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Business Structuring part 1in Calgary Tax Saving for Business
Sole Proprietorship – is a type of business entity where in one person operates a business without forming a corporation. Legally, a sole proprietorship is not separate from its owner. Therefore, the income of the business is taxed in the hands of the owner, at personal income tax rates. Some of the advantages of a sole proprietorship are the low costs and simplicity of setting it up, less regulations compared to corporations and the owner receives all profits and is in control of all aspects of the business. On the other hand, sole proprietorships allow the burden of debts and liabilities to fall on the owner and if profitable, the owner is taxed higher.
Corporation - is a legal entity used to conduct business and exists as a product of corporate law and their rules balance the interests of the shareholders that invest their capital and the employees who contribute labor. As a separate entity a corporation pays corporate income tax which is calculated completely separately from the owners’ personal income tax. One of the biggest advantages of incorporating a business is limited liability which means that the liability of the shareholders is usually limited to the amount they have invested in their shares of the corporation. Another big advantage is that all Canadian controlled private corporations pay a much lower federal tax than would be paid by an unincorporated business due to the small business deduction. On the downside, corporations are very expensive and very complicated to set up and maintain.
Partnership – is also an unincorporated business. It is similar to a proprietorship except two or more entities are partners in the business. For partners who are individuals, the income from the partnership is taxed at a personal income tax rates and a percentage of the income is included on the personal income tax return of each owner. A partnership has the same advantages and disadvantages of a sole proprietorship except the control of the business is divided among the partners and all partners except the limited partners carry the burden of unlimited liability. Limited partners are partners that contribute capital but do not participate in the management of the business.