Should I Register or Incorporate My Business?
The first thing you should do is look at what you want from your business — is this a hobby business that you are planning to grow into a medium sized business where you will have employees and want to claim your expenses that you acquire. Then the answer is yes. But if you're running a hobby business where you bake dainties and you sell them to a few good friends and family. Your sales are under $2,000 so you don't claim it on your taxes. Your expenses are $3,000. Then CRA does not consider this a business as you are not earning profit. It looks more like you're doing this for the pleasure and you're not concerned with making a profit.
Now let us say that your little hobby bake shop is starting to get a little more business and your cliental is growing. You increase your prices and are now earning $3,000. Your expenses are $2,000. Congratulations you've made a profit! Your hobby is now a real business and you must register this company and file income tax for it.
The next Question is, what type business should I register? There are a couple options — Sole Proprietorship, Partnership or Corporation?
Sole proprietor this is the type of business that is owned by one person. They are simplest of all business entities, where the Owner and the business are looked at as one and the same. This is simplest and easiest business set-up as you don't need a lot of money to pay for a lawyer, accountant, auditor, etc. The disadvantage is that the government looks at your business and your personal self as one in the same. If for some reason the business fails and owes money to vendors, suppliers, lending institutions or the government they will look at your personal assets such as your vehicle or house to pay off your business debt. Another downfall is that it is very difficult to continue the business if the owner is no longer able to operate the business. There is usually a strong relationship between the owner and cliental. This makes selling the business more difficult when the time comes.
Partnership this is very much like a sole proprietor except that two people join to form a company. This doesn't have to be a 50/50 partnership this can be what the two partners have decided on but it is recommended that with type of partnership a contract is drawn up to outline the agreement between the parties. This can be drawn up by a business lawyer or by the partners and approved by a notary. This way all the aspects of the business relationship are in writing and if the company fails, one of the partners dies, or if one wants to buy the other out, all the requirements are outlined to make these transitions easier.
Corporation is a separate legal entity, which means all personal assets (house, vehicles, etc.) are protected from any claims that may be made against the company. In some instantizes a creditor may ask the shareholders to sign a guarantee that the debt will be repaid. By signing a personal-guarantee you are now personally responsible for the debt if the company is unable to pay it back. This also can hold true for CRA if, for example, the corporation has not been paying CRA and then takes out a personal loan to pay off some other creditors. In this case CRA can seize the personal loan as it was done for business purposes and the company is not paying CRA any amounts that are required under the Income Tax Act, Employment Insurance Act, Canada Pension Plan and the Excise Tax Act. A corporation can be made up of one or more people who will hold shares in the company. These details are outlined in the company bylaws that usually require legal preparation and authentication.
A Nonprofit is an organization that does not earn profit for its owners. This is normally a tax-exempt organization and is always incorporated and managed by board members. Any monies that are earned are to be used to manage its own day-to-day business operations and programs. These types of organizations usually receive funding from a government institution. Therefore, if they are shut down nothing is owed to the government as they were exempt from taxes and received government funding or donations. The nonprofit will simply dissolve and no person could be personally responsible if there are monies owing to creditors.