Guide to Choosing

Your Business
Structure

MAQ CPA

1840 Lawrence Ave East Unit

203, Scarborough ON M1R 2Y4

416-901-4126

abdul@maqcpa.ca

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Table of Contents
Introduction .......................................................................................................................... 2

Sole Proprietorship ................................................................................................................ 2

Partnership ........................................................................................................................... 3

Corporation ........................................................................................................................... 3

Business number and program accounts ................................................................................ 4

The End ................................................................................................................................. 4

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Introduction
Business structure plays an important role in tax perspective. Business structure determines how you
will report income and which tax forms/returns you will have to use to report income to CRA. There are
three most common types of business structures being used, which are as follows:

1. Sole Proprietorship
2. Partnership
3. Corporation

Sole Proprietorship
A sole proprietorship is the simplest business structure, which is unincorporated and owned by one
individual who is solely responsible for business risks, profits and losses. It has no separate legal status;
the sole proprietor reports business incomes/losses in his/her personal tax return. The sole proprietor
takes full risk of operating the business and exposes personal properties and assets to risks in case
creditors come after them due to business failure.

Business can be operated under an operating name or in sole proprietors personal name or both. Sole
proprietors pay small business tax, if any as part of their personal income tax reported on the individual
tax return i.e., T1 return.

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Partnership
A partnership is an association of two or more individuals or corporations or partnerships or trusts who
joined together to carry out a venture or a trade or a business. This is also a simple form like as sole
proprietorship. Although a partnership can be formed on verbal agreement but the written agreement
should be in place to avoid any disputes regarding the contribution of money, labor, property and skills,
the share of profits/losses, enter/exit of partners, and any other matters.

Partnership is considered as a person for GST/HST purposes, which reports and remits any GST/HST
owing to CRA. Partnership affairs should be written in a clear and understandable manner in order to
avoid any confusion. However, unlike sole proprietorship, partnership income is divided among the
partners who ultimately report partnership profits/losses in their respective tax returns.

Corporation
A corporation is a separate legal entity with lasting existence, the owners or shareholders of which are
considered as the separate persons. Few important factors of a corporation are as follows:

It can enter into and enforce any contract and own property in its name.

It can raise capital and borrow funds easily than a sole proprietorship or a partnership.

It reports its profits or losses in corporation income tax return i.e., T2 return, and shareholders cannot
report its losses in their personal income tax return.

Shareholders liability is usually limited, that means that they are not liable for a corporate debt.
However, if they provide any personal guarantee for corporate debt, then they are liable to repay in
case the corporation fails to repay the debt.

Directors (most small business owners/shareholders are directors as well in their corporation) are
personally liable for paying to CRA for any owning for income tax, GST/HST and payroll deductions on
behalf of the corporation.

A corporation can be set up with federal or any provincial government by filing articles of incorporation
appropriate to your business. A corporation can be set up as a numbered or named corporation. In case
of named corporation, you need to search first for availability of the proposed name. While
incorporating shareholders usually transfer money, property and services to the corporation in

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exchange of shares issued by the corporation. You can buy and sell shares of the corporation. A
corporation exists until and unless it winds up or merges or declares as a bankrupt or so.

Taxpayers may use a corporation for tax deferral purpose. At present, corporations entitled to small
business deduction pay a lower rate of 15% federal and Ontario combined. Taxpayers with higher
income may choose to set up a corporation and receive either a payroll or a dividend or mix of both to
the extent they need personally and leave remaining income into the corporation by paying taxes at a
lesser than personal tax rate.

Business number and program accounts

Whenever a business is registered with CRA, they assign a 9-digit business number (BN). A corporation
receives a BN after the incorporation. However, for a sole proprietorship or a partnership it is not
automatic. If annual taxable supplies are more than $30,000, then you (sole proprietorship, partnership
and corporation) need to have GST/HST registration from CRA. Four most common program accounts
you may be required to register for, their identifiers are: (a) RT for GST/HST, (b) RC for corporation
income tax, (c) RP for payroll deductions and (d) RM for import/export. You can register with each
program accounts whenever you need to.

The End
Consult with a Small Business Accountant or business incorporation service provider to decide on the
proper business structure and to get started.

Tax Accountants Toronto or Professional Accountants can help you decide on appropriate business
structure based on your specific situation.

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