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Incorporation
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There are several ways to start a
business, with each structure having its tax and legal advantages and disadvantages. Before you decide which form is best, you
should consider such aspects as personal liability, business name
protection, tax advantages and registration or filing costs. The way your business is taxed has a lot to do with the
way your business is set up.
There are mainly three
forms of business: Sole Proprietorship, Partnership and Corporation.
SOLE
PROPRIETORSHIP
A sole proprietorship is an unincorporated business that is owned by one person.
It's the simplest kind of business structure.
The owner of a sole
proprietorship has complete control over a business, and receives all of the
profits from that business, but is personally liable for
all of the debts and liabilities of that business, and this liability
extends even to the proprietor's personal property and assets. This is known as unlimited
liability.
A sole proprietorship is not required to be registered if the business is
carried on under the owner's own name (e.g. Jane Doe). However, if the
business uses a name other than the owner's, or any other words are added to
the owners name (e.g. Jane Doe Cosmetics), a declaration must be filed under
the Business Names Act before you start using it. Registered names are valid
for five years.
A sole proprietor pays taxes by reporting income (or loss) generated by the
business on a personal income tax return (T1). The income (or loss) forms part of the sole proprietor's overall income for
the year. The income tax return must include financial statements or one
or more applicable forms such as Form T2124, Statement of Business Activities; Form T2032, Statement of Professional
Activities.
PARTNERSHIP
A partnership is an arrangement where two or more persons agree to combine
their resources (money, labour, property, or skills) in the operation of a business.
In return, each partner is entitled to a share of the profits or losses in the business. The
business profits or losses are usually divided among the partners based on the
partnership agreement.
It is strongly recommended to draw up a written
partnership agreement to establish the terms of the business, profit sharing
and to protect partners/ shareholders in the event of disagreement or
dissolution of the business.
There are two types of partnerships, General Partnerships and Limited
Partnerships.
In a General Partnership, each partner shares in the management of the
business and has personal liability for all the debts and obligations of the
business.
In a Limited Partnership, some partners are "General Partners" who
control and manage the business, while some partners are "Limited
Partners" who contribute capital only, take no part in the management
of the business, and can limit their liability to the value of their
contribution to the partnership. There must be at least one managing partner
in a limited partnership, and the managing partner has unlimited liability.
A limited partner becomes a general partner if he or she takes part in the
management of the partnership. A legal document, setting out specific
requirements, must be drawn up for a limited partnership.
A partnership by itself does not pay income tax on its income, and it does
not file an annual income tax return. Instead, each partner reports his or
her share of the partnership income or loss on a personal income tax return.
Each partner also has to file either financial statements or one or more applicable
forms such as Form T2124, Statement of Business Activities; Form T2032, Statement of Professional
Activities. This requirement remains, whether the share of income was received in cash, or as a credit to a capital account in the
partnership.
A partnership has to file a partnership information return if, throughout the fiscal
period, it has six or more members or if one of its members is a member of another
partnership.
CORPORATION
A corporation is a separate legal entity, distinct from its shareholders.
Incorporation offers your business a number of advantages including business
name protection, transferability of business ownership, possible tax
advantages and limited liability in the sense
that you and the other shareholders are not responsible for the
corporation's debts.
Canadian companies may be incorporated either federally or provincially.
If
your business will operate primarily in Ontario, provincial incorporation
may be desirable. If your business will operate in a number of provinces,
you may wish to consider federal incorporation. Under provincial
incorporation your business name is protected only in the province. As a
federally incorporated business, the name has national protection.
The process of business incorporation has three main elements:
Since a corporation has a separate legal existence, it has to pay tax on its income,
and therefore must file its own income tax return (T2) within six months of the
end of every taxation year, even if it doesn't owe taxes. It also has to attach complete
financial statements and the necessary schedules to the T2 return. A corporation pays
its taxes in monthly instalments.
For more information on federal and provincial corporate tax, please refer to Taxation
- Corporate Tax.
For information on incorporating a Federal
or Ontario Corporation offered by Oliver Xing, Chartered
Accountant, please refer to Federal
Incorporation or Ontario
Incorporation.
For information on NUANS Name Search, Minute Book or Corporate Seal
offered by Oliver Xing, Chartered Accountant, please refer to NUANS
Name Search, Minute
Book or Corporate
Seal.
To order online your Federal or Ontario Incorporation
Package, NUANS Name Search, Minute Book or Corporate Seal of your choice,
please fill in the online Incorporation
Order Form or
Contact Us for more
information.
For step-to-step information on incorporating and starting a new business,
please refer to Business
Startup.
