« »

Sunday, December 1, 2013

The pros and cons of limited vs. incorporated business in Canada

Different business structure suit businesses differently
Canada has three legal business entities
It’s not an easy question for business to decide on. There are some real benefits and negatives for each of these options. So get informed before you make the big decision.

According to the Globe and Mail, running your business as a limited partnership or sole proprietorship can seem like the right solution, until you get a boost in your revenue and find yourself facing a large tax bill that is billed at the personal rate.

The founder of a Toronto-based consultancy told the paper he would have some a whopping $40,000 in taxes if his sole proprietorship was upgraded into a corporation.

Remember, there are three types of legally recognized businesses in Canada: a sole proprietorship, where the business is owned by a single person; a limited partnership, where the business is owned by two or more people; and a corporation, the biggest option of the bunch, which can be owned be any number of people.

The sole proprietorship, since it is owned by one person, gives that person all legal rights and responsibilities tied to the business. The sole proprietorship has to be registered in order to collect and then pay provincial and federal sales taxes, which must be done when it has more than $30,000 a year in revenue.

Partnerships usually see two or more people pool together their financial, technical and managerial resources and abilities to run a business. Though they’re not required to together register a partnership, it definitely lends more credibility and protects the business name. As with a sole proprietorship, income as taxed as a share of the owners’ personal income, and each partner is responsible for the other partners’ actions.

Corporations are separate and distinct legal entities that stand apart from the owners of the business. Any number of people can launch a corporation, and it can buy, own and sell property on its own or be involved in legal action. Corporations must file their own tax returns that are separate from their owners’ personal tax returns. Those owners are also protected from the corporation’s liabilities.
Corporations are usually designed Inc., Corpo., or Ltd., indicated it’s a separate entity from its owners.

With sole proprietorship and a limited partnership being so similar, there are really only two options of staying self-owned or incorporating. The owner or owners of the business are solely responsible for its taxes, decisions and potential lawsuits.

With a partnership or sole proprietorship, owners are considered part of the business. That means they’re held personally responsible for every move the business makes. Meanwhile, entrepreneurs who go the route of incorporation are legally treated as a separate entity and are protected from being personally held liable for the business’ actions.
This means that for business working in volatile or high-risk areas, incorporation – and the legal protections it brings – can be a highly important move. For example, if your business is active oversees, it can be exposed to risks in the countries it operates, including lawsuits over any possible impact on people and the environment abroad.

What’s more, when the business really starts to grow and make big decisions such as signing leases and hiring staff, incorporating can be the right decision since it will keep the owners free from personal responsibility if the company can’t pay its bills and goes into default.

However, sole proprietorship or limited partnerships definitely have their own advantages. For example, while the owner or owners pay a high personal tax rate on their business’ revenues, they can also gain a big tax advantage by writing losses off against personal income. For this reason, owners of new businesses may prefer to avoid incorporation. 

This is especially true for owners who are looking for their new business to provide a second income. But according to a corporate governance and organization expert at the Richard Ivey School of Business at the University of Western Ontario, once revenues start to trump owners’ living expenses, they should consider incorporating. This will give them a lower tax rate than they were previously paying. And incorporating a business can help loosen the purse strings of government. A corporation, unlike a sole proprietorship or limited partnership, can qualify for government small business and employment grants. This also strengthens its legitimacy and can help bring on certain clients who are looking for markets that the business is a serious one.

Plus, corporations like to work with other corporations. Large companies will only work with other corporations. This is because business incorporations provide some stability in transactions because they have access to omissions and general liability insurance. Those are options that partnerships and sole proprietorships simply cannot get their hands on.

About the author: Being a business personality, Sandy J has turned his career path to business forecasting. He is very much passionate about researching and sharing his valuable lessons in business.

Image license: MikeKorn, RGBStock royalty free

1 comment:

  1. The reputation of a business is essential to its survival.