Home Business Idea Canada - legal structure

Home Business Idea Canada Choosing Your Legal Structure

If you have decided on a home businessss idea in Canada are you are wondering if incorporating, or operating as a sole proprietor is right for you, you've come to the right place.

Incorporating offers both advantages and disadvantages to work from home businesses, so its important to make sure you have solid, business reasons for choosing either an incorporation, or sole proprietorship. It is also important to receive sound legal and tax planning advice in making your decisions. This page is not designed to replace your Lawyer or Accountant.

The tax advantages of Sole Proprietorships, or General Partnerships are better in the initial stages of work from home businesses. As a Sole Proprietor, Canada Customs and Revenue (CCRA) allows you to deduct the portion of your home that is used for your business directly from your gross income. That goes for any utility, or service you pay for during the year as well. So if you use one room of your home as a home office, and that room is 15% of the total area of your home, you will deduct 15% of your utilities, lawn care, furnace service, and mortgage interest as business expenses.

A sole proprietorship is easy to form. No name search is required. Simply the registration of your chosen business name with the province. Business licensing is usually cheaper and in most jurisdictions you do not pay business tax on your home business. Tax preparation at the end of the year is, usually, only slightly more expensive than filing your own taxes. The major disadvantages lie in the area of liability.

As a Sole Proprietor, or a general Partnership, there is no legal barrier between you and the outside world like there is with a corporation. Your personal assets are at risk if your business fails and there is no choice when it comes to personal gaurantees on debt; you guarantee. There is also little, or no real, name protection unless you take the additional step of registering a Trademark. You can find Trademark information and search services here.

Incorporation removes a great many of the liability issues and provides a higher level of name protection, but on the downside increases your expenses substantially.

Incorporation costs vary considerably. Lawyers charge between $300 and $1,000 for a simple, basic incorporation. Private services charge between $250 and $500, while do-it-yourself kits can be purchased for $25 to $50 dollars. Filing fees vary between jurisdictions and the type and structure of the corporation you are forming, but you can expect them to add approximately $200-$300 to the cost of your DYI kit. Filing fees are included in the prices of the Lawyers and private services. A Canada Federal/Provincial NUANS search is also required to ensure that the name you have chosen is not already in use. These usually cost around $50.

There are significant benefits to incorporation. Name protection is substantial. Your name cannot be exactly copied by any other businss within the province. If you choose to to incorporate federally your name is protected across the entire country.

In addition to exstensive name protection, incorporation places a barrier between your businss operations and the outside world commonly referred to as the corporate veil. As long as you do business as the corporation instead of as an individual, and as long as you borrow money in the corporate name without personal guarantees, your personal assets are protected by the corporate veil.

Which Legal Structure is Right for My Work from Home Business in Canada?

There is no simple answer to this question. If you are starting a work from home business that presents significant liability issues, home renovations or catering for instance, the protection provided by the coporate veil is likely worth the added expenses.

If you start up a small business in Canada from your home that presents fewer liability issues, like a home based internet business, or a gift basket business, the tax advantages of sole proprietorship probably outweigh liability concerns until your business is grossing around $85,000 annually. You should involve your accountant in this decision if you expect significant income. Proper tax planning can save you thousands of hard earned dollars down the road.

Don't forget the name protection issue. While only a Trademark provides near total name protection, incorporating in your province or federally does offer significant levels of protection.

You can find specific information about the requirements, and support available in your province here

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