INCORPORATION

— Sole Proprietorship
The majority of small businesses operate as sole proprietorships. The business is carried on by an individual who owns all assets, receives all profits and is responsible for all obligations of the business.

Sole proprietorships are economical and simple, but disadvantages include:

• unlimited personal liability.

• a high marginal tax rate for proprietorship income.

• termination of the business on the death or bankruptcy of the proprietor.

The proprietor may claim business losses against other income, but once the business becomes profitable, then incorporation offers many advantages.

— Partnership
If two or more people operate a business and share profits, they are deemed to be in partnership by The Partnership Act of each province. Partnerships, like proprietorships, are only required to register their business name provincially. A partnership agreement is not mandatory but advisable. Management and profits are shared equally unless varied by a partnership agreement, which also deals with the continuation of the partnership in the event of death or the sale of the partnership. Partnership income and expenses are taxable in the hands of the individual partners. Because each partner is liable for all obligations of the partnership, a high degree of trust and co-operation are necessary.

— Incorporation
The risk of personal liability in proprietorships and partnerships makes them unpopular for substantial or risky business. Most profitable businesses incorporate.

— BENEFITS OF INCORPORATION

• Limited liability of shareholders

• Lower tax on Dividends to shareholders

• More flexibility for tax and estate planning

• The ability to raise more capital from investors

• A shareholder may claim up to $500,000 as a capital gains exemption on the disposition of his or her shares