8 Steps to Establishing a Sole Proprietorship or Partnership in Canada
- Select Your Business Structure
- Create a Business Name
- Determine Availability of Your Business Name
- Register Your Business Name
- Register for Permits, Licences and Taxes
- Complete a Partnership Agreement (optional)
- Open a Bank Account
- Start Your Business!
1. Select Your Business Structure
As a prospective business owner, one of your first decisions is choosing a business structure that suits your needs. If you have already decided that it is not necessary for you to incorporate your business, you can choose between a sole proprietorship or a partnership.
A sole proprietorship is a business that is owned by one person and it is the easiest, least expensive type of business to start.
A partnership is a business that is owned by two or more people. It is also an easy and inexpensive type of business to start. There are two types of partnership: general and limited. In a general partnership, all the partners share in the profits and losses of the business and are personally and jointly responsible for all liabilities. In a limited partnership, there are both general and limited partners. Limited partners are not involved in the daily operation of the business and they are only personally responsible for losses up to the amount of capital they originally contributed to the business. General partners are responsible to operate the limited partnership and they are personally and jointly responsible for all liabilities.
Sole proprietorships and partnerships have the following characteristics in common:
- Under the law, the business and the person or persons who operate it, are considered to be the same legal entity. This means that the owner or partners will be held personally responsible for any debts, liabilities or obligations that their business might incur. In the event that such liabilities are greater than the assets of the business, the owner or partners may have to declare personal bankruptcy.
- There are no formal legal requirements for establishing either a sole proprietorship or general partnership, other than to register the business name. If an owner or a partner intends to hire employees or charge clients GST/HST or Provincial Sales Tax, the business owner(s) will also be required to register for these tax accounts.
- All the assets of the business are personally owned by the proprietor or jointly owned by the partners.
- Owners and partners are considered to be self-employed and not employees of the business.
- Owners and partners are not paid a salary; they take money out of their businesses through personal drawings.
- Owners and partners are allowed to keep the profits of their business. If the business suffers a loss, and the owner or partners have income from other sources (such as through investments or other employment), the loss can be used to reduce their taxable personal income.
- Owners and partners should maintain separate accounting books and records for their business; however, they only need to file one personal income tax return.
- The business ends when the proprietor or one of the partners dies. If any remaining partners wish to continue the business, they will need to re-establish the partnership.
Sole proprietorships and partnerships differ in the following ways:
As a sole proprietor, you enjoy the autonomy of being your own boss. You have complete control over your business, its management and all decision-making. As a partner, you share the responsibilities of your business’ day-to-day management and operation. Decisions affecting the business are generally made jointly with all the partners.
Sole proprietors usually finance their business with personal savings, a bank loan or a line of credit. As a result, start-up capital can be somewhat limited. Partnerships are financed similarly, however since the partners are able to pool their resources, the amount of start-up capital available can be substantially greater.
Sole proprietors shoulder the burden of personal responsibility themselves. In a partnership, all partners are personally responsible for their individual actions as well as those of the other partners (except in the case of limited partners, whose liability is limited to the amount of capital they originally contributed to the partnership).
For more information on sole proprietorships, partnerships and other legal business structures, click on Selecting a Business Structure.
2. Create a Business Name
Now that you have chosen the proper legal structure for your business, you will need to create a name for it, especially if your business provides goods or services to the public.
The best business names describe your business activity but they are not so specific that they preclude you from future business opportunities. Good names are also distinctive and help to differentiate your business.
Over time, your business name can become a valuable asset in that it can help build awareness, recognition, customer loyalty and goodwill.
When creating your business name, you should consider its modern counterpart at the same time: a domain name for use on the Internet. Even if your business will not be Internet-ready until some point in the future, you are well advised to reserve your preferred domain name now rather than risk losing it later or having to buy it back from someone else.
Business names for sole proprietorships and partnerships may not include legal identifiers such as “Limited, Ltd., Incorporated, Inc., Corporation, or Corp.” These are reserved exclusively for incorporated businesses as a sign to the public of their limited liability.
Finding the right name for your business is not always easy. For some helpful hints, please click on How to Create a Great Business Name.
3. Determine Availability of Your Business Name
Before you can register your business name, you should ensure that you have a legal right to use it. This is normally accomplished by performing a name search.
The first and least expensive search is one you can perform yourself by looking through public information sources, such as phone directories, Yellow Pages and computerized online directories such as Canada 411.
The availability of prospective domain names can also be searched by completing a free WHOIS domain search here.
Searching your prospective name(s) yourself, before retaining professional services, could reveal potential conflicts immediately without incurring any expense.
It is a good idea to have more than one prospective name ready, in case a search at any stage reveals a potential conflict.
4. Register Your Business Name
The next step is a legal one – all businesses, other than businesses located in the Province of Newfoundland & Labrador, must register their business names with the province in which they intend to operate. The only exception to this requirement is if a personal name is used as the name of a sole proprietorship. Please note that if one extra word is added to a personal name, the name becomes a business name and must be registered. For instance, “Jane Smith” can be used without registration, but “Jane Smith Software” will require registration.
There are three good reasons why you should register your business name:
- You will need proof of business name registration when you open a business bank account
- You want to be sure that you are not using someone else’s business name, in which case you may have to change yours and/or compensate the owner of the similar name
- You want to establish recognition of, and goodwill toward, your chosen business name
To register your business name, you will need to contact your provincial government, fill out a form and pay a small fee. In the alternative, you can click here to search and register your business name all in one step using New Business Now.com.
IMPORTANT: It is the business owner’s responsibility to renew business name registrations as prescribed by his or her Province. If a change is made to the business, such as the addition of a new partner or a change of address or you cease operating the business altogether, you must also notify your provincial Ministry, usually within 15 days of the change.
5. Register for Permits, Licences and Taxes
All businesses, whether they operate from a commercial office or a private home, must comply with federal, provincial and municipal business laws and regulations, as well as collect and pay appropriate taxes.
At the municipal level, you may be required to obtain a business permit or licence. You should also enquire about any municipal bylaws that may have an effect on your operations, such as prohibitions against excessive courier deliveries to certain residential areas, health inspections for food-related businesses, etc.
Specialty licences to sell liquor, food, cigarettes and other goods may be required from different levels of government. In addition, many other types of specialized businesses such as security firms, taxi companies and places of amusement, etc. require specialized permits and/or licences. You should seek competent legal advice in order to acquire the necessary permits and licences.
If your business obliges you to collect Retail Sales Tax, you must register with your Province for a Vendor’s Permit and remit the sales tax collected according to the schedule established by your province.
If your business will have total sales exceeding $30,000 in a 12-month period, you are required to register to collect the Goods and Services/Harmonized Sales Tax (GST/HST). The Canada Revenue Agency will assign you a GST/HST number upon registration and payment. Businesses with total sales of less than $30,000 annually are usually not required to register for GST/HST; however, it should be noted that having a GST/HST account may be to your advantage. Certain companies are reluctant to contract the services of businesses without a valid GST/HST number, partly because they may appear to be less stable and partly because those companies can deduct any GST/HST paid from their business expenses.
6. Complete a Partnership Agreement (optional)
If you have chosen to operate your business as a partnership, either general or limited, you are strongly encouraged to have your lawyer draft a “Partnership Agreement”.
Despite the best intentions of all partners, circumstances and events are bound to arise that will challenge, threaten or adversely affect, the partnership’s structure, management or operation.
Without a written Partnership Agreement, the applicable Partnership Act will come into force and it may be very difficult or expensive to resolve or handle the unexpected termination of your partnership.
A good Partnership Agreement includes a description of the duties and responsibilities of each partner, how decisions are to be made and how the partnership will end. Other possible provisions include, but are not limited to:
- Names and addresses of the partners and any other officers or parties
- Business name of the partnership and date of agreement
- Description of the business and its business address
- Proposed length of partnership and procedure for dissolution/distribution of assets
- Capital contributions required by partners
- Method of profit distribution
- Ownership of partnership assets
- Procedures for transfer of partnership interest, admission of new partners, retirement, bankruptcy, incapacitation or death of a partner
- Decision-making, arbitration and dispute resolution
- Confidentiality, non-competition and non-solicitation considerations
- Accounting methods and partnership records
- Banking arrangements
- Signing authority for cheques, leases, other documents
- Auditor or accountant of partnership
7. Open a Bank Account
In order to open a bank account for your business, you will be required to provide proof of your business name registration and photo identification. All authorized signing officers of a partnership must sign on to the account at the bank before they will be permitted to sign cheques or access the partnership’s business account. Your bank may have additional requirements. Please make appropriate enquiries and be sure to order an adequate supply of cheques, deposit books and other stationery imprinted with your business name and address. You may also wish to have your bank issue you a banking card, interbranch card, debit card or provide internet or phone access to your account. Consider applying for a credit card that you can use solely for your business expenses.
8. Start Your Business!
Congratulations! You have fulfilled your legal obligations and are now ready to focus on operating and growing your new business. Because you have registered with different levels of government, you will receive information bulletins and updates on new legislation, changes in tax rates, business requirements, etc. It is important to keep up to date on these issues. If you should have any questions or concerns going forward, please do not hesitate to seek appropriate legal and accounting advice.
The information presented in the document above is provided for reference purposes only and is
not intended to be a substitute for the appropriate legal advice of a competent, professional lawyer.
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