Sole Proprietorship vs. Corporation (Part II) – Legal Aspects

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Sole proprietorship

Legally and practically as sole proprietor there is no separation between the sole proprietorship business organisation and the individual.

In this form of organisation, the sole proprietor gets all the benefits, and all the burden of the business. And this means the following:

–          As a sole proprietor you cannot be an employee of the business because you cannot contract with yourself.

–          The sole proprietor is exclusively responsible for performing all contracts entered into the course of the business, including contracts with customers, suppliers, employees, and lenders.

–          The sole proprietor is exclusively responsible for all torts committed personally in connection with the business.

–          For income tax purpose, the income and loss from the sole proprietorship is included with the income and loss from other sources in calculating the sole proprietor’s personal tax liability

Advantage:

Sole proprietorship is easy and simple to set up. It is easy to dissolve as well: you simply stop carrying on the business.

Disadvantage:

The main disadvantage is the unlimited personal liability. Unlimited personal liability means that the third parties may take all of your personal assets – not just those of the business – to satisfy the business’s obligations.

Corporation

The corporation has a separate legal existence. This aspect of separate legal existence has the following implications:

–          A shareholder can be an employee or a creditor of the corporation. The shareholder and the corporation are two distinct entities

–          The corporation is unaffected if a shareholder dies or withdraws from the business.

–          The corporation is treated separately for income tax purpose. Shareholders are taxed only when they personally receive something from the corporation, such as a dividend.

Advantages:

1)      You can build up a corporation with a good business and you can sell it.

2)      Shareholders have no direct liability for a corporation’s obligations. Another term used is limited liability which means that shareholders cannot lose more than they invest in the corporation in return for their shares.

Disadvantage

1)      The corporation is more costly to set-up.

2)      This form of organisation require more complicated forms regarding accounting and tax reports

If you have more questions you can contact me at info@cpa4toronto.com.

Nicole Dronca, CGA