Which business entity type is right for you?


Canada has 3 main business entity types: sole proprietorship, partnership, and corporation. Which business entity type is right for you? And why does it matter?

Should I change my business entity type?

When starting a business, choose your business entity type based on both long-term and short-term needs. The needs of a start-up business often differ from those of a more established business.

If your business has been around a while, your original business entity type might not be the best one for you anymore. It’s possible to change your business entity type. That process varies depending on the business structure. 

It might be time to consider changing your business entity type if any of the following apply to you:

  • You want to hire more employees
  • You’re planning to bring on a new partner or co-owner
  • You’re looking for investors
  • You want to reduce self-employment taxes
  • You plan to sell your business
  • You plan to retire soon

Consult with your accountant or a business lawyer for guidance in choosing your business entity type and for help with the transition process if you decide to change it.

The 3 Main Business Entity Types in Canada

Your business entity type affects several things, including:

  • Start-up costs,
  • Liability,
  • Tax rates, and
  • Estate planning.

Let’s look at the 3 main business entity types in Canada. We’ll explore the advantages and disadvantages of each to help you determine the best fit for your business.

1. Sole Proprietorship

A sole proprietorship is a business with one person as the owner-operator who bears all the responsibilities and legal rights associated with the business. This person is the sole proprietor. 

Legally, the business and the owner-operator are the same legal entity. A sole proprietorship can have a  trade name that should be registered, sometimes called an “operating as” name, or simply be the name of the sole proprietor.

This is the most common type of business entity for new businesses because it’s easy and inexpensive to set up. 

Is a sole proprietorship the right business entity type for me?

Simplicity is the biggest advantage of a sole proprietorship. In Alberta, setting up a sole proprietorship involves little more than registering it with a provincial registry. If you’ll make more than $30,000 in a year, you also need to register for a GST number. 

Even taxes are simpler for a sole proprietorship. Because the sole proprietorship (the business) and the sole proprietor (owner-operator) are the same legal entity, only personal taxes need to be filed. Business income is claimed as self-employment income. Business expenses can be deducted from your income, which reduces your tax payable. Your tax forms will include a “Statement of Business Activity” which will show the performance of your business operations.

Another big advantage of sole proprietorship is that you own 100% of the business, which means you get to run the business the way you want to. The flip side is, you’re also 100% responsible for everything, including any debt your business incurs. Claims can be made against your personal assets to pay off the debt.

If you want to raise funds by finding investors, a sole proprietorship might not be the best option for you. 

Another notable disadvantage of a sole proprietorship is that transferring ownership in the event of the sole proprietor’s death can be more difficult.  


A partnership is like a sole proprietorship, but with more than one owner-operator. (There is no limit to the number of partners a partnership can have.) Ownership percentages, revenue shares, authority and responsibilities can vary.

As with a sole proprietorship, it’s easy and inexpensive to set up a partnership, and the partnership (business) and the partners (proprietors) are the same legal entity.

Is a partnership the right business entity type for me?

Advantages of a partnership are the same as those of a sole proprietorship. Partners can deduct business expenses from personal income for tax purposes. At the same time, partners are personally liable for any debt the business incurs. Claims can be made against your personal assets to pay off the debt.

One additional advantage of a partnership is the shared responsibility. It can be beneficial to share the costs and management of the business. And for decision-making, “two heads are better than one” might be the case here. 

That said, partnerships can be challenging when partners can’t reach a consensus about business decisions. Also, partners can be held responsible for any wrongful act by other partners acting on behalf of the business.

We highly recommend that you have a contractual agreement for any partnership to prevent complications about finances, decision-making, authority, responsibilities, exit strategies, and processes in your business. 


An incorporated business is a separate legal entity from its owner(s). The business can buy, sell, and own property independently of its shareholders. There is no limitation on the number of people that can form a corporation. 

Is incorporation the right business entity type for me?

The key advantage of an incorporated business is the separation between the business and its shareholders. The business is its own entity, so the business must pay corporate income tax. The shareholders’ personal income tax is completely separate. 

This separation is an advantage to the owners because it removes the personal liability. There are also tax deference opportunities, income splitting, capital gains exemptions, and other financial benefits. 

However, if you are seeking credit as a new corporation, there won’t be any credit history established and there may not be any or enough Tangible Net Worth in the company. It’s not unusual to have creditors ask for the owner(s) to personally guarantee any loans, etc. As your corporation grows and becomes more financially secure, the need for personal guarantees should decrease.  

It can be easier to find investors and other funding options for a corporation, which is another advantage over a sole proprietorship. 

Also, there’s more stability and continuity with incorporation. Even with changes of ownership, the business entity stays the same. 

Incorporating a business is not as simple as setting up a sole proprietorship or partnership. Depending on where your business operates, you might have to set up your corporation at the federal level rather than just provincially. 

Incorporation costs more, too. Accounting fees are higher with an incorporated business because the government requires audited annual financial reports.

How to Choose Which Business Entity Type is Right for You

The business entity type you choose will affect:

  • Your personal and corporate taxes,
  • How your business is managed, 
  • Administrative costs and
  • Legal implications.

A sole proprietorship might be the best choice if you’re newly self-employed because it’s the simplest and most affordable option. 

A partnership can be ideal if you have a like-minded partner with knowledge, skills, and experience that complement your own, and with whom you work well together.

If personal liability is a concern for you, if your plan is to build a business you can eventually sell, or if you’re hoping to secure investment capital, incorporation is likely the best choice for you. 

.Before you decide which structure is best for your business, consider the following: 

  • your financial situation, 
  • capacity for risk, 
  • long-term plan for both yourself and the business, and 
  • your growth potential. 

An accountant or business lawyer can help you decide which business entity type is right for you.