Choosing the right structure can have serious consequences for their business. Most entrepreneurs are very creative and they get right in there and pursue a dream, and they do it without thinking about a structure.
There are three common forms of business ownership in Canada – a sole proprietorship, which is owned by one person; a partnership, which is owned by two or more people; and a corporation, which can be owned by any number of people.
The main difference is whether the business or the business owner bears personal responsibility for the firm’s taxes, business decisions, and possible lawsuits.
Sole proprietors or partners are considered to be part of their business and are personally liable for everything the business does. Entrepreneurs who incorporate their business are treated as a separate entity and are protected from personal liability.
The decision to switch from a sole proprietorship or partnership to a corporation often also depends on revenues and tax considerations.
Sole proprietors or partners pay the higher personal income tax rate, but can also gain a tax advantage by writing off losses against personal income. For that reason, new business owners, especially those who need to have a second income, may prefer to set up as a sole proprietorship or partnership, but owners should consider incorporating and taking advantage of lower tax rates once revenues start to exceed their annual living expenses.
A corporate structure can also qualify businesses for small business and employment grants, suggest greater legitimacy and help to attract certain clients, Ms. Brophy says.
Many large companies work only with corporations, which have access to omissions and general liability insurance that partnerships and sole proprietorships cannot get.
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