Business Income

Small Business Structures

If you want to start a small business, there are a number of business structures you can choose from including sole proprietorship, partnership, and corporation. Each of these categories offers a range of benefits and drawbacks. The Canada Revenue Agency treats each of these entities differently, making it important to understand all of your options before you decide on the ideal structure for your business.

Sole Proprietorship

If you are running your business on your own or even with a few employees, you may want to establish your business as a sole proprietorship. As sole proprietor, you have the lowest amount of regulatory burden, and you don’t have to share decision-making or control with anyone else.

When it’s time to file your taxes, you simply file them as self-employed, claiming your business income and deducting your expenses. For years where you have a lot of profit, the profit goes to you alone, and for years where you don’t make a lot of money, you don’t have to pay a lot in taxes. In some cases, you can even carry forward losses to future years.

The downside of having a sole proprietorship is that you are the only liable party. If something goes wrong or if you can’t pay a debt, your personal finances or assets may be on the line.

In many cases, when filing your taxes as a sole proprietor, your social insurance number is used to identify your business. However, as your business grows, you may need to apply for a business number.

A BN streamlines the communication process between you and the government. For some companies a BN is optional while for others it is mandatory. If you need to remit GST/HST, file payroll taxes, or pay import/export fees, the CRA requires you to procure a BN. To obtain a BN, fill out Form RC1 and submit it to the CRA, or use the CRA’s online service, Business Registration Online.

Partnership

If you have a partner running your business alongside you, the CRA considers your business to be a partnership. Like a sole proprietorship, you and your partner(s) can be held personally liable for the business’s debts. However, unlike a sole proprietorship, you share liability with the other partner(s).

Partnerships can be governed by written or verbal contracts, and can be set up either to give each partner an even share of the business, or to have the shares reflect the effort put in.

For example, if you and your spouse are partners, when you file your taxes you can split everything down the middle. You can report half of the income and expenses on your tax return, and your spouse or common-law partner can report the other half on his return.

Alternatively, you may declare 80 percent of the income and deductions while your partner declares the other 20 percent. As long as all the partners agree, you can use the arrangement that makes the most sense for your business’s needs.

Regardless of your partnership style, you still simply file your taxes as though self-employed, in most cases. However, if your partnership has more than $5 million in worldwide assets, or an absolute value of revenue plus expenses that exceeds $2 million, you must also file a T5013, Partnership Information Return. Additionally, if one of your partners is a corporation or another partnership, you must also complete this form and submit it with your tax return.

Corporation

If you opt to incorporate your business, you essentially turn your business into its own entity and are no longer personally liable for its financial debts or obligations.

Unfortunately, it can be expensive to incorporate your business, especially when compared to the free cost of setting yourself up as self-employed or creating a verbal contract with a partner. Additionally, you have to be vigilant with record keeping, as you have to file extensive corporate records, such as notes from shareholder meetings, with the government every year.

To file your corporate taxes, you or the accountant representing your corporation must complete and send in form T2 Corporation Income Tax Return. If your annual gross revenues are more than $1 million, you must file online.

Co-Operative

The least common type of business structure in Canada is the co-operative. Like shareholders in a corporation, co-operative members are not personally liable for the co-operative’s debts. Unlike a corporation, however, co-operatives offer democratic control of a company to a group of members, allowing each member a vote regarding company matters.

Although the structure of a cooperative is slightly different than a cooperation, the CRA views them to be essentially the same. As such, a co-operative must also file a T2 Corporate Income Tax Return.