Forms of business organization
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Transcript of Forms of business organization
MODULE 1
FORMS OF BUSINESS
ORGANIZATION
LEGAL STRUCTURES
Three ways to organize your business are:
• Sole proprietorship
• Partnership
• Corporation
Owned by 1 person
Simple and inexpensive
Owner makes all decisions
Owner & business are “one”
Easy reporting & filing
SOLE PROPRIETOR
Advantages• Inexpensive to setup• Easy to administer
and get things going• Simple to shut down• Can use losses
against other sources of income in loss years
Disadvantages• Unlimited liability• Difficult to obtain
funding or bank loans
• Impression to clients and customers
• Not as much tax planning available
• Not a lot of options when selling
PARTNERSHIP
• Association or relationship between two or more people
• Can also be between corporations, trusts and other partnerships
• Also very simple to set up with nothing more than a verbal agreement if warranted
• All partners are bound by each others actions in the business (except in a L.L.P)
• Reporting is straightforward in most cases
Relationship between people
Other entities: Corps, trusts
Simple to setup even verbal
Partners bound by actions of other partners
Reporting straight-forward in most cases
PARTNERSHIPS
Advantages• Duties shared by
more than one owner• Expertise of the
partners• May be easier to fund
the business• Losses can be used
against other sources of income in loss years
Disadvantages• Joint and several
liability• Death of a partner
means the end of the partnership
• Disagreement among partners could be detrimental to business
Separate legal entity
Owners & management are separate
More difficult to setup & administer
Additional filing requirements
CORPORATION
Shareholders supply corporation with money by buying shares of corporation but do not own business or property belonging to corporation
Corporation’s income is subject to tax separately from shareholders
Directors manage corporation and delegate management of day-to-day operations to Officers
CORPORATION
Advantages
• Limited liability of all shareholders
• Easier to obtain funding and raise capital
• Shares can be sold or transferred for capital gain ($750,000 exempt)
• Continues after the death of a shareholder
Disadvantages
• Expensive to setup
• More administrative work needed
• Annual filing requirements
• Annual legal and accounting costs
• More difficult to shut down
AGREEMENTS
• Description of business
• Contribution to capital
• Division of net profits
• Authority to sign contract
• Expulsion and admission of partners
AGREEMENTS
Must deal with the “Probabilities” and issues that can arise in your business
• Death
• Disability
• Retirement
• Bankruptcy/insolvency
• Termination of employment
• Disputes
AGREEMENTS
Buy/Sell Provisions
• How to deal with deadlock in management
• Shotgun clauses
• Funding mechanism
• Mediation/arbitration
• Non-competition/Non-disclosure
FACTORS TO CONSIDER
Each form of organization has its advantages and disadvantages
These will be outlined so that you can make the best decision pertaining to your personal situation
Consult with a professional accountant and/or lawyer to make your final decision
Once a decision is made, you are not trapped but it can be an administrative hassle
PAYING TAXES
Proprietorship• Business activities reported on form T2125 Statement
of Business Activities to be filed with your T1 personal income tax return
• Return due by June 15th of the following year to avoid late filing penalties
• Any tax liability should be paid by April 30th to avoid interest
• Personal and business taxes are all filed together on one tax return
T1 General
2125 – Business statement
Due June 15 Pay by April 30
PAYING TAXES
Partnerships
• Also reported on T2125 to be filed with your T1 personal income tax return
• Income for the partnership is recorded on your taxes, with only your share being reported on the proper tax return line. Taxes will be paid on your share
• Due dates are same as proprietorship (June 15 due date, with taxes to be paid by April 30th)
• Partnerships with 5 or more partners will have other filing requirements
CORPORATE TAX REPORTING
Corporations
• Being a separate legal entity, corporations file their own tax returns
• Federal T2 and corresponding Provincial tax returns are required filing each year
• Due date is 6 months after your corporation’s year end
• Taxes owing should be paid either 2 months or 3 months after the corporation’s year end
DECISION TO INCORPORATE
• Canadian Controlled Private Corporation (CCPC)
• Small business deduction (on first $500,000 tax is
about 15 - 18% depending on your Province
• Ability to defer taxes
• The $750,000 capital gains exemption on share sale
• Facilitate cash management and discipline
• Pay dividends at a lower rate in the future
• Advanced tax planning strategies (IPP, PHSP, EPSP)
CHOOSING A BUSINESS NAME
Three types of business names to choose from:
1. Doing business under your own name – You do not need to register, i.e. John Smith
2. “Doing Business As” or “Operating As” – Gives you the right to operate a business of a specific name – Smith’s Construction
3. Incorporated name which includes the words Limited, Ltd., Corporation, Incorporated, or Inc. – i.e. Smith Construction Limited
Your own name: Do not need to register• John Smith
“Doing Business As” or “Operating As” – Trade Name must be registered• JS Contracting
Incorporation – Will include one of the words: Limited, Ltd. Incorporated, Inc. Corporation, Corp.• JS Construction Ltd.
REGISTRATION
• If you are doing business under your own name you do not need to register
• If operating under a trade name, you will have to register with your provincial authority
• To operate a corporation, you must file Articles of Incorporation with your corporate name
REGISTRATION
Corporations: Jurisdiction
Federal vs. Provincial• Ability to carry on business in different jurisdictions
• Federal 25% Directors must be Canadian
• Ontario less strict on names than federal
• Federal less expensive:
• Online: $200
• Offline: $250
• Ontario: $360; do online incorporation now
REGISTRATION
Corporations: Named vs. NumberedName- More $$- More distinct, descriptive
Numbered- Less $$- Determined for you- Depending on jurisdiction, the words “Ontario” or
“Canada” will be included in a number name.
CHANGING STRUCTURE
Sole Proprietorship Corporation
Been running your business as a proprietor but not want to incorporate
Section 85 Rollover• Transfer all business assets to new corp.• Typically will put the proprietor in the same
tax position as before he/she incorporated
CHANGING JURISDICTION
Provincial Federal
Most jurisdictions will allow corporations to migrate to another jurisdiction
File a Continuance
- Permission from jurisdiction you wish to leave
- Requires shareholder approval
Legal matter – see your lawyer
OWNER RESPONSIBILITES
• Decision-making and business management
• Contractual obligations
• Employees – Standards, Human Rights etc.
• Collect and remit sales taxes (GST, PST)
• Withhold taxes from employees and remit (CPP, EI and tax)
• File appropriate tax returns as discussed
SHAREHOLDER DUTIES
• Own the corporation – liable to 100% of investment
• May be asked to guarantee corporate debts
• Annual S/H meetings: pass resolutions, elect officers, auditors
• Approve bonuses, dividends, loans, etc.
• Receive and approve financial statements
• Approve fundamental changes (USA)
ROLES/DUTIES OF DIRECTORS
• Manage or supervise management of business
• Fiduciary Duty and Standard of Care (make further inquiry if a reasonable person would)
• Errors that could have adverse impacts
• Not responsible for breach duties if acted in good faith by relying on financial statements of independent experts
Canadian Small Business Course
www.sbclearnbusiness.com
Visit us online and take the Canadian Small Business Course for the in depth video
tutorials related to these slides
Canadian Small Business Course
www.sbclearnbusiness.com
Or take individual modules such as this presentation:
Module 1: Forms of business organization
Module 2: Starting a business step-by-step
Module 3: Compensation strategies
Module 4: Tax planning and strategies
Module 5: Expenses and deductions