What are the different types of business structures that exist in Quebec?

The business structure you choose is a key decision for any entrepreneur starting an activity in Quebec. This choice determines the framework within which the business is owned and operates, directly impacting its management, taxation, and financing.

If you're considering starting a business in Canada, understanding the different business structures is essential to selecting the one that helps to protect your assets and best suits your business needs and goals.

The main legal structures of business in Quebec

The legal status of a company determines its management rules, responsibilities and tax obligations. In addition, entrepreneurs must comply with applicable laws, such as the Quebec Civil Code and the Business Corporations Act, to carry on business within legal boundaries.

Here's an overview of the common types of business structures:

Sole proprietorship

The sole proprietorship is one of the common types of business in Quebec. Operated by a single individual, it has no separate legal status, meaning that the owner is directly responsible for the debts and obligations of the business. While this structure allows the owner to retain all business assets, it also exposes them to all liabilities, including personal assets.

Sole proprietorships are taxed at the owner's personal income tax rate, which can be advantageous for small businesses. This model is often chosen by self-employed individuals or entrepreneurs testing an idea before incorporating.

Corporation (Incorporated Company)

A corporation, also known as an incorporated company, is a legal structure that provides a clear separation between the assets of the company and those of its shareholders. Legally recognized, this separation limits the personal liability of shareholders to their initial investment.

Corporations offer several tax advantages, including lower corporate tax rates compared to personal tax rates. However, they require more complex administrative formalities, such as the filing of T2 and CO-17 tax returns. Businesses need to register their incorporation with the Registraire des entreprises under Canadian or provincial business laws. These business entities are ideal for businesses together seeking to attract investors or grow their operations.

Partnership

A partnership is a collaboration between two or more individuals who pool their resources to carry on business together. The partners share profits and losses as well as the financial responsibilities of the business.

In Quebec, this type of partnership is divided into two main categories: general partnerships (S.E.N.C.) and limited partnerships (S.E.C.).

General partnership (S.E.N.C.)

A general partnership forms when two or more people join forces to run a business together. Each partner shares business assets, skills, and activities while sharing profits and losses. However, the S.E.N.C. has no separate legal status, making each partner personally and jointly liable for the debts of the business.

This structure is simpler and less costly than a corporation, making it a popular choice for start-up projects that require close collaboration. However, the high personal risk makes it more suitable for low-risk activities.

Limited partnership (S.E.C.)

A limited partnership combines two types of partners: general partners, who actively manage the business and have unlimited liability, and limited partners, who provide financing with liability limited to their investment.

Ideal for projects that require substantial capital or involve significant risk, limited partnerships are often used in industries such as sports or real estate. Although they share some of the characteristics of legal entities, limited partnerships are not recognized as such by law. Each Quebec limited partnership balances the responsibilities of investors and managers, providing flexibility for complex projects.

Cooperative

A cooperative is a separate legal entity created by a group of individuals or companies to meet a collective need. It must be registered with the Registraire des entreprises in Quebec.

Cooperatives operate on democratic principles where each member has an equal vote, regardless of financial contribution. Profits are redistributed to members according to rules set out in the bylaws.

Although they offer benefits such as equitable profit sharing and collective governance, cooperatives are more complex to manage and require active member participation. They are often found in the agricultural, cultural, or social sectors.

Non-profit organization (NPO)

A non-profit organization (NPO) is an entity created to carry out social, educational, or cultural activities without generating profits for its members.

Revenues generated by an NPO cannot be distributed to its members and must be used exclusively to support the organization's objectives. These entities are often tax-exempt and may be eligible for government grants.

However, an NPO's activities are strictly regulated to prevent commercial deviations, and profits cannot be distributed. NPOs play an important role in the development of local communities in Quebec.

Registered charities

A registered charity may be incorporated as a corporation, a trust or an unincorporated association. It must also register as a charitable organization, public foundation or private foundation under the Canada Income Tax Act.

As a qualified donee, a charity can issue tax receipts to donors and is exempt from income tax.

Co-ownership syndicate

Made up of all the co-owners who make up a co-ownership, the syndicate of co-ownership is a legal entity governed by the Civil Code of Québec. Its existence is made possible by the publication of a declaration of co-ownership in the land register.

Its function is to ensure the following:

• Maintenance and management of the building's common areas
• Preservation and renovation of the building
• Maintain and respect the co-ownership rights
• Carry out operations of common interest.

Choose the right type of business structure?

Choosing the right structure for your business is a strategic decision. Depending on your goals and business activities, some structures will be more advantageous than others from a tax, administrative, and financial perspective.

When incorporating, consider these key questions:

What is my personal situation?

Your personal situation plays a key role in the choice of legal structure for your business. If your business is your primary source of income, it may be better to choose a structure that protects your personal assets, such as a corporation. Conversely, a simpler structure may be appropriate for a sideline or small business.

Finally, consider your ability to invest in professional advice, as more complex structures often require legal and tax expertise to manage effectively.

What are my tax priorities?

Taxation is a key consideration when choosing the legal structure for your business. If your income is high, a corporation may offer more favorable corporate tax rates and tax flexibility, such as the ability to accumulate earnings or pay dividends. On the other hand, if your income is modest or variable, a sole proprietorship taxed at individual rates may be sufficient.

Also consider the tax credits or special benefits offered by certain structures, such as cooperatives, to determine if these options are right for your business.

What is the nature of my business?

The nature of your business directly influences your choice of legal structure. If your business is in a high-risk financial or legal sector, such as construction or healthcare, a corporation may be essential to protect your personal assets. On the other hand, a sole proprietorship may be sufficient for a simple activity such as consulting or individual services.

If your project involves collaboration, a partnership or cooperative may be more appropriate, providing a framework for sharing responsibilities and profits.

What are my short- and long-term goals?

Your short- and long-term goals will largely determine the ideal legal structure for your business. If you plan to remain a small business or run a local operation without major expansion, a simple structure such as a sole proprietorship or partnership may be sufficient. On the other hand, if you're planning to grow quickly, hire employees, or take on investors, incorporating your business as a corporation may be more appropriate.

Also consider your willingness to share ownership or raise funds from partners. These goals may require a more robust and flexible structure to support your future ambitions.

What is my risk tolerance?

Assessing your risk tolerance is essential to choosing the right entity. Some options, such as a sole proprietorship or partnership, involve unlimited liability, exposing your personal assets in the event of financial difficulties or litigation. If this is a concern, a corporation, which protects the personal assets of the shareholders, may be more appropriate.

Also consider the risks specific to your industry. Sectors such as construction, healthcare, or innovative technologies often benefit from a legal structure that provides greater legal and financial protection.

Understand common business structures to better understand your company's tax implications

Understanding business legal structures is crucial for operating within Quebec’s legal framework. Each structure has advantages and limitations, so consulting a legal advisor or tax specialist can help you make informed decisions.

At T2inc.ca, we simplify business management. From incorporation as a corporation to bookkeeping and tax return preparation, our team is here to guide you.

Request a free quote today and let us help you focus on growing your business.