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Which Ownership Structure is Right For You?

BY: mathew jazenko | Category: Finance | Submitted: 2011-07-30 16:14:21
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Article Summary: "What type of ownership structure for my business is right for me? There are three types of ownership: sole proprietor, partnership, corporation. Each has advantages and disadvantages depending on the type of business one is operating. Sole proprietors are easy to set up and shut down, partnerships are slightly more complicated a.."


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Imagine, you have just started a business, congratulations! The next step is to identify which ownership type is best for your company. Sole proprietorship is the easiest to set up and shut down. It requires no formal registration from any Government agency, no extra tax filings as with the case of corporations, no partners to consult with and you are your own boss. There are a lot of deductions available for business owners such as cell phones, internet, etc that is not available to employees. The disadvantage is there is unlimited liability, failure rate is high and the income from the business is included in your personal income tax.

Partnerships on the other hand require a little more planning. Experts say a partnership should be drawn up with the help of a lawyer. The lawyer will then tell you what is involved in the process, identify the duties of each partner, what happens in case of dispute, succession plans, etc. If you don't identify the duties of each partner, then there will disputes of who is doing what and who is responsible for what. Then there will be constant arguments, I have seen this too many times where everything looks good on paper, but no real thought process. People just assume this person will do this, that and the other thing while the other partner says 'it's not my job'.

To avoid disputes, write down everything that each partner is responsible for and run it past your partner and see what you can agree on and what you can't. Maybe recommend mediation in case of a dispute where it cannot be resolved between the two partners. Also each partner is responsible for the firms debts equally unless otherwise stated in the partnership agreement. This also applies to tax implications as well. It may also be a good idea to have a lawyer to opine on your partnership agreement as well.

Corporations are more time consuming and more costly to setup and more difficult to shut down. The advantages are, limited liability, separate legal entity, have shareholders, lower tax rates, more tax deductions and if a director or CEO dies, the corporation lives on. If there is no money in the corporation, that's it no further action can be taken, except against the directors. In which case the board of directors can resign en mass or fight the lawsuit.

If the corporation is controlled by a Canadian citizen (as in the directors are Canadian Citizens) and is registered in Canada, the tax rate is 17% upto $500,000. After that the rate increases to 28% not including Provincial corporate tax rates. If an individual were making $500,000 the combined tax rate would be about 50-55%!

The disadvantages are: separate tax forms to fill out every year, one for the company and a separate one for the individual. Double taxation in the form of a tax on corporate profits and income received from shares or dividend taxes. The board of directors of the corporation can declare or not declare a dividend, as dividends are paid out after taxes are paid and after all expenses are paid. For example MRJ Financial Solutions, a private Canadian controlled corporation, declares a dividend of say $0.50 per share after making a net profit of say $300,000 and there are 10,000 shares for the sake of simplicity. The total dividends paid to the say 10 shareholders is $5,000. The shareholders pay taxes on their shares worth about $2,000 each. The rest of the $295,000 is retained by the corporation to do as the board of directors sees fit. Regardless of what the shareholders say or want. The corporation can also choose to issue more shares to raise more capital, whereas the sole proprietor and partnership
cannot.

Further complicating matters is whether the corporation is a publicly listed company or not. If its publicly listed, then the names of the board of directors are made public, the amount of money made is also made public, the salaries of each director and manager is made public. There is a real lack of privacy for a publicly listed company. However, it is easier to raise money from various sources such as a new share issue or issue bonds or private equity firms or venture capitalist firms.

Also, a Canadian controlled private corporation can own shares in another Canadian controlled corporation and receive dividends tax free. So long as the dividends stay within the corporation and are not passed onto an individual like a CEO, director or shareholder. At which point the dividends become fully taxable.

In a private corporation or non-publicly listed company, this information is not made available to the public. It is made available only to people like investors, government agencies, or to put it another way, only the people you want to have it and no one else thank you very much.

Which one is right for you? Well that really depends on a number of factors. While I was speaking at a business group meeting in Newmarket, Ontario, someone asked me that very question. I mentioned that as CEO of MRJ Financial Solutions I said that I see a lot of companies making say over $100,000 per year that start thinking about incorporating. Otherwise stay unincorporated, as the incidental costs of incorporating can far outweigh the benefits. Like separate cheques from the bank, separate bank accounts, credit cards, separate tax returns, etc., can really eat your bottom line very quickly.

It sometimes pays to put your family on the payroll as well. Instead of your kids playing in the streets, they can clean up the office, or fill up the office coffee pot for customers, answer the phones. This is a win-win for the business and the family. The kids get a paycheque and the business gets a deduction for the expense. Although firing them is pretty hard too because you have to live with them at the end of the day. Choose wisely.

About Author / Additional Info:
Mathew Jazenko is CEO of MRJ Financial Solutions and is dedicated to improving your bottom line. Questions/comments can be addressed to: mrjfinancial@gmail.com or visit us at http://www.mrjfinancialsolutions.ca

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