There are many types of business organizations, each with different tax implications and different modes of governance. The form that is best for you will vary depending upon your circumstances, and will be determined after consultation with your legal and tax advisors. Available forms include:
i. Sole Proprietorship: Sole Proprietorship occurs when by one person carries on business under a name of the sole proprietor’s choice. For tax reasons, all revenues of the business are deemed to be the income of the individual and net earnings, after deduction of normal business expenses, are deemed to be taxable income of the individual and are taxed as part of the individual owner’s income.
ii. Incorporation: Incorporation is the formation of a new legal person by grant from a province or the country where the business is to be carried on.
There are four main reasons for the incorporation of a business:
- Image and Branding. An incorporated body gives an impression of substance and stability to the purchasing public.
- Tax Planning. A corporation is taxed on its earnings at lower tax rates than an individual.
- Limited Liability. A corporation’s liability is limited to the value of the net assets owned by the corporation.
- Public Liability. This limited liability of the corporation may be compromised when any of the directors or officers personally enter into agreements which should be agreements of the corporation.
iii. Partnership: Partnership is a form of organization where two or more persons agree to carry on a business together as partners, usually for more advantageous tax treatment, through the allocation of earnings and losses to the individual partners. As such, each partner is responsible for 100% of the partnership’s debts.
A Limited Partnership is a form of partnership where only the general partner is responsible for the partnership’s debts, and the individual “limited partners” are strictly investors and are not responsible for the business’s day to day operations and as such the “limited partners” are not responsible for the business debts of the partnership.
A partnership is not a legal entity, although it is required to file a tax return on an annual basis, allocating the partnership’s earnings between the various partners to be treated as part of such partners’ individual income.
iv. Joint Venture: A Joint Venture is an agreement made between persons and corporations to carrying on a business or to complete a project usually for a limited duration of time, together with each joint venturer taking on some responsibility with respect to completion of the project. For tax purposes income and expenses are split between the joint venturers in accordance with their Joint Venture Agreement.
v. Trusts: A Trust is not a legal entity but an agreement between a settlor who sets up and funds the trust and a trustee or trustees who manage the business of the trust either directly or through another corporation or partnership. Earnings of the trust are allocated to beneficiaries who may be owners of trust units and are taxed as ordinary income in the hand of such beneficiaries or trust unit holders. To the extent that earnings are not allocated by the Trustee, the trust itself must pay income tax on its earnings at tax rates applicable to individuals, subject to the exemptions from tax normally available to individuals. Neither the settlor nor beneficiaries or trust unit holders are liable for the debts of the trust, although under the terms of the trust agreement they may be liable to make additional contributions to the trust to covers its debts.
Corporations are legal entities formed under the authority of a country, province or state. The rules applicable to corporations are found in the legislation creating them such as The Bank Act, The Insurance Companies Act, The Trust Companies Act, The Business Corporations Act, The Condominium Corporations Act, The Societies Act, The Credit Union Act, The Co-Operatives’ Act or any other similar statute. These rules may be modified or added to by the corporation’s own charter or certificate of incorporation as well as the corporation’s by-laws.
Generally the articles of incorporation name one or more persons as initial directors of the corporation, whose responsibility it is to organize the corporation. It is important to note that although a corporation may have been incorporated and may have been authorized to issue shares, the corporation has no shareholders until such time some of authorized shares of the corporation have been issued by the initial directors.
The shareholders (also sometime referred to as “members”) of a corporation are the owners of the corporation. Although the shareholders are the owners of the corporation, they are not as such responsible of the debts of the corporation, and they have very limited rights, generally restricted to:
electing the board of directors of the corporation on an annual basis;
receiving the (audited) financial statements of the corporation on an annual basis;
approving or vetoing certain actions of the directors as may be specified in the legislation or incorporating documents of the corporation, or as may be specified a unanimous shareholders agreement;
receiving any dividends that may be declared by the board of directors, and receiving the remaining property of the corporation upon dissolution of the corporation.
The Board of Directors is elected by the shareholders, generally on an annual basis. The Board has the duty and responsibility to manage the affairs of the corporation. It is important to note these duties and responsibilities rest in the board of directors not in any individual director. Each director has a fiduciary duty, to act honestly and in good faith in the interest of the corporation and may be liable to the corporation and its shareholders for a breach of its fiduciary duties. Directors also have many duties and responsibilities imposed upon them by various statutes and the common law and may be by their own individual actions assume and become responsible for certain duties and liabilities of the corporation. A corporation is managed by its board of directors, and the board of directors normally discharges its duties of management by delegation to officers of the corporation as may be named from time to time by the board of directors including the president, vice-presidents, a secretary and a treasurer.
The directors generally manage the corporation by delegating certain responsibilities to named officers, including a president, vice-presidents, a secretary and a treasurer. Officers also have a fiduciary duty to act honestly and in good faith in view of the best interest of the corporation, in accordance with the legislation, articles, by-laws and other constating documents of the corporation.