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This is the simplest form of operating a business. A sole proprietorship is an unincorporated business that is owned by one individual. The business has no existence apart from the owner. Only one owner is responsible for making all of the business decisions and, therefore, earns all the profits, but also assumes all of the risks and obligations. The owner includes the income and expenses of the business on his or her personal tax return.
A partnership is a relationship between two or more persons carrying on a business with a view to making a profit. Some individuals choose a partnership as the manner in which to carry on a business because of its ease of formation and dissolution, as well as its overall lack of formalities. However, like a sole proprietorship, one of the primary disadvantages to choosing a partnership as your business form, includes the unlimited personal liability of each partner for all of the debts and obligations of the partnership. In other words, every partner is liable for all the debts incurred by the other partners while acting in the course of business, regardless of the capital contribution of individual partners. Also, the owner may be liable for the actions of employees in the course of their employment.
A Corporation is a distinct and separate legal and tax entity from its owner(s). A corporation has its own rights, privileges and liabilities distinct from those its owners or managers. A corporation is owned by its shareholders and is managed and controlled by its board of directors who appoint the officers and agree on the policies and transactions to be undertaken by the corporation.
Benefits of Incorporating
Separate legal entity
The act of incorporating creates a new legal entity called a corporation, commonly referred to as a “company.” A corporation has the same rights and obligations under Canadian law as a natural person. Among other things, this means it can acquire assets, go into debt, enter into contracts, sue or be sued, and even be found guilty of committing a crime. A corporation’s money and other assets belong to the corporation and not to its shareholders.
When a business is incorporated, its separate legal status, property, rights and liabilities continue to exist until the corporation is dissolved, even if one or more shareholders or directors sell their shares, die or leave the corporation.
Incorporation limits the liability of a corporation’s shareholders. This means that, as a general rule, the shareholders of a corporation are not responsible for its debts. If the corporation goes bankrupt, a shareholder will not lose more than his or her investment (unless the shareholder has provided personal guarantees for the corporation’s debts). Creditors also cannot sue shareholders for liabilities (debts) incurred by the corporation, even though shareholders are owners of the corporation. Note, however, that if a shareholder has another relationship with the corporation — for example, as a director — then he or she may, in certain circumstances, be liable for the debts of the corporation.
Lower corporate tax rates
Because corporations are taxed separately from their owners, and the corporate tax rate is generally lower than the individual tax rate, incorporation may offer you some fiscal advantages. Thus incorporating might save you money.
Greater access to capital
Corporations are also often able to borrow money at lower rates than those paid by other types of businesses, simply because financial institutions and others tend to see loans to corporations as less risky than those given to other forms of enterprise.
While a partnership or sole proprietorship ceases to exist upon the death of its owner(s), a corporation would continue to live on even if every shareholder and director were to die. This is because, in the case of a corporation, ownership of the business would simply transfer to the shareholders’ heirs. This assurance of continuous existence gives a corpora-tion greater stability. This, in turn, allows the corporation to plan over a longer term, thereby helping it obtain more favorable financing.