Sole Proprietorship
A sole proprietorship is an unincorporated business with a single owner. It is the simplest business structure. There is no distinction between personal and business assets. You have the sole responsibility for making decisions, receiving all the profits, and claiming the losses. The business owner’s personal assets are accessible to creditors and any litigation against the business.
For taxation, you file personally with the CRA. Taking into account your gross profitsand deductions, HST remitted (if applicable), and payroll (CPP for both employer and employee for the business owner).
When starting a sole proprietorship, all that is required of the business owner is registering a trade name; obtaining a tax number (for remitting HST); and opening a bank account.
Should the business owner die prematurely, the business is legally dissolved.
Partnership
General Partnership
A partnership is similar to a sole proprietorship, but instead of one owner, there are two or more. As with a sole proprietorship, the business assets (and liabilities) are not seperated from your personal assets. A Partnership Agreement should be drafted to govern ownership terms, revenues, expenses and tasks.
When preparing taxes, the partners apply the same ownership percentages to income and expenses. A partnership by itself will not pay income tax on its operating results and does not file an annual income tax return. Instead, each partner includes a share of the partnership income or loss on a personal, corporate, ortrust income tax return.
Limited Partnership
Limited partnerships are not incorporated and, subject to the Limited Partnerships Act and other applicable laws. They typically consist of at least one general partner who has liability for all debts and obligations of the firm, and one or more limited partners who have limited liability up to the amount that they contribute or agree to contribute to the limited partnership. Partnership Agreements are mandatory for a Limited Partnership.
Corporation
When you incorporate your business, you are creating a completely separate entity. Unlike a sole proprietorship or (most) partnerships, creating a corporation creates a completely new entity. This can be especially beneficial if liability is an issue.
Advantages of using a corporation structure are:
- Ownership is easier to transfer
- Owners benefit from the limited liability as the corporation is its own separate entity
- The life of the corporation extends beyond the life of the founder.
- Specific to Canadian-Controlled Private Corporations; the lifetime capital gains exemption (LCGE) is available when selling your shares.
Downfalls of using a corporation structure are:
- Increased cost and complexity regardingtaxation and legal paperwork.
- Increased record keeping requirementssuch as annual director’s meeting.
- Direct losses and expenses of thecorporation do not extend to the individual.
Overall
Your accountant or lawyer will be able to specifically assist. If you foresee losses in the first year or two with very limited liabilities, it may be worth starting as a sole proprietorship first. This will allow you to recognize the business's losses on your personal tax filings.
Please note the following information is specific to those operating businesses within the Province of Ontario. The above provides information of a general nature only. This does not constitute legal or accounting advice. All transactions or circumstances vary, and specified legal advice is required to meet your particular needs. If you have a legal question you should consult with a lawyer.
