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Sole Proprietorships
A sole proprietorship is the simplest
and least expensive form your business can take. If you start a business
on your own, this is the type of business you have started. You do not even have to register your business name if
you use your own name for the business (ie. Jane Doe operates a business
called "Jane Doe".
The income or loss from your business
must be calculated on a calendar year basis whereby you compute your
profit or loss for the period or year ended December 31. That income or
loss goes onto your Individual income Tax Return on line 135 of the T1
General for that year.
The form you use to calculate your
profit or loss (and file with your return) is Form T2124 - Statement of
Business Activities or T2032 - Statement of Professional Activities for
professionals (doctors, lawyers, Accountants etc.).
If you pay to have your tax return
prepared, these forms will be filled out by your accountant. You can save
the accountant's time and therefore keep your fees down if you provide
him/her with a summary of your income and expenses using the expense
categories used in the T2124 or the T2032.
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Advantages
Sole proprietorships are easy and
inexpensive to form, you can
deduct many expenses that you cannot if you are an employee, and they give
you the ability to split income (i.e.: pay a salary to a lower income spouse
and therefore pay less tax than if all the income was in your hands).
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Disadvantages
You have unlimited liability for the
results of actions taken by the proprietorship. In other words if, for
example, a customer sues you because a project you did resulted in him
losing thousands of dollars, there is no protection offered by a
corporation. That is, all your personal assets including cars, house etc.
could be taken from you if you lose the case.
You also most likely will
have to pay Employment Insurance premiums (previously Unemployment
Insurance or UI) if it is determined that you are more like an employee
to your client. Also if you secure your work through an employment
agency, they will be required to withhold EI premiums from you (and pay
their share of 1.4 times what you pay).
You also must have a December 31 year
end - there is no possibility of deferring income, in other words delaying
the payment of taxes on income until the next year.
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Partnerships - Advantages
Partnerships have the same low cost of
formation as sole proprietorships. You are also eligible to claim any
expenses you incur to earn the income as with sole proprietorships.
You can also split the income with
other family members to reduce the overall family taxes.
Although it is not 100% guaranteed,
you will probably not have to pay EI premiums. This also goes for the
placement agency you use (if any).
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Disadvantages
You risk the same unlimited liability
exposure as with sole proprietorships. In addition, you will be held
responsible for anything your partner (s) do. In other words, if a partner
signs a lease on behalf of the partnership and then leaves, the other
partners will most likely have to honor the commitment.
You also must now have a December 31
year end - there is no possibility of delaying income (and tax) until the
next year.
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Summary
In many cases people start a business
on a part-time basis while still employed. The advantage of this is that
the start-up losses can be claimed on their personal tax return and thus
reduce the taxable income resulting in a refund of the taxes withheld on
the employment income. This thinking also applies to a partnership. The
main factor in deciding whether to form a partnership is who the person
(s) are - are you sure you can trust them? If not, don't get involved.
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