If you are planning to start a side hustle or even starting a business full time, this would be a great article for you to understand the various business structures that exist in Canada. Is there one that is better than the other for you? Find out below.

It’s important to consider the business structure as each has different tax implications, risk levels and regulatory requirements.

A business structure is also called a legal entity structure and you will have to select one before starting your side hustle or business.

There are 4 business structures in Canada but 3 of them are the most common:

What is the second most common business structure? Partnership.

Let’s get started!

What is a Business Structure?

As mentioned above, a business structure is also known as a legal entity structure which in short means how the business is organized legally. You have to pick one before starting your business; it’s not optional. There are many considerations for Partnership which we will go into more later.

How Many Businesses are Started Each Year?

According to the Key Small Business Statistics 2022 from the Government of Canada, in the 5 years between 2015 to 2019, approximately 101,324 businesses were created every year. They all had to pick a business structure to go with in order to legally form their business. You cannot operate your business if it’s not formed properly.

What is a Partnership?

According to CRA, ‘a partnership is an association or relationship between two or more individuals, corporations, trusts or partnerships that join together to carry on a trade or business’ An ‘individual’ means a human being but this structure is not limited to individuals as seen in the definition above.

Types of Partnerships

Here are three types of partnerships that are recognized in Canada:

General Partnership
Limited Partnership
Limited Liability Partnership (LLP)

Why General Partnership? 👍

Here are some reasons to go with a General Partnership:

The partners can pool together time, resources, expertise and experience
Easier to raise capital to support your business
It has a very easy and low set up cost

Why Not General Partnership? 👎

Here are some reasons to avoid General Partnership:

There is unlimited liability (all partners are joint and severally liable for the affairs of the partnership)
Partners may disagree on business decisions leading to friction and stress
Profits and losses are shared among each partner

Why Limited Partnership? 👍

A limited partnership is made up of at least 1 general partner and at least 1 limited partner.

Here are some reasons to go with a Limited Partnership:

Limited Partners are only liable for the amount that they have invested into the partnership (limited liability)
Limited Partners can access the expertise and experience of the General Partner
Limited Partners usually contribute the capital but they also share in the profits and losses based on a percentage of your investment vs total investment

Why Not Limited Partnership? 👎

Here are some reasons to avoid Limited Partnership:

Limited Partners are often not involved in the management decisions or the day-to-day operations (silent/passive partner)
There may be specific requirements on raising capital from Limited Partners
Limited Partners who become involved in the day-to-day operations may be treated like a general partner (unlimited liability)

What is a Limited Liability Partnership?

A limited liability partnership is very similar to a limited partnership, except that it’s only available for certain regulated professionals like accountants, lawyers or doctors and the rules vary from province to province and territory to territory.

What does a regulated professional mean?

There is a regulatory body who oversees all of the regulated professionals (as the name suggests).

For example, in Ontario:

Accountants (CPAs) are regulated by CPA Ontario
Lawyers and Paralegals are regulated by Law Society of Ontario
Physicians and Surgeons are regulated by the College of Physicians and Surgeons of Ontario

According to the Partnerships Act Section 10 (2a) in Ontario: ‘a partner in an LLP is not liable for the debts, liabilities or obligations of the partnership or any partner arising from the negligent or wrongful acts or omissions that another partner or an employee, agent or representative of the partnership commits in the course of the partnership business while the partnership is an LLP’

How to Start a Partnership?

If you like the pros and are okay with the cons of the different types of partnerships, here is how to start one:

1) Create a business plan

o What kind of products or services you will offer?

o Develop mission/vision statements

o Who will you cater your products or services to?

o Prepare a budget so you know how much to set aside

o Prepare a forecast to see if your business venture would be profitable

o Here is a guide from BDC How to write a business plan | BDC.ca

2) Determine a business name

o Search for existing business names to see if someone is already using it (if you’re in Ontario, you can use Search the Registry (gov.on.ca))

o If you’re planning to open an LLP, there are specific requirements on what the name could be; be sure to review with your regulatory body

3) Register the business name

o For General Partnership or Limited Partnership in Ontario, you need to Register for a Business Name

4) Register the Partnership with your province or territory

o For General Partnership in Ontario, you need to Register a Firm Name for General Partnership

o For Limited Partnership in Ontario, you need to File a Declaration of a Limited Partnership

o For Limited Liability Partnership in Ontario, you need to Register a Firm Name for an Ontario Limited Partnership

5) Create a Partnership Agreement

o This legal document governs how the partnership will operate, the responsibilities of each partner, each partner’s ownership percentage, etc (it should include all types of common scenarios)

o It’s highly recommended to retain a lawyer to help you with this

6) Open a business bank account

o You want to keep your business finances separate from your personal bank account

o It will be easier to track all your revenues and expenses

7) Check if you need any licenses or permits to run your business

o Each province or city may have different requirements

o Here is a link to BizPaL - Home Page (bizpal-perle.ca) outlining what you may need

8) Determine if you need to register for an HST account

o You can choose to register for it now or wait until you reach the requirement to register

o ie. Are you planning to have more than $30k in gross sales per year?

o Here is a link to CRA outlining when you need to register for HST: https://www.canada.ca/en/revenue-agency/services/tax/businesses/topics/gst-hst-businesses/when-register-charge.html

9) Determine if you need to register for a WSIB account

o This is only applicable if you have or planning to have employees

o Most businesses are not exempt from WSIB

o For example, under Ontario, Do you need to register with us? | WSIB

10) Create a website and branding

o More and more businesses rely on a website for marketing purposes

o Check out DIY websites like Squarespace, Wix or WordPress

11) Get financing

o If your business requires financing to get up and running, your financial institution may have some options

12) Get insurance

o Inquire with an insurance agent or broker on the types and amounts of coverage that you need to protect your business

o For an LLP, regulatory bodies usually require professional liability insurance

13) Purchase an accounting software to track your revenue and expenses

o If you’re just starting your business, you can probably just use Excel

o As your business grows, it may be useful to purchase an accounting software like QuickBooks Online

Tax Considerations

Now that we went through how to start a partnership, it’s important to think about the tax considerations too.

Here are some areas that you need to consider:

Annual Taxes

Partnerships do not file an income tax return or pay income taxes because they are not considered a taxpayer in Canada
Partnership income or losses retains its character and are allocated to the partners

o For example, if the partnership generates business income, partners would also get allocated the business income

The details of your partnership may need to be filed on the T5013 Partnership Information Return if you meet the criteria
To file the T5013 from above, you need to register for a Partnership RZ program account from CRA
T5013 and T5013 slips to partners are due by the earlier of: March 31st after the calendar year in which the fiscal period ended or 5 months after the end of the partnership’s fiscal period
The Adjusted Cost Base (ACB) of the partnership interest needs to be calculated on at least an annual basis (contribution of capital + share of partnership income from previous fiscal period – partner draws – partnership loss from previously fiscal period)
The fiscal period depends on who the partners are:

o If there is an individual, then it has to be a calendar year end

o If all members are corporations, then there is a choice

GST/HST

If you meet the eligibility criteria, you will have to start charging GST/HST to your customers and you can claim ITCs for the purchases you made
There are ongoing filings required depending on your reporting frequency
Any amounts owing on the GST/HST filings have to be paid before a certain time
Reporting frequency:

o Monthly (filings and payment are due end of following month)

o Quarterly (filings and payment are due end of the following month after the quarter)

o Annual (filings and payment are due by Mar 31st of the following year)

Payroll

On every employee pay stub, you are required to deduct Source Deductions (CPP, EI and Income Tax) and remit those deductions to CRA (along with employer’s portion of CPP and EI)
You must provide T4 and/or T4a to your employees by February 28th of the following year
If you have a WSIB or EHT account, there are filings and payments required at certain periods too
If your employees experience an interruption of earnings, you are required to file a Record of Employment with Service Canada

Other

You must keep all receipts and income documentation for a period of 6 years plus current year (in case CRA asks for it)
You may need to register for other CRA program accounts depending on your business operations

Person on a dock looking out into the ocean

Future Considerations

Starting a partnership is a good idea because of the relatively low start up costs and ongoing regulatory requirements involved. Also, there are usually business losses which you can offset against your other income. The start up costs are typically slightly higher than sole proprietorships as there are additional requirements for partnership agreements and more.

What happens if the partnership is left with one owner?

Well, it’s not a partnership anymore so your business structure can’t stay a partnership (which needs to have at least 2 owners). If you are the only owner left and your share is in your own individual name, the partnership becomes a Sole Proprietorship which is a Change of Legal Status that you will need to notify CRA and you would need to essentially register everything again as a Sole Proprietorship.

What happens if the partnership adds owners?

It’s still a partnership so it’s just a matter of updating the partnership agreement and onboarding them.

What if you decide that you want to incorporate the partnership?

Maybe you realized some success so far and want to take advantage of the benefits of a corporation. Yes, it can be done which is again a Change of Legal Status that you will need to notify CRA and you would need to essentially register everything again but as a Corporation. Your partnership won’t exist after it’s been changed to a corporation.

It’s important to seek legal and accounting advice to ensure everything is done correctly.

Your Turn

Do you have a better understanding of why you would want to start a partnership or reasons to avoid this business structure? This blog went into detail of how to start a partnership and an in-depth look into some of the tax and future considerations you should think about.

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At JTL CPA, we are Ontario’s virtual accounting firm. Our goal is to automate your accounting and bookkeeping processes in a way that increases financial visibility. Pair that with our value-added approach and tailored advisory solutions gives you the ability to make sound decisions from good data. Check out our website here: https://www.jtlaccounting.com.

Thank you for making it to the end of the blog post. If there are topics that you would like to learn more about in the future, please let us know down in the comments.

Partnerships: An In-Depth Look

Corporations: An In-Depth Look

Sole Proprietorship: An In-Depth Look