There is a big difference between identifying your business as a corporation, sole proprietorship, and a partnership. Each one of these ‘tax situations’ carries different benefits. Here is a brief breakdown:
Incorporating your business means that is now considered a separate legal entity from its owners. An incorporated business has legal rights and is now subject to a separate set of tax laws. Since the business is its own entity, filing taxes for the business will see income and losses become issues of the business itself and are recorded in the business’s tax records and other documentation – not that of those who own or operate the business. Depending on the size of the business (how many it employs) it will be subject to a distinct set of tax and reporting laws. Corporations are closely regulated and if you have shareholders, their opinions matter. You don’t have the same freedom you would with a sole proprietorship when it comes to decision making.
Difference in Partnership and Sole-proprietors
Revenue Canada defines a partnership as: “Each partner shares the management of the business and has personal liability for the business debts and obligations”. A sole proprietorship is a company the founder operates without partners and without being incorporated. Most self-employed small businesses are considered sole proprietorship’s or partnerships.
The main difference between a partnership or sole-proprietorship and a corporation is, you as an individual, or partners, are personally liable. If you put your assets against the debt of your business or if you are sued, it is you, not just your company that is affected. A corporation can be sued or bankrupted in its own right without the involvement of personal assets.
There are many benefits to a partnership/sole proprietorship, however. Some of the benefits of this can be increased deductions through expenses, especially if your business is run out of your primary residence. Since the business is not a distinct entity from the owners/operators, you have more flexibility with the decision making and the profits.
How to decide…
It really comes down to the size of the operation you plan to be running, the type of business and how expensive it is to run. If it will be a big business, requiring lots of capital and employees, you need to incorporate for your own protection. Many corporations start off as partnerships or sole proprietorship’s and once they reach a certain level of business, they incorporate. Others begin and remain small businesses run through the name of the business owner. You must assess your overall needs to determine if incorporation is right for you.
What about taxes?
There are clear advantages and disadvantages to each situation. Some have more freedom, and some have better tax advantages, but it’s all relative to your business goals, volume, etc. One important consideration is that if you need a lot of capital to start your business, incorporating helps legitimize the business and makes it much more palatable for potential investors.
Take a good look at your current business, or the plans for a business you want to start, and decide which form of business will be the most advantageous for you. It may boil down to tax brackets and credits – or it may be about simplifying the business process and making tax filing more streamlined.
When in doubt, call the professionals. AF Accounting can help you assess your needs and your growth to determine which type of structure is the most advantageous for you.