
When you own a business and tax season comes around, you want to be sure you’re getting your taxes filed properly (with the right accounting services) based on the type of business you have. If you are wondering whether your business is considered a corporation, sole proprietorship or partnership, we here at Wales Accounting would like to help you understand the differences between the three. This advice will also hopefully just give you a general idea on some important business facets as well.
What’s a Sole Proprietorship?
In simplest terms, a sole proprietorship is a business which is solely owned (and operated) by one person. If you decide to turn this type of business into a partnership then it is no longer considered a sole proprietorship. When compared to other classifications of businesses, this is most likely the easiest one to comprehend and understand. In order to run this type of business, you do not need to take any sort of action. If you remain the sole owner and runner of your company that sells whatever products & services you have to offer, your business remains a sole proprietorship. Freelancers will often call themselves a “sole proprietorship business” and the statement is 100% true. When it comes to taxes, this is quite possibly the easiest one to deal with as both your business and yourself are taxed as one since there is no true differentiation there. All that will need to change is the additional form you will have to sign, which is known as a T2125 form.
There are advantages and disadvantages to this type of business, however. They are as follows:
- Pro: You have complete control & flexibility as to how you run your company.
- Con: Because of this, you are solely reliable for all of your business debts.
- Pro: Your unlimited liability means you have the opportunity to extend your credit if needed.
- Con: Banks are reluctant to offer loans in this situation as many people who ask for this type of money are small in terms of assets and are a riskier liability with high turnover.
- Pro: You receive all of the profit!
- Con: If your business assets aren’t significant enough, creditors can come after your personal property.
What’s a Corporation?
Corporations are appealing to a wide number of different businesses because of the many advantages/features they come along with. This is especially true when it comes to people who are investing or people who are a part of start ups. With a bunch of different stock options, this type of business is incredibly appealing to potential hires, creating the opportunity for bigger, more experienced teams for your business. In addition to this, if something bad happens to the company as a whole, it’s seen as a separate issue from both the owners and the founders. Some additional advantages (as well as some drawbacks) include:
- Pro: Since owners are separate from legal liability, they are usually not entirely responsible when faced with any type of debt/legal problem.
- Con: The process to avoid these liabilities is time consuming, costly and involves a lot of paperwork.
- Pro: You have the freedom to sell stock with this business type, meaning you raise the likelihood of obtaining financial capital.
- Con: Very little flexibility is present due to the loads of regulations that come with this.
- Pro: A well made, well structured business with clearly outlined roles, schedules and responsibilities.
- Con: The chance for double taxation (meaning both the stockholders paid dividends and corporations profits are taxed).
What’s a Partnership?
The meaning of a partnership is simple, and it essentially means that two or more people manage and maintain the business at hand. While a corporation requires paperwork and approval from the federal/provincial government, a partnership requires no part of this. When it comes down to it, there are three types of partnerships; general, limited or limited liability. Each comes with their own advantages and disadvantages. The main difference between a general partnership and a limited partnership is that a general partnership makes sure that all owners are equally responsible for business debts. They each will assume unlimited reliability. In a limited partnership, however, owners can take on the role of what is known as a limited partner (LP) and will therefore have less responsibility in terms of company debt/accountability.
How Our Team Can Help
We hope that the guide we have offered above has been informative for you and your decision on how you choose to own/operate your business, or just how to file your taxes now that you are aware of each one. If you are interested in learning more, however, or you would like some financial assistance in terms of income tax filing in Richmond Hill, you can call our team at Wales Accounting so we can help. When you need it most, our experts will be there to help you every step of the way. Call today at (905) 508-9262 and let us assist you in the best way we can!