Forms Legal of Business Ownership When to Incorporate from a Tax Perspective? Sole Proprietorship: Definition o Advantages and Disadvantages
Partnerships: Definition o o o The Partnership Agreement Advantages and Disadvantages Types of Partners General Partners Limited Partners
-
Corporations: Definition o o Public Corporations vs. Private Corporations Private Corporations o Restrictions Advantages and Disadvantages
Public Corporations Advantages and Disadvantages
o
Formation of a Corporation Approaches Articles of Incorporation Required Content Federal vs. Provincial Incorporation
When to incorporate from a tax perspective? Do n o t inc or p or a t e a b u si n e s s u n til y o u a r e c e r t ai n b u si n e s s will b e p r ofit a bl e a n d r e m ai n pr ofit a bl e for t h e for e s e e a bl e fu t ur e .
-
Whyincorporate?(2cases) o o Personalratesarehigherthanpublic/privatecorporation Aslongasyouarerealizingaloss,stayunincorporatedbecauseall lossesgeneratedcanbewrit tenoffagainstanyothersourcesof
W hichfor m ist hemostcom mon? But...whichhastheLargestsales?
SoleProprietorship Advantages o Easytofor m andtodissolve o o Nolegalrestrictionstostar tasoleproprietorship
Ownerhassoleclaim onallprofits Highlevelsofpersonalincentive,freedom andsatisfaction Basicallyever ythingispersonal,liveanddiebyyourown
o o o o -
Speedofdecisionmaking Maximu m levelsofsecrecy Taxadvantages Governmentsuppor t(smallbusiness)
Disadvantages o o o Unlimitedliability DifficultyinRaisingCapital Lackofcontinuity Businessisdependentononeperson,ifsomethinghappensto individual(i.e.death)
o
Management limitations Individualmight nothavealloftheskillset/knowledgetom ake t hebusinessgrow.
o
Taxationdisadvantages Taxedont hepersonaltaxsyste m;personaltaxratesarehigher t hanbusinesstaxrates
Partnerships
-
Anunincorporatedbusinessownedandoperatedbymorethanone personforhisorherprivateprofit o Peopleof tenthinkpar tnershipsmean2,butt hereisnolegallimit to t henu m berofindividualswhocanexistinapar tnership
-
Partnershipsarealwaysfor medbyagreement Thisagreementcanbeeitherverbalorwrit ten(shouldbeinwriting) CalledaPartnershipAgreement o o o o o Alegaldocu thatoutlinesalloft ment herightsandresponsibilities oft hepar tners Designedtopreventfutureillwillandmisunderstandingbet ween par tners Shouldser veast hebasisforresolvinganyconflictordisagreement betweenthepar tners Outlineshowcer tainissueswillbehandled ContentsofaPartnershipAgreement Namesofallpar tners Typeofpar tner...generalorlimited Initialfinancialcontributionofeachpar tner Howprofitswillbeallocated Processtobefollowedifaddingapar tner Processtobefollowedifonepar tnerwantstowithdrawhisorherinvest ment
-
TypesofPartnerships o GeneralPartnership Allpar tnershavejointandseveralliability Jointliability allpar tnersequallyliablefort hedebtsofthebusiness
Severalliability ifonepar tnersassetsareinsufficienttocoverhisorher shareoft hedebtsofbusiness,t hentheotherpar tnerwouldbeexpectedto paymorethantheirshare
o
LimitedPartnership Atleastonegeneralpar tner
Limitedpar tnersliability= invest ment Onepar tnersliabilityisstrictlylimitedtotheirinitialinvest ment Limitedpar tnersnotactiveinm anagement o Ift heydo,ownersover turnthelimitedprovision,andyougobackto beingageneralpar tner
-
Atleastonepar tnerhasunlimitedliability
Advantages o Relativelyeasytofor m o o o o NeedsaPartnershipAgreement
LargerAvailabilityofCapital Highlevelsofpersonalinvolve ment andsatisfaction Potentialdiversificationofmanage ment skillsandresponsibilities Taxadvantages
-
Disadvantages o o o o o Unlimitedliability...jointandseveral Potentialm anagerialdifficulties/conflict Slowerdecisionmaking Difficultyinwithdrawingonesinvest ment Difficultyinraisingcapital
PrivateCorporations LegalRestrictions o o o o Musthavelesst han50shareholders Sharescant beofferedtothegeneralpublic Sharesarenotpubliclytraded
Transferofsharesisrestricted...mustbeapprovedbycompany sBoardofDirecto
Advantages
o o o o -
Perpetuallife Limitedliability ? Taxadvantages Secrecy...notrequiredtopublishannualreports
Disadvantages o o o o o o Moredifficultandcostlytofor m Difficultyinraisingcapital Personalguaranteesm ay resultinunlimitedliabilityforowner Management limitations Increasedad ministration,recordkeeping,andgovern ment regulations Dualtaxationofcorporateprofits