Written by: Ella Vanderburgt, ITO Indigenous Business Advisor
The type of structure you choose for your business has a significant effect on the way you report your income. The business structure impacts the type of tax returns you file each year, and many other matters. Indigenous businesses have unique reporting requirements so it is essential to learn about different business structures to determine what is best for you. Please consult with the resources at the end of this blog for more information.
Let’s take a look at the different structures to give you a clearer picture and help you decide which would be best for your business.
A sole proprietorship is an unincorporated business that is owned by one individual. It is the simplest kind of business structure.
The owner of a sole proprietorship has sole responsibility for making decisions, receives all the profits, claims all losses, and does not have separate legal status from the business. If you are a sole proprietor, you also assume all the risks of the business. The risks extend even to your personal property and assets.
If you are a sole proprietor, you pay personal income tax on the net income generated by your business. If you are an Indigenous entrepreneur operating a business on-reserve s. 87 of the Indian Act provides a tax exemption in certain situations. Business income earned by an Indigenous entrepreneur on-reserve is not subject to income tax.
You may choose to register a business name or operate under your own name or both. You can register your business and complete an optional name search in the following ways; Through ServiceOntario’s website, In person at a ServiceOntario center, By mailing an application to the address indicated on the form.
The cost to register your business ranges from $60 to $80. Your registration is valid for five years, at which time it must be renewed.
If you operate as an individual, just bill your customers or clients in your own name. If you operate under a registered business name, bill your clients and customers in the business’s name. If your business has a name other than your own, you’ll need a separate bank account to process cheques payable to your business.
A partnership is an association or relationship between two or more individuals, corporations, trusts, or partnerships that join together to carry on a trade or business.
Each partner contributes money, labour, property, or skills to the partnership. In return, each partner is entitled to a share of the profits or losses of the business. The business profits (or losses) are usually divided among the partners based on the partnership agreement.
Like a sole proprietorship, a partnership is easy to form. In fact, a simple verbal agreement is enough to form a partnership. However, most partnerships are governed by a written agreement setting out rules for partners entering or leaving the partnership, the division of partnership income, and other matters.
The partnership is bound by the actions of any member of the partnership, as long as these are within the usual scope of the operations.
Six Structures and Their Requirements
Canada recognizes five broad categories of corporations. Each has advantages for certain types of businesses and tax rates, but none of them is perfect for everybody. Be sure to check in with a professional for advice before settling on one of these forms for your business.
- Canadian-controlled private corporation (CCPC): This is arguably the best form to choose for most Canadian citizens who want to start a corporation. The Canadian Revenue Agency (CRA) has a very long list of requirements for what counts as a CCPC, if only because of the advantages this form confers on its owners. These companies get preferential treatment at tax time because they are wholly owned by Canadian citizens and do business in Canada.
- Other private corporation: These are privately owned companies that don’t meet the strict requirements for a CCPC.
- Public corporation: These corporations are traded on the stock exchange, and anyone may buy a controlling interest.
- Corporation controlled by public corporation: These are private corporations owned or controlled by a public corporation. This generally covers subsidiaries that a public firm starts for a specific purpose, such as a restaurant chain.
- Other types of corporations: This is the miscellaneous category in the CRA’s rulebook. Every corporation that doesn’t fit into the other categories, such as a crown corporation, goes here.
At the Cutting Edge of Innovation
“B Corps are at the cutting edge of innovation, good governance and corporate citizenship,” says Carla Heim, Senior Advisor Social Entrepreneurship at BDC. “They are tackling major systemic challenges. These are truly innovative businesses.”
- B Corps are businesses that act in ways that benefit society as a whole. What defines them is their belief that the purpose of a company is not just profits, but also social and environmental good. This movement of people using business as a force for good has exploded since B Corps certification (the “B” stands for “beneficial”) was launched a decade ago. Over 2,200 companies are now certified as B Corps in more than 50 countries.
See more on B Corps at www.bdc.ca
One last thing to keep in mind though, the form of business ownership isn’t fixed forever. You can change the legal structure of your business as it grows. So, if you’ve started out as a sole proprietorship or partnership, you can become incorporated at a later date that suits the growth of your company.
If you are struggling to determine the best structure for you business, take a look at the tables below to help you decide a direction before speaking with your lawyer or accountant. But before you decide your structure, I do strongly recommend speaking with a professional.
The owner is 100% liable for the business, all debts and actions. Business income tax is filed with the owner’s personal income.
|Low start-up costs||Unlimited liability|
|Greatest freedom from regulations||Lack of continuity|
|Owner has full control||Difficult to raise capital|
|Limited transfer of ownership|
Each partner is wholly liable for the business; debts and profits are shared amongst the partners. It is strongly recommended that a Partnership Agreement be drawn up by a lawyer.
|Low start-up costs||Unlimited liability|
|Broader management base||Lack of continuity|
|Possible tax advantages||Divided authority|
|Limited outside regulations||Limited transfer of ownership|
|Hard to find suitable partners|
A distinct legal entity where owners have legal liability up to the limit of their investment; debts and profits are shared. Incorporating is complicated; legal and accounting assistance is recommended.
|Limited Liability||Closely regulated|
|Ownership is transferable||Costly to set up|
|Continuous existence||Charter restrictions|
|Limited outside regulations||Record keeping requirements|
|Easier to raise capital||Complex tax rules|
Tip: How to Choose?
|If this is true…||Choose this:|
|I plan to own and operate this business myself||Sole Proprietorship or Corporation|
|This will be a small business without a lot of risk||Sole Proprietorship or Partnership|
|I plan to share ownership and management responsibilities with others||Partnership or Corporation|
|I would like to seek investment from other people||Corporation|
For income tax purposes, business is defined as an activity where there is a reasonable exception of profit and there is evidence to support that intention. The business structure that you choose will affect many aspects of your business.
If you sell goods and services in Ontario, you may need a business number to collect and remit the Harmonized Sales Tax (HST). Most businesses that make less than $30,000 in any 12-month period are not required to charge HST; however, you can register voluntarily and claim input tax credits. The main point of contact for HST remittance is the CRA.
Government of Canada’s Indigenous Entrepreneur Guide to Starting a Business
Aboriginal Financial Institutions (AFIs) – Economic Growth Agency for Indigenous people
Indigenous Business Development Toolkit
This blog was written using resources from the CRA, BDC, and Quickbooks.
Learn more about Ella, https://indigenoustourismontario.ca/marketing/indigenous-business-advisor-program/
Thank you for reading this story in The Sharing Circle! If you have any feedback on this blog post, or would like to consult an IBA, please let us know by emailing us at IBA@indigenoustourismontario.ca.