prepared properly. In some cases, accounting fees for filing an annual report can be as high as $6,000. Furthermore, companies need to keep up-to-date records of their activities within a corporate minute book. This adds another expense on top of potential legal fees and accounting services that may prove necessary for compliance purposes.
Depending on where you are in Canada, financial statement audits could become mandatory too—though some exemptions may exist for small businesses. Finally, just like with sole proprietorships (and any other type of company), there will likely be periodic costs associated with license renewals or permits issued previously. To sum up, most businesses can’t afford to pay corporation maintenance fees, which is why sole proprietorship is the best option for those just starting out, and those whose businesses don’t generate much income.
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