• by admin
• March 1, 2021

You are starting a new business or you are self-employed, you are wondering what other type of business structure or legal entities are available? Why should you know about other business structures or legal entities? What are the benefits of incorporating? We are here to help you. Let’s discuss the options you have to get a broad level of understanding.

 

When we are looking into the business structures, entities structures that are formed not for profit are excluded.

 

What are the options you have?

1. Sole proprietorship
2. Partnership
3. Incorporation

 

Which business structure I should choose?

 

Each structure has its own advantages and disadvantages.

 

The most basic and simple structure is Sole proprietorship. Do the business in your name and there are no formalities required. In the next step, you can think of doing a partnership in which case you may need to draft an agreement to formalize the rights and obligations between the partners. You may need a professional to help you draft this agreement. As the last step, you can think of incorporating your business.

 

Now let’s look into furthermore in detail each structure option.

 

Sole proprietorship

 

You can start doing business in your name and no registration is required. If you want to give a separate name to your business which is called a “trade name” or “operating name” you may need to register your trade or operating name. Under the Ontario Business Name Act if you are doing business in Ontario in public with a name that is different than your personal name you need to register that name in Ontario and obtain a master business license. This license needs to be renewed every five years. The license does not guarantee you the exclusivity of your registered name. That means anybody else might be using the same trade name elsewhere in the province or in Canada.

 

Whether you are doing business in your personal or a trading name, you are personally liable for all your business debts and obligation. That means if you can not satisfy your liabilities from your business account then you must pay that from your personal accounts and from your personal properties.

 

A sole proprietor reports his business income and loss on his T1 personal income tax return and there is no separate return filing required. The proprietor pays taxes on its net business income.

 

Partnership

 

A partnership can be the easiest form of business for you where the setup is easy, no income tax to pay, two or more people or entities can join together to generate capital, finances, and resources, and simply formed by an agreed-upon partnership agreement. However, setting up this form of business could be time-consuming when drafting a complicated agreement among the partners particularly for a limited partnership or limited liability partnership.

 

There are majorly three forms of partnerships that you can choose to run your business or profession. However, all forms of partnership are treated as disregarded entities for tax purposes. A partnership does not pay income taxes on its net profit. The net income or net loss for the tax year is distributed to its partner and the partner reports its share of profit or loss on its income tax return and pays taxes. A corporation or other types of entities can also become a partner in a partnership.

 

General partnership

 

– No registration is required. Sign the partnership agreement and start the operation.

– Partners share their loss or income from the partnership either based on their share of capital contribution or based on the rations agreed among the partners.

– However, when it comes to any legal liability, each partner is liable for the full amount of the liability. For example, in two members partnership if one of the partners is not able to pay (bankrupt) then the other partner will be liable for the remaining amount.

– Generally, in this form of partnership, all the partners participate in the business.

 

Limited Partnership (LP)

 

You want to invest but do not want to or have no time to manage the day-to-day operations and at the same time, you want to protect your obligation. You can limit your legal obligation by forming a Limited Partnership.

 

• In Ontario, you can register a Limited Partnership under the Ontario Limited Partnerships Act 1990.
• To form a Limited Partnership, you need at least one general partner and you can have one or more limited partners.
• A foreign company can also be the partner in a Limited Partnership. However, to become a general partner it needs to be registered in Ontario. To participate as a limited partner there is no registration requirement.
• A limited partnership can open a bank account and can also have business transactions with the contracted partners during the course of business.
• You need to have an address in Ontario to form a limited partnership.
• The partners can contribute in cash or in-kind and there is no minimum or maximum limit.
• The general partner/partners fully participate in the business and has unlimited liability for the business.
• The limited partner in a limited partnership does not participate in the business and its liability is limited to the amount of his investments in the limited partnership. That does not mean that it can not be held responsible for any wrongful doing.
• When a limited partner participates in managing the limited partnership business then the partner becomes a general partner.
• When it comes to taxation, income or loss of the limited partnership are distributed to its partners and the partners report that on their income tax return and pay taxes.
• If the partner is not a Canadian resident, then he has no tax liability in Canada. The non-resident partner reports its share of income on its income tax return in the country of its residency for tax purposes. However, if the income from a limited partnership consists of interests, dividends, rents, or royalties, the non-resident share of income will be subject to withholding tax.

 

Limited Liability Partnership (LLP)

 

You can form a limited liability partnership in British Columbia irrespective of your business activities. If you want to register a limited liability partnership in other provinces, then you need to be in certain categories of professionals.

In Ontario, you can register a Limited Liability Partnership under the Ontario Limited Partnerships Act 1990.

As opposed to limited partnerships, all the partners of a limited liability partnership participate in the business, and the liability of all the partners is limited.

 

Incorporation

 

A corporation is a separate legal entity from its incorporator and shareholders. A corporation can be sued in court. A corporation has to prepare its own financial statements, file a corporate income tax return, and pay taxes on its net income. A corporation distributes its after-tax profits to its shareholders and shareholders pay taxes on dividends income reported on their personal income tax return. A Canadian corporation pays tax-free dividends to another Canadian corporation. A corporation has to file an annual return failing which it may be dissolved.

 

Major benefits of incorporating

1. Exclusive business name
2. Wider access to capital and financing
3. Limited liability protection
4. Corporate image and increased credibility
5. The lower corporate tax rate
6. Larger amounts available to reinvest after-tax profit
7. Continuous existence until dissolved
8. Easy to transfer ownership
9. Lifetime capital gain exemption on the transfer of shares of a Canadian controlled private corporation
10. Easy to offer profit-sharing benefits to employees

 

There are mainly three major types of corporate business structures commonly used. These three corporate structures include Federal corporations, Provincial corporations, or professional corporations.

 

A Canadian corporation is further categorized as a Canadian-controlled private corporation or other corporation for income tax purposes.

 

Federal Corporation in Canada

 

1. One unique business name all over Canada
2. Global recognition of a federal corporation
3. Use your official business address anywhere in Canada
4. Hold your annual meeting digitally anywhere in the word
5. A foreign person incorporating in Canada must have at least 25% Board of directors from Canada

 

Provincial corporation in Canada

1. One unique business name in the province
2. Corporate information may not be publicly available
3. Attract investors locally
4. Most provinces require that at least 25% of the Board of Directors are resident in Canada. However, British Columbia, Nova Scotia, New Brunswick, and Quebec do not have this requirement and hence a foreign resident can incorporate without meeting the residency requirements.

 

What’s New

• As of March 26, 2021, Alberta has eliminated the requirements of 25% Board of Directors being residents of Canada. However, you need to appoint an agent for services within one year, who is a resident of Alberta and has a mailing address in Alberta.
• As of July 5, 2021, Ontario has also eliminated the requirements of 25% Board of Directors being residents of Canada. 

 

Extra-Provincial Corporation (EPC)

 

A corporation registered in another province can register in Ontario as an Extra-provincial registration and do business in Ontario

A foreign company can also register in Ontario under Extra-Provincial Corporation and do business in Ontario, open a bank account, and set an office. However, the foreign company needs to have an agent resident in Ontario. The EPC needs to pay income tax in Canada on only net income received in Canada.

 

Professional corporation

 

1. Generally, it is only incorporated by professionals. Like Lawyers, accounts, doctors, etc.
2. This is flexibility available to a professional practitioner to take the advantage of incorporating
3. The name includes “professional corporation”
4. Generally, professionals are the shareholders with some exceptions in certain professions.

 

RKB Accounting has expertise in cross-border taxation and has been providing accounting and taxation services for the last fifteen years in Canada and USA. RKB services include incorporating a business on both sides of the border, bookkeeping, sales tax, payroll, and corporate and personal income tax. RKB’s expertise includes cross-border tax planning, long-term tax planning, helping business start-ups, business structure planning, and resolving complex tax matters. RKB a CPA(Delaware), CA(India), and CIA(USA) has over 25 years of experience in accounting and taxation in dealing with various countries in the world.

Disclaimer: Information in the blog/post/article has been presented for a broad and simple understanding. This is not legal advice. RKB Accounting & Tax Services does not accept any liability for its application in any real situations. You need to contact your accountant or us for further information.

 

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