Starting a new business is an exciting prospect. One gets to start something potentially great, growing and evolving within a company created by them. Budding entrepreneurs are often unsure exactly how they should go about labeling their business. There are several options to choose from in Canada, but the label a company chooses needs to fit the size and structure of the company itself. In some cases, the structures cross over, which can complicate decision-making.
The three options currently available in Canada are:
1. Incorporate as a separate legal entity.
This style of business is flexible as far as it can be a sole proprietorship or a partnership. It can include liability protection, such as limited liability company, which frees the actual owner from some responsibilities and adds additional tax deductions. A corporation has the ability to sell shares of its own stock for prophet. Some deem this the safest label to take for a business.
Within the sole proprietorship label, profit and loss are both taxed under the individual’s personal taxes. It is the simplest style of business, but it is not a legal entity. The person who owns the business is solely responsible for any business debts incurred.
This is a legal way for 2 or more individuals to go into business and share the management, profits and debt. There are several different ways to do a partnership. Some utilize the general sharing; others go more a limited partnership. The limited gives one partner more power than the other, or a smaller share in most cases. It also releases the limited partner from some responsibility.
There is some common ground that all three share, such as the capability of hiring employees and registering a legal business name. All three also require taxes to be paid, but the rates, percentages and guidelines vary. The sole proprietor puts all the tax and responsibility on the owner, whereas the other 2 options put the responsibility on the company itself, or the partners involved. Incorporating also protects the individuals in the business from law suits and other issues, as long as the company is limited liability.
The limited liability may sound great, but there are a couple of good reasons why an entrepreneur should delay incorporating.
1. The benefits of utilizing loss: The first 3 to 5 years of a new business are the most difficult. The business owner can actually benefit from any loss via tax returns, utilizing it to compensate against any income earned. Using this status, an entrepreneur can also balance out against other things, like personal property or even rental properties. If one incorporates the business from the start, all income and loss falls into the company, benefiting the company and not the owners.
2. If you keep the business as a sole proprietorship, it actually can reduce the amount of cost and legal fees involved with the company. It also lessons the need for accountants, upkeep and maintenance. Corporations tend to have higher fees than individually owned and operated businesses. Keeping it individualized will save cost, unless a legal suit comes up. In that case, the owner is responsible, whereas corporations protect the owners.
It is of the utmost importance to evaluate the business structure desired and see what will be most beneficial for the individual situation. For those unsure of what to do, help is available. You can receive a consultation that provides vital information, including questions on incorporating, taxes and other aspects of the business.
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