Starting a Business in Ontario: A Step-by-Step Overview
Launching a business in Ontario involves a number of considerations and responsibilities. Many aspiring entrepreneurs begin with an idea and a clear goal, but the road from concept to operation can often be confusing and full of uncertainties. The initial phase usually involves clarifying the type of business and how it will function. Once that’s settled, the next challenge lies in moving forward with implementation — a stage where many feel uncertain or directionless.
This guide aims to break down the various legal business formats available in Ontario and outline key requirements for meeting Canada Revenue Agency (CRA) expectations.
Common Business Structures in Ontario
The three primary options include Sole Proprietorship, Partnership, and Incorporation.
1. Sole Proprietorship
A sole proprietorship is an individual-owned enterprise without any co-owners. It is the most straightforward structure, ideal for those looking to begin small. You can operate using your legal name or choose a business name, which can be registered under a Master Business License as per provincial guidelines.
Considerations:
One major drawback is the lack of legal separation between the business and the owner. As such, personal assets may be exposed to risks associated with business debts and liabilities.
Estimated Costs:
Establishing a sole proprietorship is cost-effective. Registering a Master Business License online costs approximately $60. Additional charges may apply for business name searches.
Taxation:
This structure is taxed through the owner’s personal income tax. No separate tax filing is necessary. Income or losses are reported via the T2125 Statement of Business Activities on your T1 return. Depending on earnings, you may shift into a higher tax bracket.
While obtaining a CRA business number isn’t mandatory for all sole proprietors, registering for GST/HST or payroll accounts may be necessary in specific cases. These services are accessible via the CRA’s business helpline.
2. Partnership
This format involves two or more individuals working collaboratively under one business entity. Like a sole proprietorship, a partnership does not form a separate legal body, which means individual partners might be personally responsible for any debts or legal issues.
Types of Partnerships:
- General Partnership: Each partner shares equal responsibility for the business’s obligations and may be held liable personally.
- Limited Partnership: Includes one or more general partners and one or more limited partners. Limited partners have restricted liability based on their investment, while general partners remain fully liable.
- Limited Liability Partnership (LLP): This model is available for certain regulated professions. It protects individual partners from personal liability arising from another partner’s actions, though personal investment and business assets remain at stake.
Partnership Agreements:
Though not legally mandated, having a formal agreement is strongly advised. This agreement should outline key rules such as adding/removing partners, handling profit/loss distribution, and procedures in the event of a partner’s death.
Taxation:
A partnership doesn’t file its own tax return, but income and losses are distributed among partners to report on their personal filings. Depending on various criteria, filing a T5013 Statement of Partnership Income may be required. Financial details must align with Section 96(1) of the Income Tax Act.
CRA registration might be necessary for GST/HST or payroll, based on the nature of the business and employment arrangements.
3. Corporation
Incorporating creates a distinct legal entity separate from its shareholders. Corporations must file annual tax returns, and their shareholders are typically shielded from personal liability regarding corporate obligations.
Incorporation Options:
- Federal Incorporation: Allows your company to operate across Canada using the same registered name. A federal corporation must file annual returns and may also need to register in each province where it conducts business.
- Ontario Incorporation: Limits operations to Ontario unless separate registration is completed in other provinces. However, products and services can still be sold across Canada.
Taxation:
A corporation pays taxes at corporate rates. Remaining profits post-tax are considered retained earnings and can be distributed as dividends, which are then taxed in the hands of shareholders.
Ontario Corporate Tax Rates:
Tax rates depend on whether the business qualifies for incentives like the Small Business Deduction. A typical Canadian-Controlled Private Corporation (CCPC) with eligible active income may face a combined federal and provincial tax rate of around 15.5%.
| Small-business tax rate | General corporate tax rate | M&P Corporate tax rate | |
| General Corporate Tax Rate | 38.00% | 38.00% | 38.00% |
| Federal abatement | -10.00% | -10.00% | -10.00% |
| 28.00% | 28.00% | 28.00% | |
| Small-business deduction | -17.00% | 0.00% | 0.00% |
| General tax rate reduction | 0.00% | -13.00% | 0.00% |
| M&P deduction | 0.00% | 0.00% | -13.00% |
| Federal Tax Rate | 11.00% | 15.00% | 15.00% |
| Provincial Tax Rate (Ontario) | 4.50% | 11.50% | 10.00% |
| Total Tax Rate | 15.50% | 26.50% | 25.00% |
Incorporation Expenses:
Costs may range between $500 and $5,000, depending on the complexity of the setup and any professional guidance you seek. Basic expenses include:
- Ontario incorporation (electronic filing): $300
- NUANS name search: $75
- Service provider fee: $50
- Initial return (Form 1): $50
CRA Requirements for Corporations
Corporate Tax Filings:
All corporations must submit a T2 Corporate Income Tax Return each fiscal year, even with zero payable tax. For CCPCs, tax payments are due within 90 days of the fiscal year-end, while filings must be completed within 180 days.
Business Number:
Upon incorporation, the CRA assigns a business number. Directors may need to provide a Social Insurance Number and describe the business’s main activities.
GST/HST Registration:
If projected or actual revenues exceed $30,000, GST/HST registration is required. Voluntary registration is also an option from the start. CRA guidelines offer tools to help determine the need for this account.
Payroll Account:
Businesses must register for a payroll account prior to making their first remittance. This is due by the 15th of the month following the initial payroll deduction.
Moving Forward
Choosing the appropriate business structure often depends on the nature and growth potential of your enterprise. Many individuals begin with a sole proprietorship and transition to a corporate model as the business evolves. Provisions under tax law make it possible to convert to a corporation without triggering immediate tax consequences. When doing so, it’s essential to inform the CRA to update business registration details accordingly.