Corporate Structures and Business Associations: A Crash Course
Written by Alec Fader, JD Candidate 2025 l UCalgary Law
DISCLAIMER: This analysis focusses on statutes in Alberta. There are nuances in various partnership and corporations acts across provinces and federal jurisdictions and, although the principles are generally similar, corporate structures being created in other jurisdictions should be researched separately.
There are, generally, three types of business associations in Canada which concern start-ups: (i) sole proprietorships, (ii) partnerships, and (iii) corporations. Each of different type of business association has a variety of pros and cons, and there are important considerations regarding how an entrepreneur should structure their start-up. This article seeks to provide a brief outline of what each of these business associations is, and their advantages and disadvantages.
Factors Which May Influence the Type of Business Association
There are several factors which may influence a business' decision to choose a certain structure. Two of the most salient are:
Limitation of liability[1] – there are only a couple of business associations which are going to limit the liability of individuals who are participating in the business. If a business intends on commercializing and providing products or services, it may wish to consider a structure which limits personal liability.
Access to capital[2] – some business organizations have an easier time attractive outside capital. If a business intends on raising money from outside sources and scaling, it may want to consider specific business associations.
Sole Proprietorships
A sole proprietorship is a business that is created, run, and controlled by one person. There are no formal requirements for the creation of a sole proprietorship – once an individual engages in business, they have created a sole proprietorship.[3]
Advantages
A sole proprietorship is a simple business organization – there is no need to register or file any formal documents.[4] However, if a sole proprietorship does which to register a trade name, they must make a filing, and the sole proprietorship must be registered with Revenue Canada if making over $30,000 per year. [5]
A sole proprietorship allows the proprietor to have absolute control over management – as there is only one individual running the business.
A sole proprietorship provides "flow-through" tax benefits, meaning that the losses of the business can be "flowed through" into personal income tax. This provides an offset of the losses of the business to the personal income tax (for example, if the proprietor made $100,000 of personal income and the proprietorship lost $30,000, the personal income would effectively be $70,000). However, the same is true of gains – the gains of the sole proprietorship will be reported as personal income.[6]
It is simple to dissolve – the proprietorship can either be sold or the proprietor can choose to wind down the business.
Disadvantages
Proprietor has unlimited personal liability for the obligations of the business. As a result, any liability which the business incurs (debts, lawsuit settlements, etc.) will render the proprietor as personally liable.[7]
Limited avenues to finance the business. There is only one way to finance the business, which is through debt. As noted above, the proprietor will be personally liable for the debt, and therefore financing the business can be a very risky endeavour.[8] Therefore, sole proprietorships are generally confined to smaller operations.[9]
Partnerships
There are multiple types of partnerships, including:
Partnerships
Limited Partnerships ("LP")
Limited Liability Partnerships ("LLP")
For the purposes of this article, I will focus on partnerships, as LLPs are available only for certain types of professions (such as lawyers, doctors, and accountants),[10] and LPs are a more complicated structure generally used for joint venture projects and for specific tax reasons, and there is generally not much utility for start-up companies (as the trade-off to obtain limited liability in the LP is to have no role in the management of the LP).[11]
Partnership
A partnership is a type of business organization where two or more people carry on business together with the intention of making a profit.[12] This happens by operation of law and is a question of fact. There are no filings necessary to create a partnership – if the necessary elements of a partnership are there, a partnership has been created.
Advantages
Flow through tax benefits (described above). In the case of a partnership, each partner will have the ability to use a certain share of the partnership losses to offset their personal income. If the partnership makes a profit, partners will report a share of those profits on their personal income.
Again, a simpler type of arrangement – there are no formal requirements that exist, and the partnership, in the absence of a partnership agreement, will automatically be governed by the Partnership Act. However, to provide greater structure and maximize certainty about the operations of the partnership, it is beneficial to draft a partnership agreement (which could be considered a disadvantage as it adds complexity to the arrangement and there are some elements of a partnership which cannot be changed through a partnership agreement[13]).
Disadvantages
Unlimited joint and several liability on all the partners for the debts and liabilities of the partnership.[14] In other words, if one partner, in the course of partnership business, takes on debt without the consent of the partners (as partners are all agents of one another and can bind one another) each partner will be jointly (together) and severally (individually) liable for the full extent of the debt or liability.
Again, financing is difficult to obtain.[15] Giving money to a partnership may present an image than an investor is a partner to the partnership – something which both parties are unlikely to want. Furthermore, it is similar to the sole proprietorship where equity cannot be issued. Therefore, the only financing which is available will be debt financing – again, where each partner will be jointly and severally liable for the debt obligation.
Corporations
A corporation is a distinct legal entity which has several of the same rights as a natural person. As a quick run-down, the corporation has shareholders, directors, officers. The shareholders of the corporation are commonly referred to as the "owners" of the corporation – they hold equity in the corporation and are entitled to the residuary (what is left over after all other outstanding obligations are paid out in the event of liquidation of the corporation). Shareholders become shareholders by providing capital to the corporation in exchange for equity. Directors are the individuals who run the corporation. The directors, under corporations' law, have all power to manage and direct the corporation, however, this power must be exercised in a "quorum" as a board.[16] Therefore, it would be inefficient to manage the day-to-day operations as a board, and day-to-day management powers are delegated to the officers, who are the C-Suite of the corporation (CEO, CFO, etc.).[17] It is important to note that there are some functions which cannot be delegated to management,[18] and some functions of the corporation which must be approved by shareholders.[19]
Advantages
The corporation creates limited liability[20] - As stated, the corporation is a separate legal entity. As a result, it can sue and be sued. Therefore, shareholders and directors will have limited liability.
Ease of financing[21] - As noted, the corporation can issue equity in exchange for capital. Effectively, a shareholder can give capital to the corporation in exchange for equity, and they become an equity holder of the corporation. This equity can grow and become more expensive, providing incentives for investors to choose this type of investment. For example, an investor can purchase 10 shares for $0.50, and in 2 years those shares may be worth $1.00, representing a 100% increase.
There are significant tax advantages to incorporation.[22]
Disadvantages
Most complicated structure[23] – there are several formal requirements of the corporation. Incorporation occurs, which necessitates constating documents (Articles of Incorporation, Bylaws, etc.). These constating documents must be done with a view to the future in order to ensure they do not create future issues for the corporation.
Endnotes
[1] Bryce C. Tingle, Start-Up and Growth Companies in Canada: A guide to Legal and Business Practice, 3rd ed (Toronto, Canada: LexisNexis Canada Inc, 2018) [Tingle, Growth Companies], at 37.
[2] Ibid, at 28.
[3] Government of Canada: https://www.canada.ca/en/revenue-agency/services/tax/businesses/small-businesses-self-employed-income/setting-your-business/sole-proprietorship.html [GoC, Small Businesses].
[4] Ibid; Joshua J. Marych and Mitchell Grimmer, "Three Basic Business Structure: Corporations, Sole Proprietorships, and Partnerships" (2024) [Marych and Grimmer, Business Structures].
[5] Government of Canada: https://www.canada.ca/en/services/business/start/register-with-gov/register-sole-prop-partner.html.
[6] GoC, Small Businesses, supra note 3.
[7] Ibid.
[8] Tingle, Growth Companies, supra note 1 at 36.
[9] Marych and Grimmer, Business Structures, supra note 4.
[10] Partnership Act, RSA 2000 c P-3 [Partnership Act], s.81.
[11] Partnership Act, s. 56; Marych and Grimmer, Business Structures, supra note 4; Tingle, Growth Companies, supra note 1 at 37.
[12] Partnership Act, s.1(g).
[13] See generally the Partnership Act.
[14] Partnership Act, s. 15.
[15] Tingle, Growth Companies, supra note 1 at 36.
[16] Business Corporations Act, RSA 2000, c B-9 [ABCA], s.114.
[17] Ibid, s. 115(1)
[18] Ibid, s.115(3).
[19] See ABCA generally.
[20] Marych and Grimmer, Business Structures, supra note 4.
[21] Tingle, Growth Companies, supra note 1 at 36.
[22] Marych and Grimmer, Business Structures, supra note 4.; Invest Alberta: https://investalberta.ca/why-alberta/tax-advantages/.
[23] BDC: https://www.bdc.ca/en/articles-tools/start-buy-business/start-business/advantages-different-business-structures.
