The Structure of Your Business
The three basic types of business structure are a sole proprietorship, a partnership and a corporation.
A sole proprietorship is easy to form – you simply start doing business. The business is owned and operated in your own name or through a trade name. Business income and personal income are treated the same for tax purposes – you only file one tax return and claim business expenses and losses against your personal taxes. When you first start to operate your business and are likely to incur significant costs, this can be a major benefit. The downside to being a sole proprietor is that you are personally responsible for all business debts and liabilities.
A partnership is similar to a proprietorship, but involves two or more owners. Partners may not necessarily be 50-50: it can be 80-20, 99-1 or whatever reflects the investment, contribution and business brought in by each partner. Each partner can enter into contracts for the partnership, and these contracts are binding on the other partners. Unless the business is a limited partnership, each partner is fully liable for the debts and liabilities of the partnership. Like a sole proprietorship, the partnership does not pay income tax. Instead, each partner’s portion of the net profit or loss is declared on his or her own personal tax return.
A corporation is a separate legal entity from the owner(s) of the business. It has the rights and obligations of a natural person: it can acquire assets, go into debt, enter into contracts, sue or be sued, and be found guilty of committing a crime. A corporation files a separate tax return from its shareholders, which means that business losses cannot be written off against personal losses. A longer discussion of the benefits and drawbacks of incorporating is provided in “When should I incorporate?”
Located in: Real Estate Law