Deciding on which countries to expand your business can be a complex and difficult decision. Perhaps some of you are considering whether you should register company in Canada. To help you make a better decision, in this article, Tetra Consultants will offer key insights about the different types of companies in Canada you can choose to set up.
1. Sole proprietorship
The sole proprietor is one of the most simple business structures, where a single individual owns the business as in charge of making all relevant decisions and running operational activities. This makes the business and its operating structure relatively straightforward. However, certain regulatory requirements, such as licensing and business name registrations, will still apply. Hence, this structure is best suited for small enterprises, as all benefits and liabilities of the business flow through to the individual.
However, by being a sole proprietor, the Canadian Revenue Agency sees the owner and the business itself as the same entity, meaning that one is personally responsible for the business actions and inactions. This means that the risks and liability of your business is the same as the liability of the sole person who owns that business. As such, assets owned by the individual privately are at risk in honouring the liabilities of the business. Furthermore, as a sole proprietor, income tax imposed is in accordance with the personal income tax rate, not the corporate tax rate, as profits of the business flow directly to the individual.
A partnership is a business made of at least 2 or more individuals but is not incorporated. This means that the group of owners and business partners have to privately determine how profits earned are distributed amongst themselves, and are all responsible for any debt obligations or legal action taken against the business.
Within the country, each province has exclusive jurisdiction with respect to partnerships and has enacted its own specific partnership legislation correspondingly. However, in general, similar to that of a sole proprietor, a partnership has no clear legal structure. However, it is highly encouraged for the different business owners to have an official agreement clearly stating how the business is structured and operated, especially with regards to revenue, expenses, liabilities and profits.
When it comes to the issue of taxation, the partnership is not required to file a tax return or pay income tax. In contrast, much like a sole proprietorship, the state views the partnership and its members as one in the same entity. As such, each individual partner is responsible for filing their own income tax return and claiming the agreed upon split of profits and losses of the business operations.
However, there are specific types of partnerships where business owners are not fully liable for the firm’s debts and burdens. For instance, limited partnerships consist of general partners and limited partners. While general partners predominantly manage the affairs of the business and are personally liable to an unlimited extent, limited partners do not actively contribute to the business management process and their liability is limited to the amount of capital contributed. In fact, in some jurisdictions, limited liability partnerships are permitted, typically to professionals in the medical or legal industry. Under this specific type of business structure, only the personal assets of individual partners whose actions led to these liabilities are held accountable, while others are shielded from these burdens.
In clear contrast to other types of companies in Canada like sole proprietorship or partnership, a corporation is viewed by the state as its own legal entity endowed with the exact same legal abilities of a natural person such as the ability to own property, conduct business, borrow, lend, sue or be sued.
Additionally, owners of the corporation do not directly own any assets of the corporation and are usually not personally responsible for its liabilities. Hence, corporations offer limited liability which personally protects business owners, the easy transfer of assets and perpetual existence as an entity.
Additionally, this means that corporations come with the benefits of lower tax rates in contrast to partnerships, lowering the net business costs. However, this could result in higher administrative costs due to set up fees, more paperwork, or additional money spent acquiring the support of experts in the respective areas to handle more complex tax filing requirements.
However, if you are foreign investor looking to register business in Canada, you must take note of residency requirements. The Canada Business Corporations Act mandates that a minimum of 25% of a corporation’s directors must be residents in Canada. In cases with less than four directors, this Act stipulates that one director be resident in Canada. Furthermore, each Canadian province has varying requirements regarding residency which businessmen wishing to incorporate in Canada must account for.
4. Branch Operations
Another option foreign investors could explore when considering whether to register company in Canada is the setting up of a branch operation. In order to establish a branch operation, one must obtain a license or otherwise register in the specific province where it carries out business in. While the specific legal definition for “carrying out business” is different across various provinces, in general, key criterion determining if a corporation is indeed carrying out business are:
- Having a representative or office which conducts its business in the province
- Holding an interest in tangible property located within the province
Failure to obtain an official license for such a branch office may result in being unable to legally enforce any contracts negotiated by or under its name within court proceedings, thus hurting business operations. This could also be accompanied with various penalties from Canadian regulatory authorities if such licenses are not properly obtained.
Despite these concerns, the business structure of branch offices is commonly used because they enjoy certain tax advantages. However, given that this branch office is not treated as a legally distinct entity from the parent company, the parent will be liable for any obligations and debts incurred by such Canadian operations.
6. Joint Ventures
“Joint venture” refers to any business structure where two or more individuals agree to contribute goods, services or capital to a common commercial enterprise. While there are no existing legal structures and official statutes regulating such joint ventures, these business initiatives are governed in accordance with the private contracts agreed upon by the participating parties and interests. As such, the specific terms of collaboration, the nature of co-venturers’ respective contributions, profit and management structures/hierarchies are most commonly, clearly stipulated in these agreed upon contracts.
Navigating Canada’s complex business environment with multiple contrasting corporate structures and variations is most definitely a challenging process – a hassle to say the least. Yet, despite the potential logistical challenges which will come with register business in Canada, each type of company comes with its own unique benefits, ranging from tax benefits, administrative benefits or greater corporate flexibility in general. Tetra Consultants hopes that through this article, you have a much clearer picture of these different types of companies in Canada.
So, what are you waiting for? Contact us to find out more about the process of starting a business in Canada today, and our dedicated and experienced team will respond within the next 24 hours.