According to the Canada Revenue Agency (CRA) “For income tax purposes, a business is an activity that you intend to carry on for profit and there is evidence to support that intention.”
1. Sole Proprietorship – this business is unincorporated and is owned by one person. That person is the only person that makes decisions, claims any profit made as their own but can also claim any loss the business may have as well. In this business structure the owner also carries all legal liabilities which can even extend to the personal property and assets.
A sole proprietor will pay income tax on all profits generated by the business activities by reporting income (or loss) on their personal tax return.
2. Partnership – this business is comprised of two or more people, corporations or trusts that work together to carry on business. Each partner contributes to the partnership in some form or another – money, labour, property or skills. A partnership should have a partnership agreement to determine what share of the profit (or loss) each partner is entitled to.
At tax time each partner includes a share of the partnership income (or loss) on their personal, corporate or trust income tax return depending on the type of partnership the business is.
3. Corporation – this type of business is a separate legal entity. It can own property in its own name separately from the owners. Owners of the corporation are called shareholders. They transfer money, property or services to the corporation in the start up phase in exchange for shares.
Since a corporation has a separate legal existence from the owner, the company must file an income tax return of its own to report and pay tax on the the profit made. This tax return must be filed within 6 months of the end of each fiscal tax year (not necessarily Dec 31 as with sole proprietors and partnerships). Complete financial statements must be prepared along with a T2 tax return. Usually, a corporation will pay taxes in instalments on a quarterly or sometimes even monthly basis.
As a shareholder, the owner of the company has only limited liability (rather than full liability as with the first two business structures). However that protection is only limited. A bank may ask for the shareholders personal guarantee that a loan will be paid back. This also applies to any taxes owing. If a corporation owes taxes and CRA chooses to intercept any loans or credit lines on account of the tax arrears and if the shareholder has given the bank a personal guarantee, then the shareholder will be jointly liable as well.
Shareholders may also be liable to pay amounts owed by the corporation for any payroll deductions that the corporation may have failed to remit.
Information taken from: Canada Revenue Website
- The Difference Between a DBA, Sole Proprietor, Corporation and LLC (smallbiztrends.com)
- Which Business Structure Is Right For You? (smallbusinessbonfire.com)
- The Pros and Cons of Sole Proprietorship (corpnet.com)