One of the most important decisions you make when starting a business is the type of legal organization you select for your company.
This decision can affect how much you pay in taxes, the type of reporting required, and your exposure to personal liability. If you are unsure which business structure is best for your business, we recommend you contact a lawyer or an accountant to get advice.
Forms of business structure
- Sole Proprietorship
A sole proprietorship is the simplest form of business, owned and operated by one person, with no separate legal existence from its owner.
Sole proprietorship advantages
- Easy to set up, with minimal cost.
- Direct control of decision making.
- Business losses can be written off against other income of the owner.
- The administration of a sole proprietorship is less costly than that of a corporation.
- If you operate your business under your own given name (first name and last name), you do not have to register a business name. However, you must erect a sign or poster displaying your name at the place where you will run your business. Example: Jane Doe’s Flower Shop.
Sole proprietorship disadvantages
- The owner is personally liable for all business debts. Creditors may be able to recover against the owner’s personal assets (e.g. home, car) to satisfy business debts.
- Business profits are combined with the owner’s other income and taxed at personal rates regardless of how much money the owner withdraws from the business during the year.
- Lack of permanence. If the owner dies, business assets become part of his or her estate, and there may be immediate tax implications. In addition, valuable leases and contracts may not transfer to the estate.
Sole proprietorship future considerations
A sole proprietorship can be converted to a corporation if the needs of the business change. The decision to incorporate is often prompted by the need for limited liability protection, lower corporate tax rates, tax deferral and the opportunity for income splitting.
A partnership is a legal entity made up of more than one person carrying on business. A person can include a natural person and those created by law (e.g. corporations, unincorporated associations, trusts, etc.). All partnerships must be registered with the Manitoba Companies Office.
- Setup costs are relatively low.
- Partners can combine their financial resources and skills without the cost and reporting requirements associated with a corporation.
- Business losses can be written off against other income of the partners.
- Partners can legally bind one another and are each responsible for the debt obligations, as well as wrongful acts or omissions by another partner. Essentially each partner is responsible for the actions of the other partner(s).
- Decisions must be made jointly.
- Each partner’s share of the business profits or losses are combined with their other income and taxed at personal rates regardless of how much money they withdraw from the partnership during the year.
- In the absence of a partnership agreement, the business must be dissolved when a partner leaves or dies, or when there is a dispute which cannot be resolved. Also, the death or retirement of a partner will not end the partner's liability for debts and obligations of the partnership that were incurred before the death or retirement.
A partnership agreement is strongly recommended. It is a written document that outlines the relationship between the business owners and their individual obligations and contributions to the partnership.
An agreement should be drawn up with the assistance of a lawyer to establish the terms of the partnership and protect business owners. Documenting roles and responsibilities, and how each partner will be remunerated can save time and money if disputes arise.
Partnership future consideration
A partnership can be converted to a corporation if the needs of the business change. The decision to incorporate is often prompted by the need for limited liability protection, lower corporate tax rates, tax deferral and the opportunity for income splitting.
A corporation is a legal entity that is separate and distinct from its owner(s). The corporation name must include a legal element identified by the terms “Limited”, “Ltd”, “Incorporated”, “Inc”, “Corporation” or “Corp”. Legal assistance is advisable for setting up a corporation.
- Limited liability exposure for personal assets.
- Easier to obtain financing. May be able to access larger loans and the ability to raise equity capital from investors.
- Profitable small businesses with active business income (ABI) can take advantage of tax deferral due to low corporate tax rates.
- Income splitting opportunities with members of your family or other individuals that become shareholders and receive dividends from the corporation.
- The life of a corporation is not affected by a shareholder’s death.
- Capital gains exemption on the sale of shares of a qualifying small business corporation.
- High setup and administrative costs.
- More administrative requirements including holding an annual shareholders’ meeting, keeping minute books and share records up to date, filing an annual return of information and preparing and filing a separate annual corporate tax return.
- Most complex business structure to set up. Care must be taken in setting up classes of shares, determining who will be shareholders and how much control they will have. Legal advice is recommended.
Provincial vs. federal corporations
Provincial corporation (Manitoba)
If your business operates primarily within Manitoba, provincial incorporation may be enough for you. When you incorporate your business under The Corporations Act in the province of Manitoba, you are only entitled to operate your business in Manitoba and only have business name protection in Manitoba. All Manitoba corporations must be registered with the Manitoba Companies Office.
Federal incorporation under the Canada Business Corporations Act provides nation-wide business name protection (the corporate name is approved for use in every province or territory in Canada that the business wishes to operate in). It also provides more global recognition than provincial incorporation if you plan to operate internationally. If you choose federal incorporation, you will also be required to register your federal corporation in Manitoba and any other province or territory in which you carry on business.
Corporations Canada gives you a general overview of creating and operating a business corporation including information on the steps to incorporating, your obligations and more.
If you plan to operate your business outside of Manitoba, you must register your corporation in each province or territory in which you carry on business, even if you have chosen federal incorporation. Each province or territory has their own rules and regulations governing extra-provincial registration.
This document provides general information on registration of a business and incorporation. It is not intended to convey legal or tax advice and you may find it useful to consult a lawyer and an accountant. The list of advantages and disadvantages may not be complete.