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Proprietorship, Partnership or Incorporation?

From a legal point of view, there are three common types of businesses: sole proprietorship, partnership and corporation. Each has different and important implications for liability, taxation and succession. A lawyer or accountant can advise you on which is suited to your needs, and undertake the necessary formalities.

Advantages and Disadvantages of Proprietorship

This is the simplest way to set up a business. A sole proprietor is fully responsible for all debts and obligations related to his or her business. A creditor with a claim against a sole proprietor would normally have a right against all of his or her assets, whether business or personal. This is known as unlimited liability.

In a proprietorship, one person performs all the functions required for the successful operation of the business. The proprietor secures the capital, establishes and operates the business, assumes all risks, accepts all profits and losses, and pays all taxes. The proprietor is said to be self-employed.

Advantages

  • Low start-up costs
  • Greatest freedom from regulation
  • Owner in direct control of decision making
  • Minimal working capital required
  • Tax advantages to owner
  • All profits to owner

Disadvantages

  • Unlimited liability
  • Lack of continuity in business organization in absence of owner
  • Difficulty in raising capital

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Advantages and Disadvantages of Partnership

A partnership is an agreement in which two or more persons combine their resources in a business with a view to making a profit. In order to establish the terms of the partnership and to protect partners in the event of a disagreement or dissolution of a partnership, a partnership agreement should be drawn up. Standard form partnership agreements can also be purchased for about $5.00 at stationary stores. Partners share in the profits according to the terms of the agreement.

In a General Partnership, two or more owners share the management of a business, and each is personally liable for all the debts and obligations of the business. This means that each partner is responsible for, and must assume the consequences of, the actions of the other partner(s).

A second type of partnership is a Limited Partnership which involves limited partners who combine only capital. They are not involved in managing the business and cannot be liable for more than the amount of capital they have contributed. This is known as limited liability.

A limited partnership also involves general partners, who are involved in management. They are fully liable for the debts and obligations of the business, but may be entitled to a greater share of the profits.

Advantages:

  • Ease of formation
  • Low start-up costs
  • Additional sources of investment capital
  • Possible tax advantages
  • Limited regulation
  • Broader management base

Disadvantages:

  • Unlimited liability
  • Divided authority
  • Difficulty in raising additional capital
  • Hard to find suitable partners
  • Possible development of conflict between partners
  • Partners can legally bind each other without prior approval
  • Lack of continuity

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Advantages and Disadvantages of Incorporating

A corporation, also known as a Limited Company, is a legal entity which is separate and distinct from its members (shareholders). Each shareholder has limited liability. A creditor with a claim against the assets of the company would normally have no rights against its shareholders, although in certain circumstances shareholders may be held liable. It is recommended that legal advice be sought. This type of business can be incorporated at either the federal or provincial level.

Ownership interests in a corporation are usually easily changed. Shares may be transferred without affecting the corporations existence or continued operation.

The following characteristics distinguish it from a partnership or proprietorship:

Limited liability - normally no member can be held personally liable for the debts, obligations or acts of the corporation beyond the amount of share capital the members has subscribed; and

Perpetual succession - because the corporation is a separate legal entity, its existence does not depend on the continued membership of any of its members.

Advantages

  • Limited liability
  • Possible tax advantage (if you qualify for a small business tax rate)
  • Specialized management
  • Ownership is transferable
  • Continuous existence
  • Separate legal entity
  • Easier to raise capital

Disadvantages

  • Closely regulated
  • Most expensive form to organize
  • Charter restrictions
  • Extensive record keeping necessary
  • Double taxation of dividends
  • Shareholders may be held legally responsible in certain circumstances
  • Personal guarantees undermine limited liability advantage

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Registering a Proprietorship or Partnership

Proprietorships and Partnerships are regulated by the provincial government. For information on registering a proprietorship or partnership in your province, click on the province or territory where you want to register.

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Registering a Corporation

You have the option to incorporate at a provincial level or at a federal level. If a company intends to carry on its activities solely in one province, provincial incorporation may be preferable. If the company wishes to expand its activities outside of its provincial jurisdiction at a later date, it must obtain an extra-provincial license from every other province in which it wishes to open an office or obtain a presence.

Under the Canada Business Corporations Act, any individual or corporation may receive a certificate of incorporation for any legal purpose with the exception of operating such institutions as banks, insurance companies, and trust and loan companies. In several provinces, a federally incorporated company will still have to obtain extra provincial registration to operate.

For further information see document Federal Business Incorporation - Canada Business Corporations Act (CBCA).

For further information see document Federal Not-For-Profit Incorporation - Canada Corporations Act / Part II.

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Incorporating a Company in your Province

Incorporating can be a very involved process and it is recommended that you seek the advice and services of a lawyer and/or an accountant. For information on incorporating in your province, click on the province or territory where you want to incorporate.

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Aboriginals and Forms of Business

Aboriginal businesses may receive tax exemptions for certain forms of business. The form of business you choose can have a significant impact on the way you are protected under the law and the way you are affected by income tax rules and regulations. Therefore, it is necessary that Aboriginals understand the advantages to starting one form of business over another. For further information on this subject, please visit the Canada Customs and Revenue Agency Web site.

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Last Modified: 2007-11-06

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