Sole Proprietorship, Partnership, Limited Partnership, And Limited Liability Partnership Structures In Canada

Types of Business Structures

Question:

Discuss about the Compare and Contrast Business Structures for Sole Proprietors.

Before starting the business the owners must decide what type of business entity they want to establish. The form of a business entity determines which kind of income tax return the owners want to file[1]. As the business change and grow, sometimes the owners want to move to a different type of business structure. There are mainly four types of business structures, sole proprietorships, partners, limited partners and limited liability partners.

A sole proprietorship cannot be defined as a legal entity as it just refers to as the individual who owns the business. The owner of the business is responsible for the debts and this type of business runs under the name of the owner. Sole proprietors register the name of the business to secure a local license[2]. The owners of the business can keep the profit because the persons are personally liable for the business entity. However, a creditor can demand the personal assets and the business assets to satisfy the debts. The sole proprietor owners can own the organisation for any duration and they can sell the business. Sole proprietors can pass the business to their heirs. Sole proprietors should have to comply with the licensing requirements in Canada. To register the business in Canada, business owners need to register with the territories and provinces where they want to do the business. The owners will get a unique federal business number and they will also have a tax account.

Partnership business is owned by two or more individuals. Partnership types of businesses are inexpensive and easy types to start. In General partnership business, all the partners need to take the share of profits as well as the losses of the business entity. Moreover, the partners are jointly and personally responsible for the liabilities[3]. In partnership types of business, the financial resources must be combined with the partners of the business. Legal agreements between the partners should be there. The partnership agreement is important as it creates the terms of the partnership that would help the individual partner to solve the disruption in a later stage. In order to register the business in Canada legally, the business must have a name and it determines the availability of business and register for license, taxes and permits. The partners need to open a bank account to release the taxes. In case of the general partnership, each of the partners is personally liable or debts as torts can result from the partnership operation in business. In general partnership, the partners can be sued for from the performance of the business.

Sole Proprietorship

A limited partnership in business exists when two or more than two partners can unite to continue a business jointly where partners are liable to the extent the amount of money that the partners invest. Limited partners business does not get dividends; however, they can enjoy access to income and expenses[4]. In a limited partnership, one individual can contribute to business without being associated with the business. In a limited partnership, when two partners go for the legal agreement, they must hire a lawyer in order to draw up the partnership in a better way. For the reason of liability, the owners of the limited partners can set up the business with a corporation like general partners.

In limited liability partnership, the partners should have limited liabilities. Limited liability partners show elements of partnerships. The main difference between general partnership and limited liability partnership is that in limited liability partnership (LLP), each of the partners is not liable for another partner’s negligence and misconduct[5]. However, in Canada, LLP is available in some of the provinces; not the whole sections o Canada. Some of the groups of professionals can enjoy this type of partnership, accountants, lawyers and doctors. For instance, in Ontario, lawyers and chartered accountants can form LLP. This type of partnership needs agreements from specific provincial legislation. LLP gives more liability protection to the partners.

Many of the small business owners opt for the sole proprietorship because it is simple, it takes nominal cost and it is easy to set up. In case of the sole proprietorship, the owners can register the business inexpensive way and regulatory burden will be lighter from the side of owners. The sole proprietors can directly control the decision-making and minimum working capital is required to start the business. In Canada, the sole proprietors enjoy some of the tax advantages like sole proprietors can enjoy the small amount loss from personal income and they can also enjoy lower tax bracket. One of the most important factors in a sole proprietorship is that the owners can enjoy the direct profit from the business[6]. On the contrary, sole proprietorship gives unlimited liability and income is taxable in the stage of personal rate. In addition, if the owners become unavailable, the business can get dissolved and it is difficult to create capital on its own.

In case of partnership businesses both a limited partnership and limited liability partnership, these businesses provide the advantage of fairly inexpensive and easy to create. In addition, the partners can lessen the start-up cost as the partners can equally share this[7]. In addition, partners can get an equal share in the management, assets and profit. The partners can get tax advantage as it includes the shares of all partners. On the other side, partnerships business does not provide the legal difference between the partners. The partners may get unlimited liability and it can be sometimes getting difficult to find the partners who are suitable for the business. There is a possibility to develop conflict between the partners and the partners are the economically responsible for business decisions like a contract made and broken.

Partnership Business

In addition, limited liability partnership business, the partners can get tax flexibility. In Canada, the jurisdiction does not make separate entity for LLP for tax purposes at the initial stage. In Canada, members are treated like a traditional partnership. If the LLP is made as a corporation, the members of the business entity may elect to file the tax as a corporation. Limited liability is associated with the less paperwork and LLP provides the member's liability protection[8]. The members of the business are not personally liable for debts and it is a good shield that does not provide in general partnership and sole proprietorship.

Sole proprietorship and partnerships have some common characteristics, as there is no formal legal need for creating both types of business structures. If the partners or owners of the business want to hire the staffs or charge the GST from the clients, they need to register the business with tax accounts. The business owners in sole proprietorship and partners own the assets and they are considered to be self-employed[9]. On the contrary, in case of sole proprietorship, the owners can enjoy the business as autonomy and they have control over the business, whereas, in partnerships, the partners have responsibilities of daily operation and management. Sole proprietors do finance the business with savings and a bank loan, whereas in partnerships, partners share their resources to start the business.

Ali Berry has been running the small bakery successfully by himself and his business is getting busier. Ali Berry can choose Limited Partnership option where Ali Berry is a Canadian resident and he is not required for a person to be a limited partner. In exchange for Limited Partner, limited partners must forfeit some of the managerial powers. There is no minimum contribution needed in a Limited Partnership and some of the Limited Partnership agreements many necessitate the additional capital requirement. Ali Berry can pass through taxation where the loss and profit can attribute directly. Limited Partners structure will provide personal liability protection. Ali Berry can enjoy the organizational and managerial flexibility. The business' interests can readily transferrable and the capital can be created through selling limited partnership interests. In Limited partnership, interests can be transferred and whose structure can provide for the transfer of share. Ali Berry will be benefitted for this as he can own all business assets personally and they can share the operational duty. Limited Partnership business has limited regulation and Ali Berry can maintain separate accounting records for his business as well as separate income tax return file. If Ali Berry wants, he can end the business at any time as Limited Partnership provides this provision and Limited Partnership is less expensive to create than a corporation.

Thank you.

Reference List

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