Source AWFS Consulting
If you are starting a business you have options as to how to structure your business. Your choices are sole proprietorship, partnership or incorporation.
A sole proprietorship is a business that is not incorporated, and owned by one individual. The net income earned by the business is taxed in the hands of the owner personally at the applicable graduated personal income tax rates. The net income / loss of the business is included in the personal income tax return of the owner along with all other sources of income earned by the owner.
A partnership is a business that is not incorporated similar to a sole proprietorship with one key distinction; there are at least two owners of the business. The net income earned by the business is taxed in the hands of owners based on their percentage ownership. For individuals who are owners, their portion of the net income is taxed personally at the applicable graduated personal income tax rates. The individual owner’s proportion of the net income / loss of the business is included in the personal income tax return of the owner along with all other sources of income earned by the owner.
An incorporated business is a separate legal entity, and a business can be incorporated federally or provincially. The owners or shareholders of the corporation are issued shares of the corporation which represents their ownership percentage of the entity. Since the business is a separate legal entity, it is required to file annually tax returns (Corporate Income Tax Returns) separate from the shareholders of the corporation. The shareholders of the corporation include amounts received by the corporation in their income for tax purposes that represent remuneration (e.g. salaries and wages, director’s fees), dividends or interest payments.
There are advantages to each structure. The advantages of Sole Proprietorships and Partnerships represent the disadvantages to Incorporation, and the advantages of Incorporation represent the disadvantages of Sole Proprietorships and Partnerships.
Advantages of Sole Proprietorships and Partnerships:
- Simple and low cost to setup and maintain;
- Losses can be utilized against other sources of income to reduce the taxpayers overall taxes.
Advantages of Incorporation:
- Limited liability, generally the liability of the owners of the corporation is limited to their investment in the business (Note that there are of course limits to limited liability);
- Low tax rates.
- The ability to shelter capital gains on the sale of the business.
Which business structure should you use?
The incorporation structure becomes more and more attractive as the net income of the business increases, due to the many tax advantages available through incorporation. However, it is always wise to seek professional advice to assist your decision on the structure that meets your needs.
AWFS Consulting Inc. offers professional tax, business advisory, and accounting services to clients. The company’s mission is to offer financial leadership and support to clients in this ever changing economic environment.