If you are starting a new business in Canada or are operating one already, then this article is for you.
Types of business structures
The type of structure you choose has a significant effect on the way you report your income, the type of returns you file each year, and many other matters.
The three most common types of new business structures are listed below with a brief description of each. For further information on the best structure for your new business, contact KWB and we’d be happy to discuss this with you and determine the best structure for your current and future needs.
- Sole proprietorship: is an unincorporated business that is owned by one person in which the owner has sole responsibility for making decisions, receives all the profits, claims all losses, and does not have separate legal status from the business.
If you are a sole proprietor, you pay personal income tax on all revenue generated by your business and you also assume all the risks. The risks extend even to your personal property and assets.
- Partnership: is an association between two or more individuals, corporations, or partnerships that join together to carry on business.
The partnership itself does not pay tax, each partner includes their share of the partnership income or loss on their personal, corporate, or trust income tax return. The partnership must file an annual partnership income return with CRA. The partner is responsible for their share of the liabilities of the partnership.
- Corporation: is a separate legal entity as it can enter into contracts and own property on its own name, separately from its owners (shareholders). Since a corporation is a separate legal entity, it must file its own tax return.
As a shareholder you have limited liability, which means that you and the other shareholders are not responsible for the corporation’s debt unless you as a shareholder provide personal guarantees for a loan.
Step 1: Now that you have determined the structure of your new business, you need to incorporate or register your business name.
You can incorporate your company at an authorized registry, or use legal services to assist in the incorporation. KWB is able to refer you to a number of legal services that can assist you with incorporating your new business, and we recommend this approach. Most “do-it-yourself” incorporations are not created properly and require costly legal fees to correct. For example, you should talk to us about the types of shares and number of shares that should be issued to each person that you are thinking about involving in your business, and who should be involved in order to optimize your tax planning.
The following information is required when incorporating:
- Share structure
- Any restrictions on the transfer of shares
- Number of directors
- Any restrictions on the type of business that the corporation may conduct
- Any other rules or provisions the corporation would like to include.
- Corporations can operate under the corporate number provided, however, if a corporate name is desired you will need to request a NUANS report and an Alberta Name Reservation Report. We recommend that the company be named rather than use the original corporate number.
Sole Proprietorship and Partnership:
Sole Proprietorships and Partnerships must register a business name when they carry on business under a name that is not their personal name. This can be done through an authorized service provider.
In addition, both may need to apply for a business number from Canada Revenue Agency, for GST, payroll, or export purposes.
Step 2: When you register a new business, Canada Revenue Agency (CRA) will assign a business number (BN) to identify your business.
There are five major CRA business program accounts:
- RC – corporate income tax
- RT – GST/HST
- RP – payroll deductions
- RM – import / export
- RZ – information return
Each program account is assigned the same BN followed by the program abbreviation above to help distinguish what account it is.
Registration for a BN and CRA program accounts can be done in four ways:
- Online at www.businessregistration.gc.ca (for first time registrants only)
- By telephone 1-800-959-5525
- By mail or fax using form RC1 (Request for a business number). To print a form go to Form RC1, Request for a Business Number or to order a form, go to Getting forms and publications.
Before you register for your BN, you will need to provide the following:
- Name of the new business
- Its location
- Its legal structure (corporation, partnership or sole proprietorship)
- Its fiscal year-end
- What the sales or revenue of your business is expected to be
- How frequently you want to file your GST returns
- If you want to use the “Quick Method” of GST filing. See our blog for more info.
Without this information, you will not be able to complete form RC1.
Corporate income tax number (RC)
Corporations must have an RC number in order to pay their corporate income taxes. An RC number is not applicable to Sole Proprietorships or Partnerships.
GST registration number (RT)
A company must register for GST if revenues from taxable goods and services are over $30,000. The benefit to registering your company for GST at the beginning of operations is the ability to claim GST income tax credits on initial expenses. When you become a GST registrant, you can select one of three reporting periods depending on your threshold amount. If you do not select a reporting period, CRA will assign you one based on your threshold amount.
|Threshold Amount||Reporting Period Options Available|
|$1,500,000 or less||Annual, quarterly, or monthly|
|More than $1,500,000 but less than $6,000,000||Quarterly or monthly|
|More than $6,000,000||Monthly|
Your fiscal year for GST purposes should be the same as your fiscal year for income tax purposes. Ensure that both fiscal years match when you register for GST.
Payroll number (RP)
If the new business is paying employees it will require a payroll account to which source deductions are paid. You are responsible for deducting CPP, EI premiums, and income tax from your employee’s remuneration.
To calculate various deductions, you can use the Payroll Deduction Online calculator at www.cra.gc.ca/pdoc, or see Guide T4001, Employer’s guide for further details.
Step 3: Opening up a bank account
There are a number of items you will need in order to open up a bank account for your new business. Below are some of the items that may be required by your bank.
- Two pieces of identification like: drivers license, passport, social insurance number etc. (from the shareholder, the sole proprietor or all partners)
- Two pieces of identification of the signing authorities (for corporations)
- Certificate and articles of incorporation if a corporation
- Trade name registration and the partnership agreement if a partnership
- Trade name registration if operating under a name other than your personal name (for sole proprietorships)
Step 4: Other considerations
WCB (Workers Compensation)
Is the business in an industry that requires WCB coverage? See www.wcb.ab.ca for a listing of exempt industries.
Is the business required to obtain a business license? See www.servicealberta.gov.ab.ca for a listing of the types of businesses that require a license.
Has the company purchased adequate insurance coverage? KWB is able to refer you to a commercial insurance broker for assistance with determining the proper levels of coverage and other risks associated with your business.
- Business interruption
- Surety bond (if required in the company’s industry)
Registering a domain name for your business will allow you to establish a web site to promote your new business.
There is a legal requirement to maintain adequate records of your business activities. Depending on the size and complexity of your business maintaining your records can be done manually, tracked on spreadsheets, or through various accounting software packages which range from basic free bookkeeping programs, small business payroll and accounting packages, to full service business management programs.
Accounting software will handle all the financial aspects of your company. Even the simplest programs will help you pay bills, create invoices, calculate and track GST, maintain receivables, track cash flow, and automate general ledger activities for revenues and expenses.
More sophisticated programs will include payroll and inventory modules, and enhanced reporting to help you gain insight into your business and drive profitability.
QuickBooks Online (“QBO”) has quickly become our software program of choice. QBO is a cloud based software designed to provide real time information from anywhere and anytime. It has been designed to integrate with apps to process receipts and expense, track employee time, and manage inventory and more. It also allows shared access to your accountant or bookkeeper so that we can provide you support when you need it. If you would like more information about QBO, please refer to our blog article Switching to QuickBooks Online (QBO).
We also provide full service bookkeeping or partial bookkeeping if you would like to do some of it yourself. This allows you to have easy access to the information you need, while we do the majority of the work, so that you can save time and focus on your business. If you would like further information on bookkeeping services please contact us and we can advise you as to the options available.
Regardless of the accounting method you use, your records must be complete. They must contain a systematic account for your income, deductions, credits, and other information you need to report on your income tax and GST returns.
All records such as paper documents and those stored in an electronic medium, must be kept in Canada or made available in Canada for a period of seven years from the date of the last tax assessment or tax reassessment notice for that year and they must be in English or French.
For further details, we recommend reading Canada Revenue Agency’s guide “RC4070 – Guide for Canadian Small Businesses“ which provides details on CRA programs and online services. It also provides an overview of your obligations and entitlements under the laws administered by the CRA.
If you would like more information or have any questions, feel free to contact us at 780.466.6204, or click here to send us an email.
Thanks to Darren Buma of KWB Chartered Professional Accountants for providing this content.