Legal forms and Structures

Question 1

Types of structures

Answer 1

1) sole proprietorship
2) corporation
3) partnership
4) joint venture

Question 2

Sole proprietorship

Answer 2

• no distinction between individual and business
• individual has unlimited liability for all business debts

Question 3

Corporation

Answer 3

• 3 types: public (resident in CAN with publicly listed shares), private, CCPC (CAN resident, not controlled by non-resident, not controlled by public corporation, and no public shares)
• separate legal entity from shareholders
• shareholders not personally liable for debt

Question 4

Partnership

Answer 4

• each partner jointly liable for debts
• income not taxable in partnership rather its allocated to partners according to partnership agreement

Question 5

Joint Venture

Answer 5

• only liable for the debts that you put in/contribute
• income allocated based on agreement and then individuals deduct their expenses against income

Question 6

Advantages of a Corporation

Answer 6

• reasonable salaries may be paid to owner, and owners spouse and children
• potential for income splitting with family (be mindful of TOSI rules)
• potential for tax deferral if personal tax rates are higher than corporate tax rates
• estate or succession planning is possible
• lifetime capital gains exemption might be possible

Question 7

Disadvantages of a Corporation

Answer 7

• losses realized at startup are retained in the corporation and cannot be used against other income of the shareholder
• separate tax return required
• higher admin costs (accounting fees from preparing 2 return, legal costs, minute books)

Question 8

Advantages of Partnership & Sole Proprietorship

Answer 8

• losses from the startup may be used against other income of the individual partner or proprietorship
• reasonable salaries may be paid to partner or to proprietors spouse/children
• no need for full set of financial statements (income is included in the individuals T1)

Question 9

Disadvantages of Partnerships & Sole Proprietorship

Answer 9

• no tax deferral in profits
• not a separate legal entity – no estate planning available
• no lifetime capital gains exemption