There are essentially three different kinds or structures of companies for business owners or soon-to-be owners to consider.  Which one is chosen will affect how the company needs to operate and the implications involved from both a financial and legal perspective.  From our end, even the bookkeeping requirements will change to some extent.

The three kinds of companies are the proprietorship, the partnership and the corporation.

The proprietorship is the easiest to set up and operate as it is basically an extension of the owner.  Registration of the business is fairly straight forward although additional permits and considerations may be needed depending on the kind of business.  The owner is legally and personally liable for the entire operation to the extent that personal assets could be at risk if the business is successfully sued.  Up to a given revenue threshold it makes sense for the business to operate in this fashion when it comes to taxation and tax benefits.  From a bookkeeping standpoint, all that Revenue Canada requires is an annual Profit and Loss statement.  The bottom line from this report is tacked on to the personal tax return of the owner as either a profit or a loss.  The year end is always December 31.

A partnership is essentially the same as a proprietorship except that there is more than one owner.  The tasks within the business are usually divided up according to a formula as is the remuneration or income that each owner takes from the business.  Ownership percentage is usually based on the amount contributed or invested in the business.  Personal liability is often divided by this same percentage.  A Partnership Agreement should be considered a must to define what each partner is responsible for and to avoid misunderstandings.  This agreement should be put in place up front when everybody is on good terms and excited about the future.  The bookkeeping process is essentially the same as the proprietorship with the bottom line of the Profit and Loss statement getting divided up between the partners – generally in proportion to ownership unless an agreement is in place with a different formula.

The corporation is the third option.  In essence a new “individual” is created in the eyes of the law and Revenue Canada.  The owners are shareholders in the corporation and the operation of the corporation is defined and regulated by a Shareholder Agreement and overseen by directors.  This is similar to a Partnership Agreement.  The corporation is able to conduct business in its own name, undertake contracts and incur debt.  Although there is some degree of legal protection of the owners within the corporation, the law is holding its directors more and more accountable and liable for its operation and conduct.  The bookkeeping for a corporation is somewhat more comprehensive as Revenue Canada requires a Balance Sheet as well as a Profit and Loss statement at year end.  The year end is also variable and does not need to be December 31.

There is obviously a lot more to the setup and operation of these three types of business.  Hopefully this will give you some indication as to what is involved and guide you in the right direction.  It is always worthwhile to consult with a lawyer and an accountant to get full and proper advice based on your situation.  Hope this helps.

Best regards,

Tracy