Starting a business is a big step on the path to financial freedom. In our experience many individuals do not properly plan the structure that is best suited for their business. It is generally advisable to start as a sole proprietorship or partnership as the costs associated with corporations can be significantly higher. Factors such a liability and tax planning also need to be considered alongside costs, so consulting a professional would be recommended. The form of the business is not fixed so the legal structure can change as the business grows.
Cost savings (low regulatory burden). Individuals file one income tax return annually.
Tax advantage (if losses) as business losses can be used against other sources of income (ex. employment income)
Unlimited Liability. Creditors can come after personal assets to pay the businesses debts.
Tax disadvantage (if profits) as profits are taxed when earned.
Setting up a proprietorship has no cost, you can just start doing business. If a individual loses money, the business losses will reduce other sources of income resulting in tax savings. If and when the business grows and a taxpayer begins to be taxed at a high personal income tax rate, they can incorporate and begin to defer their taxes.
Someone makes a profit of $500,000.00 As a proprietor they would have to pay tax on the entire $500,000.00 at once.
Same as Sole Proprietorship
Same as Sole Proprietorship
Unlimited Liability. Creditors can come after all partners for debts associated with the business. This is not applicable to limited liability partnerships (not discussed here).
In a partnership, if one of the partners violates a contract, any or all of the partners can be held responsible.
Limited Liability. Debts are limited to money or assets that are invested in the company.
Tax deferral. Personal income taxes are paid at a lower rate, over a longer period of time.
Income Splitting. Dividends can be paid to shareholders (ex. family members) even if they are not actively involved in the company.
Unlimited life and transfer-ability of ownership. Sole proprietorship or partnership ends with the death of an owner/partner. A corporation is a separate entity so can easily be transferred.
Regulatory requirements and associated costs. Individuals file two income tax returns and other documentation annually.
Tax Disadvantage (if losses). Business losses can not be claimed against other sources of personal income (except in certain circumstances).
A corporation makes a profit of $500,000.00. It can pay the corporate tax and distribute the profits over a longer period (ex. spread out over five years) or distribute dividends to multiple shareholders (ex. different family members).
An individual is setting up a business with multiple shareholders and does not want to risk their personal assets if something goes wrong. In a partnership structure, all partners are responsible for the debts of the business. If they want to limit their liability due to the industry or risk of the venture, it can be advisable to incorporate for that reason alone.
An individual is self-employed and has a net income of $50,000.00. It is better to just pay the .cx when earned as a proprietor and be done with it.
Further information can be found at https://canadabusiness.ca