Language selection

Search

Start, build, and grow a social enterprise: Build your social enterprise

From: Innovation, Science and Economic Development Canada

On this page

Overview of corporate structures

Sole proprietorship

Partnership

Business corporation

Not-for-profit corporation

Co-operative corporation

Incorporated

No

No

Yes

Yes

Yes

Jurisdiction

Provincial

Provincial

Provincial and federal

Provincial and federal

Provincial and federal

Difficulty of setting up

Easy

Easy

Medium

Medium

Medium

Who owns the business?

One owner

Shared between general partners

Shareholders in proportion to shareholding

Members do not own the business

Members regardless of shareholding

Liability

Unlimited

Unlimited

Limited

Limited

Limited

Who runs the business?

Owner has full control

General partners share control

Shareholders with elected directors

Shareholders with elected directors

Shareholders with elected directors

Difficulty to raise capital

High

High

Medium

High

Medium

Access to equity financing

No

No

Yes

No

Yes

Limits on distribution of dividends

-

-

No

-

Yes

Tax

Personal taxation

Personal taxation

Personal and corporate taxation

Usually corporate taxation only

Personal and corporate taxation

Administrative and regulatory burden

Small

Medium

Large

Large

Large

Type of social enterprise best suited for

Commercially focused

Commercially focused

Commercially focused

Socially focused

Comercially and socially focused

-

Learn more

Learn more

Learn more

Learn more

Learn more

The right corporate structure for your social enterprise

Sole proprietorship

Structure

A sole proprietorship is the simplest corporate structure. An owner makes all the decisions, takes in all the profit but also shoulders all liabilities.

Operating as a social enterprise

An owner of a sole proprietorship can undertake a variety of commercial activities to fuel the goals of the social enterprise. In addition, the owner takes all the decisions regarding what to do with profits, and how to invest in its business' social mission.

Challenges

Sole proprietorships cannot issue shares to finance their business and may have a more limited ability to find government funding opportunities. In addition, owners of sole proprietorships face considerable risk because they are personally liable for poor business decisions.

Advantages

Disadvantages

  • Easy and inexpensive to register
  • Regulatory burden is generally light
  • You have direct control of decision making
  • Minimal working capital required for start-up
  • Some tax advantages if your business is not doing well (for example, deducting your losses from your personal income, and a lower tax bracket when profits are low)
  • All profits go to you directly
  • Unlimited liability (if you have business debts, claims can be made against your personal assets to pay them off)
  • Income is taxable at your personal rate and, if your business is profitable, this could put you in a higher tax bracket
  • Lack of continuity for your business if you are unavailable
  • Can be difficult to raise capital on your own

Source: Sole proprietorship, partnership, corporation or co-operative?

Partnerships

Structure

A partnership is a business relationship between two or more persons with a view to making a profit. Partnerships are easy to create and dissolve, they are also flexible to operate. The specific requirements for setting up a partnership vary by province or territory. There are three kinds of partnerships: general partnerships, limited partnerships, and limited liability partnerships (limited to professional associations like lawyers or accountants).

Operating as a social enterprise

A partnership can be used to operate a social enterprise just as easily as a sole-proprietorship.

In a general partnership, the general partners equally share the decision making, the profits, and the liability, unless otherwise provided in a formal partnership contract.

A limited partnership is a type of general partnership where a single general partner with unlimited liability is supported by "limited partners". Limited partners contribute capital but are not involved in the company's management. Limited partners are only liable to the extent of their capital contribution — like shareholders of a corporation. In exchange for shouldering all the risks, the general partner takes in a bigger share of the profits.

Challenges

Operating a social enterprise as a partnership provides much of the same benefits and downfalls than a sole proprietorship. The added difficulty is to find partners that see eye-to-eye with your project, otherwise, a fallout between partners can cost you your social enterprise.

Advantages

Disadvantages

  • Fairly easy and inexpensive to form a partnership
  • Start-up costs are shared equally with you and your partner(s)
  • Equal share in the management, profits and assets
  • Tax advantage — if income from the partnership is low or loses money (you and your partner(s) include your shares of the partnership in your individual tax returns)
  • There is no legal difference between you and your business
  • Unlimited liability (if you have business debts, personal assets can be used to pay off the debt)
  • Can be difficult to find a suitable partner
  • Possible development of conflict between you and your partner(s)
  • You are held financially responsible for business decisions made by your partner(s); for example, contracts that are broken
  • Legal issues for small business. Do you really need a lawyer when you start your small business? Find out how legal counsel could benefit your business.

Source: Sole proprietorship, partnership, corporation or co-operative?

Business corporations

Structure

A business corporation or for-profit corporation is an incorporated entity; that is, a legal entity that exists separately and independently from its owners. A business corporation can enter into contracts with other persons or legal entities, can sue, be sued, and own property.

The owners of a corporation are shareholders, and the individuals who manage and run its affairs are officers and directors. Shareholders enjoy "limited liability", as they are only liable to the extent of their capital contribution to the company.

A business corporation is one of the most common types of organization to run a business. Corporations are incorporated at the Federal level under the Canada Business Corporations Act, or at the provincial/territorial level. Unless otherwise provided in the articles of incorporation or by resolution, there are generally no restrictions on how a corporation uses its revenue.

Operating as a social enterprise

Business corporations can commit to a social cause in various ways. The social objective can be integrated into the corporate structure of the business corporation, in its business model or in both.

A business corporation can achieve a social mission by indicating this in its articles of incorporation — a binding legal document of corporate governance that serves as the constitution of the corporation — or by a resolution passed by the executive board or by its shareholders. Resolutions passed by shareholders (or by the board) and the articles of incorporation are equally binding on the corporation. However, resolutions are more easily replaced by a later resolution while a change in the corporation's articles needs special majority approval by the shareholders.

A social mission can be pursued as an in-house program or within a department of the business corporation. In this case, the social mission or objective may or may not be referenced in the articles of incorporation or in a formal resolution, but the company is still driven by its management to achieve them. There are many examples of for-profit corporations committed to social objectives and this type of organization seems to be on the rise. Often, this approach falls into companies' corporate social responsibility mandate, and can translate into outreach programs, renewable energy initiatives, commitment to local charities — see Sustainability and Corporate Social Responsibility.

As well, for-profit corporations can set up a not-for-profit subsidiary to operate a social enterprise — see Grow Your Social Enterprise.

Note that business corporations can obtain charitable status if the articles of incorporation are set up to meet the definition of charity under the Income Tax Act, but this is very rarely seen in practice. Individuals interested in running a registered charity opt to set up a not-for-profit corporation and then apply for charity registration — see Registered charities.

Challenges

Keep in mind that shareholders have a financial stake in your business, and have a right to vote. Dissatisfied shareholders who are looking for higher returns could change the social objectives of your social enterprise by amending by-laws, voting in directors friendly to their interests, or even amending the articles of incorporation. To overcome this, you can shape your membership structure to limit the power that some stakeholders could have.

"For-profit" social enterprises, like business corporations, might find it challenging to convince customers, investors, and business partners that the social enterprise is committed to a social or environmental cause, and not simply paying "lip-service." In order to overcome this challenge, it is your duty to be transparent about how your social enterprise contributes to a social or environmental goal.

Advantages

Disadvantages

  • Easy to attract capital and access markets, debt and equity financing
  • No limit on profits
  • Self-sustained and scalable in ways greater than a not-for-profit corporation
  • Mission and objective are set by shareholders and can be purely socially oriented making it easier to attract investors supporting the mission and objective
  • Taxed as a regular business
  • Cannot rely on tax-deductible donations and some forms of government funding
  • Risk that future directors or shareholders can always change mission/priority or amend corporate charter

Not-for-profit corporations

Structure

A not-for-profit corporation is an incorporated legal entity that does not distribute dividends to its members. Not-for-profits can be incorporated at the Federal level under the Canada Not-For-Profit Corporations Act, or at the provincial/territorial level.

The term not-for-profit can be misleading; there exists a wide spectrum of not-for-profit corporations. Some operate lucrative commercial businesses and are taxed like for-profit corporations, and others operate as "registered charities" or "non-profits" to benefit from special tax exemptions.

The fundamental difference between a business corporation and a not-for-profit corporation is the ownership structure. Whereas shareholders own the business corporation and are entitled to dividends, members of a not-for-profit do not own the company and therefore do not receive dividends. But members have much of the same rights shareholders have with regards to electing directors, voting, accountability etc...

Operating as a social enterprise

The federal not-for-profit corporation allows entrepreneurs to operate a social enterprise like a for-profit business without distributing dividends. The federal not-for-profit model could help your social enterprise stay focused on its social cause because your ownership base is not expecting dividends from its membership contribution.

Like a business corporation, you can integrate a social goal into a not-for-profit by integrating it into the corporation's articles of incorporation, or by passing resolutions.

There are no restrictions on what kind of business federally incorporated not-for-profits can conduct. A federal not-for-profit can engage in commercial activities, apply the same commercial strategies that for-profits use to further a social goal, and make a profit. If a federal not-for-profit corporation declares profits, the not-for-profit corporation will pay the same taxes than a for-profit corporation.

In contrast, many of the "not-for-profit" or "societies" at the provincial level have restrictions regarding what commercial activities they are allowed to undertake.

Challenges

It may be challenging to attract significant investments due to membership shares' lack of financial incentives. Your not-for-profit would have to rely on traditional debt financing, or government grants to achieve its goals. As a result, it may be difficult to scale your business.

Advantages

Disadvantages

  • Ease of integrating social and organizational mission/objective
  • Attract institutional or private investors (in exchange for tax receipts — charities only)
  • Tax exemptions (non-profit organizations and charities only)
  • Less administrative and regulatory reporting obligations
  • Risk of failing to attract significant investments
  • No opportunity for equity financing, unless through a for-profit subsidiary
  • Risk of relying on government funding or debt financing to meet objectives/deliver program
  • Risk of not being able to scale the business

Co-operatives

Structure

A co-operative is a type of incorporated entity democratically owned and operated by an association of members. Cooperatives respond to the needs of their members, be it social, economic or environmental, such as accessing products or services, the sale of their products or services, or employment. A member of a co-operative carries one vote regardless of the number of shares she or he possesses.

Some co-operatives operate as "for-profit" businesses and distribute dividends to members; others, are purely social endeavors that do not distribute any surpluses to their members — this is often the case for nursery schools and daycare co-operatives.

Co-operatives are incorporated under specific federal, provincial or territorial Acts. Generally, they adhere to internationally recognized cooperative principles. There are comprehensive guidelines regarding cooperatives in Canada and online tools to start and grow your co-operative.

Co-operatives operate in almost every industry in Canada. For more information on their economic activity, visit Co-operatives in Canada in 2015.

Operating as a social enterprise

Like business corporations and not-for-profit corporations, a co-operative can integrate the social cause in its articles of incorporation, or by passing resolutions. While the primary beneficiaries of a co-operative may be its members, a co-operative can extend its activities to benefit a wider community.

Co-operatives operate for a variety of reasons. For example, the Information Guide on Co-operative identifies the following four types of co-operatives:

  • A consumer co-op provides products or services to its members (such as a retail co-op, housing, financial, health-care or child-care co-op).
  • A producer co-op processes and markets the goods or services produced by its members, and/or supplies products or services necessary to the members' professional activities (such as independent entrepreneurs, artisans, or farmers)
  • A worker co-op provides employment for its members. In this type of co-op, the employees are the members and the owners of the enterprise.
  • A multi-stakeholder co-op serves the needs of different stakeholder groups—such as employees, clients, and other interested individuals and organizations. This type of co-op is usually found in health, home care, and other social enterprises.

Some provincials have additional types of co-operative incorporations, such as "New Generation Co-operatives" in Alberta or "Worker-Shareholder Co-operatives" in Quebec. In addition, co-operatives can form "cooperative federations" — a co-operative owned by smaller co-operatives or businesses. Canada is home to some very large co-operative federations.

Federal cooperatives can attract investments and expand on their social mission by creating a separate class of equity shares, called investment shares. Investment shares are issued to non-members and allow co-operatives to raise capital without relinquishing decision-making control.

Investment shares are restricted in a number of ways. Section 124(1) of the Canada Cooperatives Act provides that investment shares do not have voting power unless otherwise provided in the co-operative's articles of incorporation, and that holders of investment shares, if they do have voting rights, cannot elect more than 20% of the directors of a co-operative.

Like not-for-profit corporations, co-operatives can own subsidiary for-profit business — see Grow Your Social Enterprise.

Challenges

Co-operatives are controlled and run democratically, so your own vision of a social enterprise may be drowned out by the other members' vision. As your cooperative evolves to meet the changing needs of its members, your cooperative may change substantially.

The legislative framework of cooperatives require the active participation of members in the affairs of the co-operatives, so you need a committed group of members willing to give their time to the cooperative — shareholders or members of a not-for-profit aren't necessarily as involved.

Advantages

Disadvantages

  • Easier to start up with a group of people committed to a cause
  • Easier to attract investment, debt and equity financing than not-for-profit corporation
  • Can reinvest profits into expanding the business and create investment shares to pay out interest/dividend
  • More self-sustainable and scalable in ways greater than a non-profit
  • Cooperative principles are built into the core mission/business model and must be adhered to by the members/management
  • More difficult to raise capital than a regular business corporation
  • Returns on investment and dividends limited to a maximum fixed in corporate charter
  • Taxed as a regular business, unless set up to meet non-profit status
  • Cannot rely on tax-deductible donations and some forms of government funding
  • Generally, scalability of the business is limited by the number of members committed to the nature of the business (i.e., worker, consumer, housing co-op)

Provincial social enterprise models

Structure

The provincial governments of British Columbia and Nova Scotia created hybrid corporate structures for social enterprises. In British Columbia, the Community Contribution Company (C3 or CCC) is an entity created under the Business Corporation Act and the CCC regulations. In Nova Scotia, the Community Interest Company (or CIC) is created by the Community Interest Companies Act and CIC regulations.

The government of British Columbia offers a guide on how to incorporate a community contribution company. In Nova Scotia, businesses must apply to be designated as a CIC when incorporating, as prescribed by section 5 of the Community Interest Companies Act.

Operating as a social enterprise

CCCs and CICs give the opportunity for social entrepreneurs to operate a social enterprise much like a business corporation or a co-operative.

Some of the common characteristics of CCCs and CICs are:

  • Their social mission must be indicated in their articles of incorporation;
  • They can issue shares to attract investors;
  • They are limited to distributing a maximum of 40% of profits as dividends to their shareholders;
  • They are required to issue a detailed report to their shareholders outlining business information, and the achievements of their social mission;
  • They are subject to the same tax rate as a for-profit corporation.

CCCs and CICs benefit from increased visibility in their communities as they are required to have the words "Community Contribution Company" or "Community Interest Company", or the relevant acronyms, as part of their corporate name. Corporations that have a CCC or CIC appellation send a strong signal to customers that the corporation is socially responsible, and maintains transparent corporate practices.

Another advantage of CCCs and CICs is that they allow social entrepreneurs to develop or operate a business that may be unrelated to their social cause — as opposed to non-profit organizations and registered charities.

Challenges

CCCs and CICs are still taxed like business corporations.

To date, there are not many examples of CCCs and CICs.

Registered charities

Structure

Registered charities are charitable organizations, public foundations, or private foundations that use their resources for charitable activities and have charitable purposes that fall into one or more of the following categories:

  • The relief of poverty;
  • The advancement of education;
  • The advancement of religion; or
  • Other purposes that benefit the community.

An organization can become a registered charity as defined under the Income Tax Act after applying and being approved by the CRA. The CRA provides useful guidance about what to consider before applying for registration. It is important to understand the differences between a registered charity and a non-profit organization — see the CRA chart below. Note that a registered charity cannot also be a non-profit organization.

Applying for "registered charity" status is a decision you make after incorporating into one of the corporate structures mentioned above.

Operating as a social enterprise

Operating a social enterprise through a registered charity has multiple advantages — including increased credibility in the community, providing donations receipts and the ability to receive gifts from other charities or foundations.

Registered charities are usually financed by fundraising (private donations, government grants or programs), loans and revenue generated by charging fees for a service. They can also operate a "related business" as a social enterprise to expand their social mission.

Under section 149(1)(3)(a) of the Income Tax Act, registered charities can engage in commercial activities related to their social mission. The CRA offers substantial policy directives on what it considers a "related business", and deference should be given to the CRA's guidelines when operating a "related business."

The CRA offers comprehensive guidelines regarding charities, including a glossary of terms related to charities in plain language, and checklists and a toolbox for directors, officers, and volunteers.

Challenges

A significant drawback of running a social enterprise through a charity is the limited ability to carry commercial activities and attract capital without jeopardizing the charity's status under the Income Tax Act. For instance, on top of the fact that registered charities can only operate "related businesses", registered charities can only hold up to a 20% interest into a limited partnership, failing which the charity will be considered to be carrying on a business.

Registered charities have to meet disbursement quotas — they are required to spend a minimum of their revenue on their own programs or as charitable donations to other charities. Operating a social enterprise as a charity will come down to the individual needs and goals of your social enterprise.

Non-profit organizations

Structure

A non-profit organization is an organization that operates solely for social welfare, civic improvement, pleasure or recreation, or any other purposes, except profit. An organization must fulfill and maintain certain requirements to be exempt from paying income tax.

Operating as a non-profit organization is a decision you make after incorporating into a corporate structure.

Operating as a social enterprise

A non-profit organization can run its own business and generate revenue if the business is connected to its social mission. Non-profits have commonly engaged in various sorts of commercial activities related to their social mission, like a hospital running a cafeteria, a university running a bookstore, or a church renting out unused parking lot.

Non-profit organizations, contrary to registered charities, do not have spending requirements.

Challenges

A non-profit cannot carry out a trade or business exclusively with the view of making a profit otherwise, the CRA may revoke a non-profit's organization tax exempt status. As a result, a non-profit is limited in the ways it can make money since its revenue-generating business needs to be "related" to the not-for profit's mission.

The following characteristics might indicate that a business of a non-profit organization is operating on a "for-profit" basis:

  • It is a trade or business in the ordinary meaning, that is, it is operated in a normal commercial manner;
  • Its goods or services are not restricted to members and their guests;
  • It is operated on a profit basis rather than a cost-recovery basis; or
  • It is operated in competition with taxable entities carrying on the same trade or business.
The differences between a registered charity and a non-profit organization

Topic

Registered charity

NPO

Purposes

  • must be established and operate exclusively for charitable purposes
  • can operate for social welfare, civic improvement, pleasure, sport, recreation, or any other purpose except profit
  • cannot operate exclusively for charitable purposes

Registration

  • must apply to the CRA and be approved for registration as a charity
  • does not have to go through a registration process for income tax purposes

Charitable registration number

  • is not issued a charitable registration number

Tax receipts

  • can issue official donation receipts for income tax purposes
  • cannot issue official donation receipts for income tax purposes

Spending requirement (disbursement quota)

  • must spend a minimum amount on its own charitable activities or as gifts to qualified donees
  • does not have a spending requirement

Designation

  • is designated by the CRA as a charitable organization, a public foundation, or a private foundation
  • does not receive a designation

Returns

  • must file an annual information return (Form T3010) within six months of its fiscal period-end
  • may have to file a T2 return (if incorporated) or an information return (Form T1044) or both within six months of its fiscal period-end

Personal benefits to members

  • cannot use its income to personally benefit its members
  • cannot use its income to personally benefit its members

Tax exempt status

  • is exempt from paying income tax
  • is generally exempt from paying income tax
  • may have to pay tax on property income or on capital gains

GST/HST

  • generally must pay GST/HST on purchases
  • may claim a partial rebate of GST/HST paid on eligible purchases
  • most supplies made by charities are exempt
  • calculates net tax using the net tax calculation for charities
  • must pay GST/HST on purchases
  • may claim a partial rebate of GST/HST paid on eligible purchases only if it receives significant government funding
  • few supplies made by NPOs are exempt
  • calculates net tax the regular way

Source: CRA, What is the difference between a registered charity and a non-profit organization?

How to manage your social enterprise?

Day to day operations

Managing your social enterprise includes a wide range of activities, such as managing employees, marketing, and protecting your business. The Government of Canada's Managing Your Business platform provides useful links to help you manage the affairs of your business. The Business Development Bank of Canada also offers an Entrepreneur's Toolkit to help you grow and manage your business.

Sustainability and corporate social responsibility

Corporate social responsibility (CSR) are social and environmental practices that enable a company to operate and engage in sustainable business practices. CSR practices are used internally to shape the corporate culture of a company, but also externally to deal with business partners and customers. The goals of CSR are closely aligned with those of a social enterprise. A social enterprise can benefit from using CSR practices, some of these benefits include:

There are extensive resources available for social enterprise who want to adopt CSR practices including a CSR implementation guide, a CSR toolkit, and a sustainability roadmap for small and medium size enterprises.

Staying on top of your tax obligations

Your business will be taxed differently depending on its given corporate structure. Below are a list of resources and websites that explain in further details the tax implications and tax obligations of sole proprietorships, partnerships, for-profit corporations, not-for-profit corporation, co-operatives, and charities.

List of all CRA publications

General Information
Taxation of Unincorporated Entities
Taxation of Incorporated Entities
Taxation of Special Status Organizations under the Income Tax Act

The information provided is to assist you in understanding more about social enterprises. It is not intended to replace legal advice. Consider consulting a lawyer or another professional advisor to ensure that the specific needs of your corporation are met.

Date modified: