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Tax considerations
are important to any business, since taxes often govern whether
the business will be profitable or not. When an operator is choosing
a business structure, tax considerations should be as important
as legal considerations, especially in the early days when revenue
is probably smaller.
Sole
Proprietorship
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Advantages
- There
are tax benefits in start-up losses. Because the business’
money is seen as the proprietor’s money by tax authorities,
losses can be offset against other personal income.
- There
is some opportunity to use the tax system to reduce personal
expenses, if they affect the business. A typical situation
would involve the use of your home in business operations.
- Few
tax implications exist if the business is wound down.
- The
personal tax rate is lower than the rate for corporations
in some situations, i.e., if there is little revenue.
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Disadvantages
- The
owner is personally liable for all debts and taxes.
- It
is frequently difficult to raise capital or receive conventional
loans.
- It
can be difficult to receive government subsidies.
- If
the business fails, it is often very difficult to get unemployment
benefits.
- A
sole proprietorship could result in higher taxes. Profits
can be higher than expected and are taxed at personal tax
rates that could be higher than what a corporation would
pay.
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Partnership
Advantages
- Someone
to share the expenses and costs.
- Two
or more are sharing the marketing and selling relieving
the burden on a sole proprietor.
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Disadvantages
- Financial
disagreements. Like in a marriage, partners can find themselves
arguing constantly over money. Sometimes the business can
fail because of it.
- Sale
of a business can become complicated, especially if one
partner disagrees
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Corporation
| Advantages
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Lower tax rates if the business reaches a certain level
of profitability.
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Access to tax credits for operation in certain areas, such
as research and development.
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More flexibility regarding the business operator’s
compensation.
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More opportunity to plan future growth.
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Personal tax flexibility in that a shareholder can “lend”
money to the company. If the shareholder in turn borrows
that money, the interest on the loan is deductible from
personal taxes.
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Disadvantages
- Higher
operating costs.
- Continuous
accounting and legal costs.
- Financial
records must be well maintained.
- A
formal financial statement must be prepared annually.
- Operating
losses and tax credits remain with the company and cannot
be personally used by shareholders
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