What You Need to Know Before Starting a Business in Canada: Types, Benefits, and Requirements

8 min readOct 23, 2023

Have you ever dreamed of starting your own business in Canada? Whether you want to sell your products or services online, open a store or restaurant, or offer professional or consulting services, Canada is a great place to launch your entrepreneurial journey. But before you take the plunge, you need to know some important things about the types, benefits, and requirements of different business structures in Canada.

Key Takeaway:

Choose the right business structure for your needs and goals in Canada
Learn about the three common types of business structures: sole proprietorship, partnership, and corporation
Compare the pros and cons of each business structure in terms of taxation, financing, risk management, and exit strategy
Follow the requirements for registering and operating your business in Canada
Get more information and guidance from this article

Introduction

Canada is one of the best countries in the world to start and run a business. It has a stable economy, a diverse and skilled workforce, a supportive government, and a large and growing market. According to the World Bank, Canada ranks 23rd out of 190 countries in ease of doing business. It also offers various incentives and programs for entrepreneurs, such as tax credits, grants, loans, and mentorship.

In this article, we will cover the basics of what you need to know before starting a business in Canada. We will explain the differences between the three common types of business structures: sole proprietorship, partnership, and corporation. We will also discuss the benefits and drawbacks of each one, as well as the legal and financial requirements that you need to meet. By the end of this article, you will have a better understanding of which business structure is best suited for your needs and goals.

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Types of Business Structures in Canada

A business structure is the way you organize your business legally and financially. It affects how you pay taxes, how you raise funds, how you manage risks, and how you exit or transfer your business. Choosing the right business structure is crucial for your success and profitability. It can also save you time, money, and headaches in the long run.

There are three common types of business structures in Canada: sole proprietorship, partnership, and corporation. Each one has its own characteristics, requirements, and benefits. Let’s take a closer look at each one.

Sole Proprietorship

This is the simplest and most common type of business structure. It means that you are the sole owner and operator of your business. You have full control over all aspects of your business. You also have full responsibility for all debts and liabilities of your business.

For example, if you are a freelance writer or photographer who works from home, you are likely operating as a sole proprietor.

Some advantages of sole proprietorship are:

It is easy and inexpensive to set up and run.
You have complete freedom to make decisions for your business.
You keep all the profits from your business.
You can deduct business expenses from your income.
You may qualify for the small business deduction if your income is below a certain threshold.

Some disadvantages of sole proprietorship are:

You pay personal income tax on your business income at your marginal tax rate.
You rely on your own savings, credit, or personal loans to fund your business.
You may have difficulty accessing external financing from banks or investors.
You are personally liable for all debts and obligations of your business.
You may lose your personal assets if your business fails or faces a lawsuit.
You have limited options to exit or transfer your business.

Partnership

This is when two or more people agree to share the ownership and operation of a business. You can have different types of partnerships, such as general partnership, limited partnership, or limited liability partnership. Each type has its own rules and implications for how you share profits, losses, decision-making power, and liability.

For example, if you are a lawyer or an accountant who works with other professionals in your field, you may be part of a partnership.

Some advantages of partnership are:

It is relatively easy and inexpensive to set up and run.
You pool your resources with your partners to fund your business.
You may have access to more financing options from banks or investors.
You can benefit from the skills, experience, and network of your partners.
You can deduct business expenses from your income.
You may qualify for the small business deduction if your income is below a certain threshold.

Some disadvantages of partnership are:

You and your partners pay personal income tax on your share of the business income at your marginal tax rate.
You and your partners are jointly and severally liable for all debts and obligations of the business.
You may lose your personal assets if the business fails or faces a lawsuit.
You need to have a partnership agreement that outlines how you will manage the partnership, such as how you will share profits and losses, how you will make decisions, how you will resolve disputes, etc.
You may have conflicts or disagreements with your partners over the direction or operation of the business.
You need the consent of the other partners to exit or transfer your interest in the partnership.

Corporation

This is when you create a separate legal entity for your business. It means that your business has its own rights and obligations that are distinct from yours as an individual. You can have different types of corporations, such as private corporation, public corporation, or non-profit corporation. Each type has its own advantages and disadvantages for how you raise capital, pay taxes, distribute dividends, and protect your assets.

For example, if you are an inventor or an entrepreneur who wants to scale up your business or go public, you may want to incorporate your business.

Some advantages of corporation are:

Your corporation pays corporate income tax on its profits at a lower rate than personal income tax.
You pay personal income tax on the salary or dividends that you receive from the corporation.
You can take advantage of various tax credits, deductions, and deferrals that are available for corporations.
You can raise capital by issuing shares or bonds to shareholders or creditors.
You have access to a wider range of financing options from banks, investors, or the public market.
Your corporation is liable for its own debts and obligations.
Your personal assets are generally protected from the creditors or lawsuits of the corporation, unless you provide a personal guarantee or act fraudulently or negligently.
You have more options to exit or transfer your shares in the corporation, subject to certain restrictions or conditions.

Some disadvantages of corporation are:

It is more complex and costly to set up and run than other business structures.
You need to follow the rules and regulations of the federal or provincial government that governs your corporation, such as filing annual reports, holding annual meetings, keeping records, etc.
You have less control over your business than other business structures, as you need to consider the interests and rights of other shareholders, directors, officers, etc.
You may face double taxation if you pay corporate income tax on your profits and personal income tax on your dividends.

Requirements for Each Business Structure

To start and run a business in Canada, you need to comply with various federal, provincial, territorial, and municipal laws and regulations. Depending on the type of business structure you choose, you may need to do some or all of the following:

Choose a name for your business: You need to make sure that your business name is unique and not confusing with other existing businesses. You can use the [Business Name Search] tool to check the availability of your desired name.
Register your business: You need to register your business with the appropriate government authority and obtain a business number (BN). A BN is a unique identifier that you use for tax purposes and other transactions with the government. If you operate as a sole proprietorship or a partnership, you can register your business online through the [Business Registration Online] service. If you want to incorporate your business, you can use the [Corporations Canada] website to file your articles of incorporation and other documents.
Get permits and licenses: You need to obtain any permits or licenses that are required for your type of business activity and location. For example, you may need a zoning permit, a building permit, a health permit, a liquor license, etc. You can use the [BizPaL] service to find out what permits and licenses you need for your business.
Open a bank account: You need to open a separate bank account for your business transactions. This will help you keep track of your income and expenses, as well as prepare your financial statements and tax returns.
Hire employees: If you plan to hire employees for your business, you need to follow the labour laws and standards that apply to your jurisdiction. For example, you need to pay minimum wage, provide vacation pay, deduct payroll taxes, etc. You can find more information on hiring employees for your business in Canada on the [Hiring and managing employees] page. You can also use the [Recruiting and hiring] page to find tips and resources for finding and attracting the right talent for your business.
Keep records and report taxes: You need to keep accurate and complete records of your business transactions, such as income, expenses, assets, liabilities, etc. You also need to report and remit your taxes to the government on time, such as income tax, GST/HST, payroll tax, etc. You can use the [Business taxes] page to find out what taxes you need to pay and how to file your returns.
Protect your business: You need to take measures to protect your business from potential risks, such as theft, fire, cyberattack, etc. You can use the [Business security and emergency management] page to learn how to secure your premises, data, and employees. You can also consider getting insurance for your business to cover any losses or damages that may occur.

Conclusion

In this article, we have covered the basics of what you need to know before starting a business in Canada. We have explained the differences between the three common types of business structures: sole proprietorship, partnership, and corporation. We have also discussed the benefits and drawbacks of each one, as well as the legal and financial requirements that you need to meet. We hope that this article has helped you understand which business structure is best suited for your needs and goals.

If you are ready to start your business in Canada, you can use the [Starting a business] page to find more information and guidance on how to plan, launch, and grow your business. You can also contact us if you have any questions or need any assistance with your business registration or operation.

Thank you for reading this article. We wish you all the best with your business venture in Canada.