When starting a new business in Newfoundland, it’s essential to select the business structure that best supports your goals. Business structures are chosen for the most part to comply with tax law, which treats each type of structure differently. There are three types of legal structures for a business: Sole proprietorship, partnership (which is a form of proprietorship) and incorporation. Each has distinct characteristics.
Newfoundland Sole Proprietorships
In Newfoundland, a sole proprietorship is the simplest format for operating a business. Unless you choose to operate the business in a name other than your own, no registrations are necessary to start the business. If you anticipate generating less than $30 000 in annual revenue, there is no need to register and collect GST. Depending on where you operate, you might or might not have to register to collect sales tax. See Appendix B for registration requirements within your province or territory. Registration is usually a fairly simple, straightforward process that seldom requires the assistance of a lawyer.
For tax purposes, business income is reported as income of the owner and is included on the standard personal income tax return. Similarly, business expenses and losses are deductible from that income.
The main advantage of a sole proprietorship is its overall simplicity. It is easy to set up and maintain, and business losses can be offset against personal income.
There are, however, some major disadvantages to this format. The owner is personally liable for all business debts and liabilities. Many owners have lost their personal assets as a result of business difficulties. As mentioned above, the only way to totally protect personal assets is to transfer ownership to a family member before starting the business.
Also, a sole proprietorship is usually considered to be a small operation, and customers might be wary of that.
Frequently when sole proprietorships are sold, the seller must produce personal income tax returns as a means of confirming business income. Being as independent as they are, not many business owners would want to disclose their personal income tax return to prospective purchasers of the business.
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Newfoundland Partnerships
A partnership is similar, but instead of one proprietor, there are two or more. As with a sole proprietorship, there is no legal structure for a partnership. However, partners usually have some type of contractual agreement that governs, in percentage terms, the sharing of revenues, expenses and tasks. Then when preparing their taxes, the partners apply the same percentages to income and expenses.
The major advantage of a partnership over a sole proprietorship is the pooling of resources. By combining their skills and equity, partners will have more resources to offer than they would have if they were operating as sole proprietors.
Characteristics of Partnerships in Newfoundland.
A general partnership involves two or more people carrying on a business together—normally pursuant to a partnership agreement—and sharing the profits and losses.
Advantages of Partnerships in Newfoundland
Partners can combine expertise and assets. A general partnership also allows liability to be spread among more people. The business can be continued after the death of a partner if bought out by the surviving partner.
Disadvantages of Partnerships in Newfoundland.
Each partner is liable for acts of other partners within the scope of the business. This means that if your partner harms a customer or signs a million-dollar credit line in the partnership name, you can be held personally liable. Even if left in the business, all profits are taxable. Control is shared by all parties and the death of a partner may result in liquidation. In a general partnership, it is often difficult to get rid of a bad partner.
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Newfoundland Corporations
A corporation, or limited company, is a distinct legal entity whose rights and obligations are separate from those of its owners. It can run a business in the normal manner: borrowing money, buying and selling goods and services, hiring and paying employees, and so on. The magic feature of a corporation is the fact that its owners (shareholders) are not automatically liable for its debts; nor is the corporation automatically liable for the debts of its shareholders. As a result, personal assets are not at risk of being seized to pay the debts of an incorporated business.
Characteristics of Corporations in Newfoundland:
A corporation is an artificial, legal person that carries on business through its officers for its shareholders. In Newfoundland one person may form a corporation and be the sole shareholder and officer. Laws covering corporations are contained in the Newfoundland Business Corporation Act.
Advantages of Corporations in Newfoundland:
One of the biggest advantages of incorporating a business is limited liability. This means that the liability of the shareholders is usually limited to the amount that they have invested in their shares in the corporation. However, many incorporated small businesses are not able to get bank loans without the personal guarantee of the shareholders, so this eliminates part of the advantage of limited liability. The personal assets of the shareholders are protected from lawsuits against the corporation. However, shareholders who are directors of the corporation can be held legally liable for some debts of the corporation (such as GST/HST and payroll taxes) in certain circumstances.
Another major advantage for a profitable small business is the income tax advantage. A Canadian controlled private corporation, or CCPC, pays a much lower rate of federal tax (small business rate) on the first $500,000 (in 2017) of active business income than would be paid by an unincorporated business, due to the small business deduction. Active business income generally does not include investment income or rental income, which is taxed at regular corporate tax rates. The combined federal + provincial small business tax rate varies from approximately 10.5% to 18.5% in 2017 for the first $500,000, depending on the province, and from 26% to 31% for income over the threshold. The threshold amount subject to the lower small business rate also varies between provinces. Keep in mind that this tax advantage is mainly a deferral of taxes until the profits are paid out to the shareholder. If all the profits are paid out to the shareholder as they are earned, leaving the corporation with little or no taxable income, then they will be taxed entirely as income of the shareholder, at personal income tax rates.
Another tax advantage of incorporation is the $800,000+ capital gains deduction on the sale of shares of a qualifying small business corporation. One of the qualifications is that the corporation must be a CCPC with active business income.
Private Health Service Plans can be used to provide tax-free benefits to employees. This deduction is also available to sole proprietors and partners, but the treatment for corporations is more favorable than that for unincorporated businesses.
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