10 key decisions for business owners
Key decision 1 – What is the best structure for your business?
Whether you already own your business, are thinking of starting a business from scratch or buying an existing business, choosing the right business structure can have a major impact on the future success of your enterprise – as well as your personal tax and estate planning.
Your decision should take into account a range of factors, including the nature of your business and where it’s located, the number of people involved, taxation considerations, your potential exposure to liability and the company’s financial requirements.
Consult an experienced legal professional and tax accountant. Your professional advisors can help ensure that you are well informed on the legal and taxation issues you may encounter and that you understand the personal and business implications of your decisions.
A sole proprietorship is the simplest form of business organization and is often the most inexpensive to set up. For small enterprises you, as the business owner, have direct control over business decisions and receive all the profits. However, you are legally responsible for the debts and obligations of the business. This means that both your business and personal assets may be subject to the claims of creditors.
How is a sole proprietor taxed?
You must file a personal tax return to report your business income. You would include the income, or losses, from your business on your personal tax return as part of your overall income for the year. Your net business income is taxed as personal income so there are limited tax-planning opportunities.
Partnerships can be relatively easy to set up and often have low start-up costs. A key advantage of having partners is that they generally bring additional sources of investment capital and provide a broader management base but finding suitable partners can be a challenge. This kind of business structure can also mean a division of authority and/or conflict between partners.
A written partnership agreement can help minimize potential conflict. In many cases it sets out the terms of business, protects the interests of individual partners in the event of disagreement or dissolution of the business and generally defines how the partners will share the business profits.
If you are considering investing in a partnership, you should also review the tax and legal implications carefully with your advisor.
How is a partnership taxed?
Instead of your partnership paying tax on its income and filing a partnership tax return, the partnership’s income and/or loss will flow through to the individual partners who then report their share of the partnership’s net income or loss on their personal tax returns.
Corporations are a very popular business structure. A corporation is a separate legal entity from its shareholders but has all the legal characteristics of an individual. It can own property, incur legal liability, lend, borrow and carry on business. Corporations also file an annual corporate tax return.
If you’re thinking of starting or investing in a corporation, there can be a number of advantages. It can provide greater business continuity as shares can be bought and sold without affecting the company’s continued operation. It is also easier to raise investment capital for a corporation, and you may find that the size and resources of an incorporated business make it easier to attract specialized management expertise. In addition, as an owner-manager and a shareholder, your liability is generally limited to your shareholding, so your personal assets are protected from the company’s creditors unless you have provided personal guarantees for loans to the corporation.
Scott Donovan, B.A. | Investment Advisor | RBC Dominion Securities Inc. |
T. 519-747-0133 | F. 519-747-1808 | 95 King Street South, 3rd Floor | Waterloo, ON N2J 5A2 |
This article is supplied by Scott Donovan, an Investment Advisor with RBC Dominion Securities Inc. Member – Canadian Investor Protection Fund. This article is for information purposes only. Please consult with a professional advisor before taking any action based on information in this article.