A person or company wishing to operate a business in Canada has a choice of several business structures. The appropriate structure depends on several factors including the nature and location of the business, liability and general issues of exposure, the entity’s financing requirements, and tax considerations. Three basic structures are recognized:
A sole proprietorship is used when the business is both owned and operated by the individual responsible for the business and its liabilities. This simple structure can avoid many legal complications. Nevertheless, it may involve some requirements such as licensing. Sole proprietorship is best suited for small businesses because all of the benefits and liabilities of the business go to the individual. Unlike a corporation, the assets of the sole proprietor are at risk for the debts and other liabilities of the enterprise. Similarly, the profits of the business go directly to the individual and are taxed in his or her hands.
A partnership exists when two or more individuals or corporations carry on business together with the goal of profit. Partnerships lie exclusively within the jurisdiction of the provinces, each of which has enacted specific legislation regarding partnership. All provinces recognize the general partnership and the limited partnership. In addition to these, the province of Québec also recognizes the undeclared partnership.
In Canada, a corporation is a legal entity endowed with the same legal abilities that a human being possesses. A corporation can own property, enter into contracts, be held to its obligations and hold others likewise accountable. Shareholders of the corporation do not own assets of the corporation and are rarely personally responsible for its liabilities. The limited liability provided by corporations makes incorporating an easy way to transfer assets and ensure perpetual existence. Since it is a distinct legal entity, the corporation must pay tax on its income. The corporation is the most widespread business structure used in Canada.
Further information is available on the following topics:
(a) Incorporation Under Federal or Provincial Law
A corporation can be formed under either federal or provincial law. Where the corporation will be conducting business in only one province, the company is usually incorporated provincially. Incorporation at the federal level might be necessary for some companies. Businesses in industries that are governed by federal regulation must be incorporated under federal law. Certain industry-specific enterprises, such as banking, must be incorporated under the appropriate federal legislation.
Additionally, peculiarities in provincial statutes may well lead a foreign investor to choose federal incorporation. Depending on the circumstances, federal or provincial incorporation may present foreign investors with further advantages.
(b) Residency Requirements
Foreign investors must be aware of the residency requirements that apply to the directors of companies incorporated in Canada. Federal law requires that at least 25% of the directors be Canadian citizens or permanent residents of Canada. Each province has its own residency requirements. For example, businesses incorporated in Ontario and Alberta have specific restrictions on foreign directors, whereas British Columbia and Quebec do not. Nova Scotia offers a particular corporation that affords favorable tax treatment to American individuals doing business anywhere in Canada.
(c) Branch Operations
A business incorporated outside of Canada may operate a branch to conduct business within Canada. A branch of a foreign corporation in Canada does not incorporate but rather must first register in the province(s) where it will carry on business. Branch offices are frequently used and may enjoy some tax advantages. The “parent” corporation remains liable for the debts, liabilities and obligation of the Canadian branch because the branch office is not a separate legal entity from the “parent” company.
(d) Subsidiary Corporation
A subsidiary of a foreign corporation can be incorporated under federal or provincial statutes governing corporations. An important advantage to choosing this method of carrying on business(interactive doing bus.) in Canada is that the liabilities of the Canadian entity are not passed on to the parent corporation. As with branch operations, the subsidiary may be required to obtain a licence or registration in the province where the company carries on business.
(e) Joint Venture
A “joint venture” describes an arrangement between two or msore persons who agree to contribute goods, services or capital to a common commercial enterprise. At present, Canada has no statute governing joint ventures.