Why Business Structure Matters

Selecting the right business structure is one of the most important decisions you'll make as an entrepreneur. It affects:

• How much you pay in taxes
• Your personal liability for business debts
• How you raise capital and attract investors
• Administrative complexity and costs
• Your ability to sell or transfer the business

Sole Proprietorship

The simplest business structure where you and your business are legally one entity.

Advantages

• Easy Setup: Register your business name and you're ready to go
• Low Cost: Minimal registration and compliance fees
• Simple Taxation: Report business income on your personal tax return
• Complete Control: You make all decisions
• Tax Flexibility: Business losses offset personal income

Disadvantages

• Unlimited Liability: Your personal assets are at risk if the business faces lawsuits or debts
• Higher Tax Burden: All income taxed at personal rates (no small business deduction)
• Difficult to Raise Capital: Can't issue shares or attract investors
• Business Ends with Owner: Difficult to sell or transfer

Best For

• Low-risk businesses
• Freelancers and consultants
• Testing business ideas with minimal commitment
• Businesses with limited income initially

Partnership

Two or more people share ownership, profits, and responsibilities.

Types of Partnerships

• General Partnership: All partners share liability and management
• Limited Partnership: General partners manage; limited partners invest but have limited liability
• Limited Liability Partnership (LLP): All partners have limited liability (common for professionals like accountants and lawyers)

Advantages

• Shared Resources: Pool capital, skills, and expertise
• Simple Taxation: Income flows through to partners' personal returns
• Flexibility: Partners can agree on profit-sharing arrangements
• Low Setup Costs: Similar to sole proprietorship

Disadvantages

• Unlimited Liability (General Partners): Personal assets at risk
• Joint Liability: You're responsible for your partners' business decisions
• Potential Disputes: Disagreements can harm the business
• Instability: Partnership may dissolve if a partner leaves or dies

Best For

• Professional services (law, accounting, medicine)
• Businesses requiring complementary skills
• Family businesses

Corporation

A separate legal entity owned by shareholders, offering the highest level of protection and tax benefits.

Types of Corporations

• Canadian-Controlled Private Corporation (CCPC): Eligible for small business deduction
• Public Corporation: Shares traded publicly

Advantages

• Limited Liability: Shareholders' personal assets are protected
• Tax Advantages: Small business deduction (first $500K income taxed at ~12.2%)
• Income Splitting: Pay family members dividends or salaries
• Easier to Raise Capital: Issue shares to investors
• Perpetual Existence: Business continues even if shareholders change
• Credibility: Perceived as more established and professional
• Deferral of Taxes: Leave profits in the corporation at lower rates

Disadvantages

• Higher Setup Costs: Legal fees for incorporation
• Ongoing Compliance: Annual filings, corporate tax returns, minute books
• Double Taxation: Corporate income taxed, then dividends taxed in shareholders' hands
• Complexity: Requires professional accounting and legal advice
• Stricter Regulations: More rules and reporting requirements

Best For

• High-income businesses (over $100K annually)
• Businesses with significant liability risks
• Companies planning to raise capital or attract investors
• Businesses planning for growth and expansion

Tax Comparison

Sole Proprietorship/Partnership

• All income taxed at personal marginal rates (up to 53.5% in BC)
• No small business deduction
• Business losses offset personal income

Corporation (CCPC)

• First $500K of active business income taxed at ~12.2% (federal + BC)
• Income over $500K taxed at ~27%
• Dividend tax credit reduces shareholder-level tax
• Tax deferral opportunities

Incorporation Threshold

Generally, incorporation becomes beneficial when:

• Business income exceeds $100,000 annually
• You want to defer taxes by leaving profits in the corporation
• You need liability protection
• You want to income-split with family members
• You're planning for business growth and investment

Special Considerations

Professionals (Doctors, Lawyers, Accountants)

Many professionals can incorporate (e.g., Professional Corporation for doctors), gaining tax benefits while maintaining professional standards.

Real Estate Investors

Corporations may not be ideal due to loss of principal residence exemption and capital gains exemption. Consult a tax advisor.

Startups Seeking Investment

Incorporation is usually required to issue shares to investors and access venture capital.

How to Decide

Ask Yourself:

• What is my expected annual income?
• What are the liability risks in my industry?
• Do I plan to reinvest profits or take all income personally?
• Will I need to raise capital from investors?
• Am I comfortable with the administrative complexity of a corporation?
• Do I want to involve family members in income splitting?

Changing Your Structure

You can change your business structure as your needs evolve:

• Sole Proprietorship to Corporation: Common when income grows
• Partnership to Corporation: Partners become shareholders
• Corporation to Sole Proprietorship: Rare, but possible if winding down

Next Steps

1. Assess Your Situation: Consider income, liability, and goals
2. Consult Professionals: Work with an accountant and lawyer
3. Calculate Tax Implications: Model scenarios to understand savings
4. Register Your Business: Complete necessary filings
5. Set Up Accounting: Establish proper bookkeeping systems

Get Expert Guidance

Choosing the right business structure requires careful analysis of your unique circumstances. Calvin Bui & Partners can help you evaluate your options, calculate tax implications, and set up your business for long-term success.