Forms of Business Organization

A sole proprietorship is an unincorporated business that is owned by one individual. It is the simplest type of business to start and is the least regulated form of a business organization. Depending on where you live, you can start a proprietorship by doing little more than getting a business license and opening your doors.

If a sole proprietorship establishes a business in his/her own name, without adding any other words, it is not necessary to register the business. If the sole proprietorship chooses to carry on a business under a name other than his/her own, he/she must register the business name.

There is no distinction between personal and business income, so all business income is taxed as personal income. However, it is advisable to have a separate bank account for the business.

1. Easy to set up -- simplest and least expensive business organization to set up.

3. Minimal registration requirements -- certificate of compliance, business license, and GST registration.

6. Tax advantages -- lower tax rate and losses may be applied against other income of proprietor.

7. Continuity of business -- sole proprietorship will continue till business owner's death or if he/she decides to dissolve business.

1. Unlimited liability -- creditors can look beyond business assets to the proprietor's personal assets for payments.

2. Difficulty in obtaining start-up costs -- the amount of equity that can be raised is limited to the proprietor's personal wealth. Due to the risk of sole proprietorships, it is often difficult to obtain financing.

3. Employment insurance benefits -- if the business does not succeed the sole proprietor is not eligible to collect employment insurance benefits.

5. Termination of business -- legal life of business terminates with death of business owner.

A sole proprietorship pays taxes by reporting income (or loss) on a personal income tax return (form T1). The income (or loss) forms part of the sole proprietor's overall income for the year.

Have to pay tax for the year;
Disposed of capital property or had a taxable capital gain in the year;
Are required to make Canada Pension Plan payments on self employed earnings or pensionable earnings for the year; or
Received a demand from Revenue Canada to a file a return.

This list does not provide all situations whereby the sole proprietor must file a return. If unsure, contact your tax services office.

As a sole proprietorship, your income tax return must include financial statements or one or more of the following applicable forms: Statement of Business Activities (form T2124), Statement of Professional Activities (form T2032).

As a sole proprietorship, you have to register for the GST if your worldwide annual taxable revenues exceed $30,000. Sole proprietors have GST reporting periods for which a return has to be filed. The GST reporting period is based on your estimated total annual taxable revenues.

A partnership is a business formed by two or more co-owners. Like a sole proprietorship, a partnership is easy to form. Just a simple verbal agreement is sufficient but if money and property is at stake, a formal agreement should be written. A partnership can be formed either as a general or limited partnership.

General partnership
All the partners share in gains/losses and all have unlimited liability for all partnership debts, not just some particular share. The way partnership gains/losses are divided is described in the partnership agreement.

Limited partnership
One or more general partners has unlimited liability and runs the business for one or more limited partners who do not actively participate in the business. A limited partner's liability for business debts is limited to the amount contributed to the partnership. This form of organization is common in real estate ventures, for example.

The partnership agreement should outline the following: objectives of the partnership; amount of investment of each partner; how are gains/losses divided; duties/participation of partners; provision for death, retirement, or succession; any special conditions; and dissolution of the partnership.

Note: You might want to contact a lawyer for partnership agreements, procedures, and issues.

3. Minimal registration requirements -- certificate of compliance, business license, and GST registration.

5. Tax advantages -- lower tax rate and losses may be applied against other income of partners.

6. Continuity of business -- partnership will continue till one of the partners death or if one of the other partners decides to dissolve business.

7. Incorporation -- not difficult to convert a partnership to a different business structure.

1. Unlimited liability -- creditors can look beyond business assets to the partner's personal assets for payments.

2. Difficulty in finding partners -- difficult to find a compatible partner to do business with.

3. Difficulty in obtaining start-up costs -- the amount of equity that can be raised is limited to the partner's personal wealth. Due to the risk of partnership's, it is often difficult to obtain financing.

4. Employment insurance benefits -- if the business does not succeed the partners are not eligible to collect employment insurance benefits.

6. Sharing of control/profits -- partners need to compromise and agree on beneficial terms.

7. Potential of conflict -- since everything is shared great potential for conflict.

8. Termination of business -- legal life of business terminates with death of partner unless partnership agreement states otherwise and the partners decide to continue the partnership.

A partnership by itself does not pay income tax on its operating profits and does not have to file an annual return. Instead, each partner includes a share of the partnership income or loss on a personal, corporate, or trust income tax return.

Each partner also has to file either financial statements or one or more of the following applicable forms: Statement of Business Activities (form T2124), Statement of Professional Activities (form T2032). You do this whether or not you actually received your share in money or in credit to your partnership's capital account.

A partnership has to a file a partnership information return if, throughout the fiscal period, it has six or more partners or if one of its partners is a partner of another partnership.

A partnership is considered to be a separate person and must file a GST return and remit tax where applicable.

A corporation is a business created as a distinct legal entity composed of one or more individuals or entities. Starting a corporation is somewhat more complicated than starting the other forms of business organizations, but not greatly so for a small business.

Forming a corporation involves preparing articles of incorporation (or a charter) and a set of bylaws. Canadian firms can be incorporated under either the federal Canada Business Corporation Act or Territorial Law.

Two types of corporations are possible: a private corporation or public corporation.

Private corporation
Is limited to 50 or less shareholders. It cannot issue shares or debt to the public and has restricted right to transfer shares. Much easier process to incorporate privately.

Public corporation
Is not limited to the amount of shareholders. It can issue shares and debt to the public and transfer of shares is easily accomplished. Capital can be raised through share offerings to the public. The public corporation must hire external auditors and publish yearly financial statements.

Private and public corporations may be incorporated federally under the Canada Corporations Act. A firm operating nationally or in several provinces may find this advantageous. A federally incorporated business must still register in each province in which it does business.

Provincially incorporated companies are legal entities in the province or territory in which it's incorporated. Its shareholders are not protected by limited liability if it does business outside of its home province. Provincial incorporation is less expensive than being federally incorporated.

Federally incorporated companies are considered legal entities anywhere in Canada . Therefore, its shareholders are protected by limited liability anywhere in Canada .

The articles of incorporation should include the following: corporation's name; its intended life; its business purpose; and the number of shares that can be issued. This information must be supplied to regulators in the jurisdiction in which the firm is incorporated.

What should be included in the bylaws?

The bylaws are rules describing how the corporation regulates its own existence. For example, the bylaws describe how directors are elected. These bylaws may be a very simple statement of a few rules and procedures, or they may be quite extensive for a large corporation. The bylaws may be amended or extended from time to time by the shareholders.

Note: You might want to contact a lawyer for incorporation procedures and issues.

1. Ease of transferring ownership -- ownership (represented by shares of stock) can be readily transferred.

2. Limited liability -- shareholders are not held accountable for corporation's debt, obligations, or acts of the company over and above the amount paid or owed for the purchase of shares.

3. Unlimited life -- the corporation does not cease to exist, unlike sole proprietorships or partnership, with the death of shareholders because it is a separate legal entity.

4. Access to capital -- corporations can raise capital by issuing and selling new shares in the company or by issuing debt.

1. Must pay taxes -- corporations are legal entities therefore it must pay taxes.

2. Double taxation -- monies paid to shareholders in dividends are taxed again as income to those shareholders. This means that corporate profits are taxed twice at the corporate level when they are earned and again at the personal level when they are paid out.

3. Added costs -- additional costs are incurred due to the complexity and legal requirements of incorporating.

A corporation must file a corporation income tax return (form T2) within six months of the end of every taxation year, even if it doesn't owe taxes. The corporation must also attach financial statements to the tax return.

A corporation must register for GST if its taxable worldwide annual revenues are more than $30,000. Corporations have reporting periods for which a return has to be filed.

Certificate of Compliance
Worker's Compensation Board
Employer Services
Yellowknife, Northwest Territories
1-800-661-0792 (toll free)
(867) 920-3888 (phone)
(867) 873-4596 (fax)

Business License
If you intend to establish your business within a community that has Hamlet, Village, Town or City status you must receive a business license from the local municipal office.

If you intend to establish your business in a community that does not have municipal by-laws you must receive a business license from:

Department of Municipal and Community Affairs
Consumer & Corporate Affairs
Government of the Northwest Territories
Yellowknife, Northwest Territories
(867) 873-7125 (phone)
(867) 920-6343 (fax)

Registering/Incorporating Your Business -- All businesses and non-profit organizations.

Territorial:                          Federal:
Northwest Territories Legal Registries              Corporations Directorate
Department of Justice                  Industry Canada
Yellowknife, Northwest Territories             9th Floor, Jean Edmonds Towers South
Corporate Registries (867) 873-7492              365 Laurier Avenue West
Fax: (867) 873-0243                 Ottawa, Ontario K1A 0C8
                                    Telephone: (613) 941-9042
                                                                        Fax: (613) 941-0601

Canada Revenue Agency                    Canada Revenue Agency
Business Window                       Yellowknife, Northwest Territories
Edmonton , Alberta                     (867) 920-6650 (phone)
1-800-959-5525 (toll free)
(780) 990-7188 (fax)

http://www.cra-arc.gc.ca/ Payroll tax is a tax on income that employers must collect. In the NWT it is 1%. 2% beginning January 1, 2005 .

Department of Finance
Taxation Division
Yellowknife , Northwest Territories
1-800-661-0820 (toll free)
(867) 920-3470 (phone)
(867) 873-0325 (fax)

A co-operative is an enterprise, or business, owned by an association of persons seeking to satisfy common needs (i.e. access to products or services, sale of their products or services, employment).

Co-operatives operate democratically (one person, one vote) through two bodies – general meeting of the members or delegates, and the board of directors which is composed of members elected at a general meeting.

1. Consumers -- who use the co-operative to acquire products or services (such as a retail co-operative, housing, health care or day care co-operative).

2. Producers (such as independent entrepreneurs, artisans, or farmers) -- who use the enterprise to process and market the goods or services they produced, or to buy products or services necessary to their professional activities.

3. Workers -- who use the enterprise to secure their employment and control their working conditions.

The purpose of a co-operative is both economic and social. It may include for example, social development or local economic development through job creation or the provision of goods and services that would be otherwise unavailable.

1. Consumer's co-operative -- to meet the members' needs by offering them, for example, the best quality and/or price for products and services. Examples: food, housing, and child-care co-operative.

2. Producer's co-operative -- to meet members' needs by offering them, for example, the best price for products and services bought my members (as in a supply co-operative) or sold for members (as in a marketing co-operative). Examples: agricultural supply and grain or dairy processing co-operatives.

3. Worker's co-operative -- to meet members' needs of securing employment or of finding work that offers good working conditions (good salary or better working environment for example). Examples: all sectors, although primarily sectors where labour or knowledge is key to the business operation.

A co-operative may be formed in accordance with:
1. A territorial co-operative status setting out is corporate from and mode of operation.
2. The Canada Co-operative Associations Act when the co-operative has a place of business in at least two provinces.

Advantages:
1. Social and educational needs are served by the pooled effort necessary to operate a co-operative.
2. Community development in remote areas can be stimulated as a spin off from a co-operative activity.
3. Life of the co-operative does not end with the death of a shareholder.
4. Greater ability to respond to communities' needs.
5. The collective buying power of co-operatives greatly exceeds that of the individuals who make up the co-operatives.

1. Members having the larger investment have no advantages over the smaller contributors.

2. Due to the democratic form and social and educational objectives, often business decisions are more likely to be made for reasons other than return on investment.

Supervisor of Co-operative Associations
Government of the Northwest Territories
Department of Industry, Tourism and Investment
4
th Floor Scotia Centre
5201 50th Avenue
Box 1320
Yellowknife, NT X1A 2L9
Telephone: (867) 873-7381
Fax: (867) 765-0652

Arctic Co-operatives Ltd.
4801 Franklin Avenue
Yellowknife , Northwest Territories
Telephone: (867) 873-5944

Northwest Territories Co-operative Development Fund
321 -- C Old Airport Development
Yellowknife , Northwest Territories
Telephone: (867) 873-3481
Fax: (867) 920-4052

Co-operatives Secretariat
Government of Canada
Sir John Carling Building
Ottawa , Ontario
K1A 0C5
Telephone: (613) 759-7194
Fax: (613) 759-7489
E-mail: coops@em.agr.ca
http://www.agr.ca/policy/coop/accueil.html

Franchising is a special type of licensing arrangement between a franchisor and franchisee employed for the distribution of products or services.

The franchisor is the company or individual that owns or controls the trademarks and the franchise system and grants the right to operate the franchise using trademarks, know-how, and business systems of the franchisor.

The franchisee is the company or individual that contracts with the franchisor for the right to operate the franchise in return for payment of an initial fee and/or an ongoing royalty.

It is essential to get good advice about buying a franchise during the investigation process from any one or more of a lawyer, accountant, and franchise consultant.

1. Reduced risk -- receiving a proven system that includes initial training, opening assistance, accounting systems, established suppliers, manuals, and use of the trade-marks.

2. Easier access to financing and reduced cash requirements -- financial institutes prefer to lend to established franchised systems because of their higher success rates.

3. Purchasing power -- purchasing power of the franchisor can reduce the franchisee's initial outlay for equipment and supplies

4. Site selection assistance -- franchisors can provide expert site selection assistance based on their opening experience and demographic knowledge.

5. Advertising -- the advertising cost is spread over many units, enabling the franchisor to achieve economies of scale.

6. Stress reduction -- systems that control job scheduling, cash flow and inventory levels allow the franchisee to run the business instead of the other way around.

1. Loss of independence -- franchisors have the right to control significant aspects of the franchised business.

2. Franchisor's inability to perform -- some franchisor's don't deliver what they promise.

3. Misunderstanding the franchise agreement -- a potential franchisee may never have encountered a document anywhere which is as sophisticated as a franchise agreement.

4. Overselling by the franchisor -- sometimes a franchise opportunity is oversold to the extent where it is not accurately described.

5. Payment of fees and royalties -- the franchisee pays an initial fee for being granted the franchise. In addition to initial franchise fee, some form of ongoing royalty is paid by the franchisee to the franchisor.

Contacts

The Franchise Annual
9 Duke Street
Box 670
St. Catherines , Ontario
L2R 6W8
Telephone: (905) 688-2665
Fax: (905) 688-7728
Email: infopress@infonews.com
http://infonews.com/franchise

Five or more persons may apply to incorporate a society under the Societies Act for any benevolent, philanthropic, charitable, religious, provident, scientific, artistic, literary, educational, sporting or other useful purpose other than carrying on a trade or business.

Advantages:
1. Exists as legal entity apart from its members.
2. Entitled to acquire property, and borrow money.
3. Individual members of the society are not liable for the debts or obligations of the society.

1. Operations of an incorporated society must be more structured than those of an unincorporated organization.

3. Any society that contravenes the Societies Act is guilty of an offence and liable to a fine.

4. The Societies Act provides that the property of a society cannot be distributed to its members during the legal existence of the society.

Registrar of Societies
Department of Justice
1st Floor Stuart M. Hodgson Building
5009 49th Street
Box 1320
Yellowknife, Northwest Territories
X1A 2L9
Corporate Registries (867) 873-7492
Fax: (867) 873-0243

Many societies wish to be registered as a charity for income tax purposes. Once registered as a charity, a society will be exempt from paying tax on income and can issue receipts to donors for donations. Certain societies that do not qualify for registration as a charity for the purpose of issuing receipts for donations will still qualify for registration as non-profit organizations exempt from the payment of taxes.

It is not necessary to incorporate in order to be registered as a charity. Also, not all societies incorporated under the Societies Act will qualify for charitable status for income tax purposes. The onus is on a society wishing to register as a charity to establish objectives that qualify.

Applications for registration as a charity can be obtained from the Canada Revenue Agency. Any further questions regarding registration as a charity should also be directed to the Canada Revenue Agency

Client Assistance Section, Charities Division
Canada Revenue Agency
400 Cumberland St.
Ottawa , Ontario
K1A 0L8
Telephone: 1-800-267-2384
Fax: (613) 952-6020
Web site: www.ccra-adrc.gc.ca

Forms of Business Organization

Summary