In Canada, four ways exist to structure your business:

Sole proprietorship

This is a partnership with a single partner: you.

While regarded as the most straightforward way to set up a business (having fewer start-up costs, less paperwork, more direct control, and minimal working capital needed), it also means that as sole proprietor, you are personally liable for the activities of your company.

You will find yourself in a position of unlimited liability, which means should debt arise, your creditors will have the right to claim against all your personal AND business assets. This occurs because a sole proprietorship is not a separate legal entity from its owner.

Partnership

This is a partnership between two or more parties.

In this case, a legal contract is usually prepared to define the terms of the partnership and how the profit-sharing will work. A partnership is also not a separate legal entity from its owners. Two types of partnership exist in Ontario:

  • General partnerships—where each partner shares the management and remains personally and legally liable for the company’s debts
  • Limited partnerships—where some (“general”) partners manage the company and other (“limited”) partners contribute only financially—here, the extent of liability and profit-sharing varies and will have been defined contractually at the onset.

Corporation

A corporation is a business structure that is a separate legal entity from its owners.

No personal liability for the debts or obligations of the company is assumed by the owners (shareholders)—their liability remains limited to the value of their investments. A corporation has more of a continuous existence than a sole proprietorship or a partnership as its lifespan is not tied to specific individual ownership. Two types of corporations exist in Ontario, and they can be incorporated at the provincial or federal level.

  • Private corporations: These can be formed by one or more people, but must have a majority of its directors residing in Canada. Private corporations cannot sell shares or securities to the public.
  • Public corporations: These can list and sell shares and securities to the public. They must operate in compliance with the Ontario Securities Act regulations. In Ontario, private and public corporations can incorporate at the provincial or federal level.

Cooperative

A corporation where members with similar needs have organized to create a business structure through which they can either obtain or share certain products or services.

In a cooperative, each member is voluntary and has an equal democratic say in the running of the business. A cooperative returns limited interest on investment and distributes its profits to members in relation to the extent of their patronage.

References

Markle, K. (2004, August). Introduction to Accounting. Presentation delivered at Schulich School of Business, York University, Toronto, Canada.

Pratt, Jamie. (2003). Financial Accounting in an Economic Context.New York: John Wiley & Sons. pp. 750, 762, 766.

Government of Canada. (2012, June 7). Corporation, partnership, or sole proprietorship? Retrieved June 7, 2012 from Canada Business Network website: http://www.canadabusiness.ca/eng/page/2853/.