Starting a business in Canada means making one of your first and most important decisions: choosing the right business structure. Two of the most common options for entrepreneurs are sole proprietorships and partnerships. Each comes with its own benefits, drawbacks, and legal considerations, so understanding the differences can save you time, money, and potential headaches.
What is a Sole Proprietorship?
A sole proprietorship is the simplest form of business ownership in Canada. It’s owned and operated by one individual, who is personally responsible for all aspects of the business.
Key Features:
- Owned by a single person.
- No legal separation between the owner and the business.
Profits are reported as personal income.
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What is a Partnership
A partnership involves two or more people who share ownership, decision-making, and profits. Partnerships can be:
- General Partnerships (GP): All partners share equal responsibility and liability.
- Limited Partnerships (LP): Includes both general partners (who manage and bear liability) and limited partners (who invest but have limited liability).
Key Features:
- Shared ownership and responsibilities.
- Profit is divided according to the partnership agreement.
More resources and skills, but requires trust between partners.
Comparative Table: Pros and Cons
| Feature | Sole Proprietorship | Partnership |
|---|---|---|
| Setup Cost | Low | Low to Moderate |
| Control | Full control | Shared control |
| Liability | Unlimited personal liability | Unlimited personal liability (for GPs) |
| Taxes | Personal income tax | Personal income tax (split between partners) |
| Decision-Making | Quick decisions | Requires consensus |
| Skillset & Resources | Limited to owner’s skills | Broader skills and pooled resources |
| Business Continuity | Ends with owner | Can continue if partner leaves (depends on agreement) |
| Regulatory Requirements | Minimal | Minimal to moderate |
Key Differences Between Sole Proprietorship and Partnership
- Ownership: Sole proprietorship = one owner; partnership = two or more owners.
- Decision-Making: Sole proprietors decide independently, partnerships require agreement.
- Profit Sharing: Sole proprietors keep all profits; partnerships share profits.
- Liability: Both have unlimited liability, but in partnerships, liability is shared.
Growth Potential: Partnerships may have greater resources to expand.
Legal and Tax Considerations in Canada
Before choosing, consider these factors:
Legal:
- Both require business name registration if not using your personal name.
- Partnerships need a written partnership agreement to avoid disputes.
Tax:
- Both report business income on personal tax returns.
- Partnerships file a T5013 Partnership Information Return (if applicable).
- GST/HST registration required if annual revenue exceeds $30,000.
Frequently Asked Questions (FAQs)
Which is cheaper to start, a sole proprietorship or a partnership?
Sole proprietorships are generally cheaper due to fewer legal agreements and lower registration costs.
Can a sole proprietorship have employees?
Yes, but the owner remains fully liable for business debts and obligations.
What happens if a partner leaves the business?
The partnership agreement should outline this. Without one, the business may dissolve.
Do I need a lawyer to start a partnership?
Not legally required, but highly recommended to draft a solid partnership agreement.
Are there tax advantages to partnerships?
Partnerships can split income, potentially lowering individual tax burdens..
Can non-residents open a sole proprietorship or partnership in Canada?
Yes, but certain provinces may have residency requirements..
Is liability insurance recommended?
Absolutely, to protect personal assets.
Which is better for long-term growth?
Partnerships may scale faster due to shared resources, but sole proprietorships allow more control..
Ready to take the next step?
Learn how to choose the best business structure for your goals before making your decision.