Starting a business can be an exciting yet intimidating endeavour.
With the abundance of options available to entrepreneurs in Canada, it can be difficult to decide which type of small business best fits you and your unique objectives.
To help make this decision easier, this article will look at four types of small businesses in Canada and provide insight into which one is right for you.
Sole-Proprietorship
A sole proprietorship is the simplest type of small business to set up.
The owner of a sole proprietorship is personally responsible for all liabilities and debts incurred by the business, meaning that there is no legal distinction between the owner and the company. This means that any profits from the business are taxed as personal income, making it easy to enter into this type of business structure.
The advantages of a sole proprietorship include low start-up costs, limited paperwork and minimal legal requirements.
Also, sole proprietorships allow owners to control their businesses fully without sharing decision-making responsibilities with other stakeholders.
On the downside, owners have unlimited personal liability for any debt or losses associated with their businesses.
They may have difficulty accessing capital if needed due to lack of external resources.
Pros:
- Easy to set up and maintain.
- The owner keeps all profits.
- Flexible management structure.
- Tax advantages for the proprietor.
- The proprietor has sole decision-making authority.
Cons:
- Potential for unlimited liability for business debts and obligations of the owner.
- Difficulty in raising capital as a single person or entity with limited resources and collateral available to secure a loan or investment funds from outside sources.
- Limited ability to attract key employees without sharing some ownership or control of the business due to lack of stock options or other incentives available from larger businesses and corporations.
- Difficulty in planning an orderly succession of business ownership should the owner become incapacitated or decide to retire from their business activities due to lack of an established system of transferable ownership interests, such as those that exist with corporations and other types of business entities.
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Partnership
Forming a partnership is an attractive option for small business owners in Canada.
When two or more people come together to form a business, they are able to share the risks and responsibilities associated with running a company.
This type of small business in Canada also allows entrepreneurs to benefit from the strengths of each partner as they go about their operations.
A successful partnership depends on all parties having complementary skills and goals, making it important for partners to have a good working relationship.
Partnerships can be formed through verbal agreement or via written contract, and should include provisions such as dispute resolution clauses, exit strategies, and capital contributions.
Canadian partnerships are subject to provincial laws which require them to register their business name in most cases; failure to do so may result in legal action if someone else registers the name first.
Pros:
- Partners can share the costs and responsibilities of the business.
- It allows partners to combine their ideas and resources for maximum efficiency and growth potential.
- Partners can easily draw on each other’s skills and expertise to cover any weaknesses or gaps in their knowledge base.
- Partners have access to more capital as they can pool together their resources and finances, allowing them to invest in better equipment, tools, and materials.
- A partnership allows partners to benefit from tax breaks that they would not receive as a sole proprietorship or limited liability company (LLC).
Cons:
- The business is liable for any debts incurred by either partner, meaning that one partner could put the entire business at risk if they act negligently or irresponsibly with funds or resources.
- Misunderstandings between the partners may lead to disputes which could harm the business’s overall performance if they are not resolved quickly.
- Partners must be constantly communicating and in agreement on decisions in order for the business to run smoothly.
- If one partner decides to leave the business, it can be difficult to dissolve the partnership without all parties’ agreement.
- Partners may have a harder time getting credit as lenders may be more hesitant to lend to a partnership than to an individual.
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Corporation
Corporations are the third type of small business in Canada.
A corporation is a legal entity that is separate from its owners and shareholders, so it can own property, take on debt, and issue shares.
Corporations are primarily used by larger businesses that want to raise funds through selling shares to investors or to limit the liability of their owners.
Incorporating your business in Canada allows you to benefit from certain tax advantages such as reduced personal income tax rates and access to special deductions.
It also gives you more control over how your profits will be distributed among shareholders, which can help maximize potential returns in the long run.
Incorporating also provides greater flexibility when setting up operations on a national or international level since corporations can conduct business across borders without having to register in each jurisdiction they operate in.
Pros:
- Corporations have a legal status that gives them protection from personal liability.
- Corporations can pool resources from multiple investors and owners.
- Corporate taxes are lower than individual tax rates in some cases.
- Corporations offer the owners limited personal financial responsibility for debts or contracts of the company.
- Corporations can easily transfer ownership through stock transfers as opposed to other business forms that require more paperwork and time to do so.
Cons:
- Forming a corporation requires more paperwork and formalities than other types of businesses, like filing articles of incorporation with the government and holding initial meetings with shareholders and directors.
- Finding capital to invest in a corporation is difficult due to the high cost associated with forming a corporation and low liquidity of corporate stocks when compared to other business forms like partnerships or sole proprietorships.
- There is less flexibility with corporate management structures, since the government tightly regulates corporate governance.
- Corporations are subject to double taxation, meaning they are taxed on their income, and then shareholders are taxed on their dividends.
- Corporations may be subject to more government regulations than other types of businesses.
Related: How To Incorporate A Business In Canada
Co-operatives (For Profit and Not-for-Profit)
Co-operatives is a popular form of business ownership in Canada.
They are owned and democratically controlled by their members, who share an economic interest or have similar goals or values.
In the case of for-profit co-operatives, member profits are shared amongst themselves according to the amount of capital or effort they have contributed.
Not-for profit co-operatives in Canada operate with all profits generated being reinvested back into the organization for its growth and stability.
The advantages to forming a co-operative include greater autonomy over decision making, more effective management through collective action and increased access to capital resources due to combined financial strength.
Additionally, many communities provide grants and other forms of assistance specifically designed to help start up new co-operative businesses.
Pros:
- Co-operatives are owned and controlled by the members, allowing for greater autonomy.
- Profits generated by Co-operatives benefit all members equally, which can encourage investment in the business.
- They allow members to pool resources in order to compete with larger businesses.
- The collective strength of Co-operatives enables them to access services, such as legal advice or accountancy support that would be expensive for an individual business owner.
- Co-operatives have the potential to increase community engagement and provide a platform for collective action on social and environmental issues.
Cons:
- Co-operatives require a lot of work from their members which can be difficult to manage and sustain over time due to competing interests and lack of commitment from some individuals.
- Cooperatives are not publicly traded in stock markets, so they may have difficulty raising capital from external sources.
- Co-operatives are subject to the same laws and regulations as any other business, and this can be costly and time-consuming to comply with.
- Co-operatives may struggle to compete with larger, better established businesses due to their limited resources.
- There is a risk of mismanagement and conflicts of interest between members.
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