From a legal point of view, there are four primary types of businesses:
- Sole Proprietorship
- Partnership
- Corporation
- Co-operative
When you decide to start your own business, the first decision you need to make is what type of structure best suits your needs and objectives.
1. Sole Proprietorship
This is the easiest and most inexpensive way to set up a business. However, the business has no legal separation from the owner. A sole proprietor is fully responsible for all debts and obligations related to the business. A creditor with a claim against a sole proprietor may have a right against both business and personal assets. This is known as unlimited liability.
A sole proprietor can conduct business outside of Saskatchewan but cannot register extra-provincially. Most provinces will only allow you to register this structure if you have a mailing address within the jurisdiction.
Sole proprietors file income on an individual tax return (T1 General) and a Statement of Business Activities (T2125). Income is taxed at an individual rate, which increases in proportion to your total income earned from all sources (your business, a part-time job, etc.). The higher your total personal income, the higher the tax rate.
Advantages
- Relatively low start-up costs
- Easy to register and low regulatory burden (name renewal every three years)
- Tax advantages to owner if business is not performing well (for example, deducting your losses from your personal income, and a lower tax bracket when profits are low)
- All profits go directly to owner
- A sole proprietor can operate under his/her own name (no obligation to use a business name)
Disadvantages
- Unlimited liability
- Lack of continuity if you pass away unexpectedly
- Can be difficult to do business internationally or with large buyers and suppliers
- Cannot expand outside of resident province
- May be difficult to secure a business loan; may have to take a personal loan
2. Partnership
A partnership is an agreement in which two or more people combine their resources. The business is similar to a sole proprietorship in that it has no legal existence beyond the owners. In order to establish the terms of the business and to protect partners in the event of a disagreement or dissolution, a Partnership Agreement should be created with the assistance of a lawyer. Partners share profits according to the terms of the agreement.
In a general partnership, each partner is jointly liable for the debts of the partnership. In a limited partnership, a partner can contribute to the business without being involved in its operations. A limited liability partnership is usually only available to a group of professionals such as lawyers, accountants, doctors, engineers, psychologists, etc.
Advantages
- Relatively low start-up costs
- Easy to register and low regulatory burden (name renewal every three years)
- Tax advantages to owners if business is not performing well (for example, deducting your losses from your personal income, and a lower tax bracket when profits are low)
- Business partners bring additional source of resources
Disadvantages
- Unlimited liability
- Divided authority and decision making
- Hard to find suitable partners and develop trust
- Possible development of conflict between partners
- Can be difficult to do business internationally or with large buyers and suppliers
- Business name cannot be reserved outside of resident province
- Can be difficult to secure a business loan; may have to take a personal loan
3. Corporation
A corporation is a legal entity that is separate from its owners, also known as the shareholders. Generally, shareholders are not personally liable for corporate debts and have limited liability regarding obligations or actions of the corporation. A corporation is identified by the suffix “Limited” or “Ltd.”, “Incorporated” or “Inc.”, “Corporation” or “Corp.”. This must be included in the legal name.
Decision making is conducted through a board of directors. A board is composed of one or more individuals who meet regularly, including an Executive Committee of Officers (CEO or President, Treasurer or CFO, Secretary, Past CEO or Past President). The directors can also be the shareholders or employees. Directors can be held personally liable if they fail to act in accordance with laws such as reporting or employment standards. Corporations can purchase Director and Officer Liability Insurance to avoid personal implications.
Corporations can pay out the operators in two basic ways. The first is through payroll, which means you become an employee of the corporation. Over the long term, it allows you to guarantee personal income and manage cash flow more effectively, but reduces the after-tax amount of retained earnings that you would probably reinvest in the corporation, regardless. The second way is to pay yourself via dividends. Dividends cannot be claimed as an expense, unlike salaries. Dividends are taxed at a corporate rate, and then again at a dividend tax rate, when claimed as personal income. The combined corporation and dividend tax rate is supposed to be similar to if the individual earned income from employment.
A Saskatchewan private corporation can be formed by one or more individuals. At least twenty-five percent of its directorship must be Canadian residents. If none of the directors reside in Saskatchewan, the corporation must appoint a Power of Attorney who resides in Saskatchewan. A private corporation cannot sell shares or securities to the general public.
A Saskatchewan public corporation is one that issues shares and securities for public distribution and is listed on a designated stock exchange. Besides filing incorporation documents, a public corporation must file a prospectus with the Saskatchewan Securities Commission, must employ outside auditors and must distribute financial statements and general reports, among other obligations.
Advantages
- Limited liability as the business is a separate legal entity
- Continuous existence since shares and directorships are transferable
- Easier to raise capital and do business with large or international companies
- Corporation tax rate range is not as varied as personal income tax rates
Disadvantages
- Closely regulated – age, decision making and residency expectations
- Most expensive form to organize
- Extensive record keeping necessary, including detailed meeting minutes and documentation filed annually with the government
- Double taxation may occur on dividends (corporate, personal)
- Possible development of conflict between shareholders and executives
Private and public corporations may federally incorporate under the Canada Business Corporations Act. Essentially, federal incorporation protects a business name across Canada so that no other firm can register that same name in any province. A firm operating nationally or in several provinces may find this advantageous. A federally incorporated business must still register in each province in which it has an office or does a significant amount of business.
Non-profit organizations and condominium associations also must register as a corporation. This formalizes the activities of the organization and reduces liability to the stakeholders and directors. Choosing not to incorporate your non-profit means you are an “association” and each member is held personally liable.
If you want your business to hold a “title”, such as a land title, vehicle registration, asset registration, certain insurance policies, stocks etc., you must incorporate.
4. Co-operative
A co-operative is a self-governing corporation organized and controlled by an association of members who pool resources to provide and access goods, services, or other benefits. Decision making is democratic – based on one member, one vote.
A co-operative is identified by the use of the words “Co-operative”, “Limited”, or “Ltd”. Co-operatives are categorized under three different acts: The Co-operatives Act 1996; Canada Cooperatives Act; The New Generation Co-operative Act.
A traditional co-op requires open and voluntary membership; however New Generation co-ops are allowed to restrict membership to those who produce, process or market agricultural products; and/or provide services to persons engaged in producing, processing or marketing agricultural products.
Advantages
- Owned and controlled by members
- Limited liability
- Profit distribution (surplus earnings) to members typically in proportion to use of service; surplus may be allocated in shares or cash
Disadvantages
- Possible development of conflict between members
- Longer decision-making process
- Participation of members required for success
- Extensive record keeping necessary
- Less incentive to invest additional capital
Changing Business Structures
Changing structures (i.e., from a sole proprietor to a corporation) is possible; however you will have to cancel your existing business and all associated accounts and re-register as your preferred structure.
Making any significant change, such as a new business name, expansion, amalgamation, ownership succession, dissolution, etc., usually requires a filing event to occur. There are corresponding forms for modifications from Information Services Corporation (the Saskatchewan Corporate Registry) and tax authorities that you will need to submit.
