Your business’s legal layout or structure has a bearing on your liability as an owner. The legal framework also influences the tax liabilities, the degree of control the proprietor has, and so on and so forth. Now, the kind of incorporation procedure you will ultimately choose depends invariably on your needs and preferences and to a considerable extent on the prevailing circumstances.
To be specific, the act of setting up a startup or a company usually boils down to choosing the appropriate commercial layout that is consistent with your short-term and long-term business objectives. This consistency has more to do with conforming to the tax laws that are specific for each and every framework. Talking about the business structures, there are three broad types namely, corporation, partnership, and sole proprietorship.
The structure of both sole proprietorship and partnership is almost the same in both United States of America and Canada. However, the other types of company structures in USA are LLC, S Corporation and C Corporation. While on the other hand, in Canada there are two more business structures, namely, Corporation and Cooperative.
All the above kinds have their characteristic features, benefits, and disadvantages. In the following paragraphs, the nature, benefits and drawbacks of some of the most common types of business entities have been outlined:
A partnership firm is a business entity established by a minimum of two individuals both of whom are owners of the outfit, co-owners to be precise. In other words, the owners of a partnership company share the ownership. The partners engage themselves in the day to day commercial activities and receive a share of the proceeds (or losses for that matter) in proportion to their investments.
A typical partnership entity is similar to a sole proprietorship enterprise in many ways at least with regards to formation or incorporation. The one and only basic difference is that the former always has a single proprietor while the latter setup has more than one owner. In order to form a partnership, there has to be at least two investors or partners.
Of course, a partnership outfit can be constituted by more than two partners as well. A partnership generally does not have a legal structure, very much like sole proprietorship. Nevertheless, the constituting partners draw up a contract or agreement that clearly outlines some crucial specifics related to trade including expenses, revenue sharing, and accomplishments of everyday tasks.
The terms and conditions of carrying out day to day trading as summarized in the contract are legally binding on all the partners. The partners are also required to pay taxes and duties which are proportionate to their earnings and expenses.
✔ Since ownership is divided or shared, it facilitates in the allocation of responsibilities as per the partners’ innate strengths and weaknesses or shortcomings.
✔ Very few legal formalities have to be fulfilled in order to incorporate a partnership firm.
✔ Losses incurred in the business can be subtracted and adjusted with taxes.
✔ The partners have greater access to funds and capital assets owing to their judicious sharing of financial resources
✔ Business growth and development could get impeded owing to disagreements and difference of opinions between the partners.
✔ The take home profit for each partner may not seem large enough as the same has to be shared. Additionally, taxes have to be paid on the revenues and sale proceeds which could diminish the net profit.
✔ Partners have unlimited liability, both individually and jointly.
Sole proprietorship is the simplest and commonest structure of business. In a sole proprietorship firm, the owner takes all the profit as well as bears the entire losses individually. The sole proprietor is also responsible for paying taxes and supervising the routine activities of the business. Majority of those who are looking to embark on a new commercial venture opt for the sole proprietorship route simply because it can be easily established and informal in nature.
The taxation and legal officials do not differentiate the sole proprietor and his or her business but regard the two as identical. The statutes pertaining to tax consider the sole proprietorship as a source of income for the owner. Therefore, the tax laws necessitate the sole proprietor to mention the financial specifics of the business in the personal income tax document.
The fact that sole proprietorship entity is synonymous with its owner, it has one noticeable advantage. The sole proprietor can leverage and manage taxes in a better manner compared to a corporation or partnership business. For instance, when the establishment incurs losses, the same can be used as a handle to reduce tax liabilities or writing off or offsetting income or earnings from other business sources.
You also do not have to file taxes separately for your entity and yourself. The profits or losses generated in the business are specified in the personal income tax return form of the proprietor. The simplicity and convenience of running a sole proprietorship is somewhat offset by sweeping liabilities related to taxes, debts, and loans.
✔ Establishing the startup is remarkably convenient, inexpensive, and simple, requiring minimal paperwork.
✔ Sole proprietor is the be-all and end-all of the entity, taking all the decisions and overseeing the entire business.
✔ Bookkeeping requirements entail very few legal technicalities.
✔ Liabilities of the sole proprietor are unlimited.
✔ Raising capital and funds for steering growth can be an uphill task as investors do not have any stake in the business.
✔ Owner is solely responsible for managing the daily activities which can prove burdensome and challenging at times.
✔ All tax liabilities are incumbent upon the owner.
Limited Liability Company
A company with a limited liability legal structure enjoys the benefits of a limited liability corporation and the simplicity or adaptability of a partnership firm. A corporation as a limited liability company (LLC) tends to be a comparatively complex legal structure, vis-à-vis a proprietorship or a part