Basically, there are two different types of corporate structure: a propritorship, or a corporation. There a many diferences within these two definitions, and we'll explain them here. What we can explain in any great detail here is how the different structure affect things such as tax planning, the operation of the business and several other factors. Always check with a an accountant to determine what type of business best suits your needs.

The type of business arrangement that you choose to operate under - sole proprietor, partnership, or corporation - have both tax and legal implications. In a sole proprietorship or partnership, the owners have no limit to their personal liability whereas the corporation is an entity in itself that carries its own liability. Directors of the corporation may be held financially responsible for corporate debts and criminally responsible for illegal acts.

Many professional advisors suggest that you should incorporate to reduce your personal exposure to liability. Another reason is in the event of bankruptcy, creditors can only seize those personal assets that you have pledged as security for a business loan, except to the extent you are held liable as a director of the corporation.

A third reason to incorporate is for tax purposes. For the year 2000, the small business corporation tax rate is 21.12% (a qualified small business corporation is taxed at 21.12% on the first $200,000 of annual profit) as compared to a marginal personal rate of 31.24% for taxable income over $30,000, advisors suggest that the added costs and reporting associated with incorporation could be worthwhile when your taxable income is above $40,000.

IMPORTANT: Please note: You should get advice on tax rates on a yearly basis.

There are a number of considerations requiring professional advice before deciding which format is best for your business. The following summarizes the advantages and disadvantages of each type of business.

Types of Company Structures

Sole Proprietorship

Advantages:
~Ease of formation
~Simple form of ownership with regard to taxes and accounting requirements

Disadvantages:
~Unlimited liability
~Variable tax rates

Partnerships

Advantages:

~Pooling of resources and capital
~Less costly to form than a corporation

Disadvantages:
~Unlimited liability
~Variable tax rates
~Major decisions require all partner consent

Corporation

Advantages:
~Limited liability
~Potential tax deferment
~Continuous existence
~Shares are easily transferable

Disadvantages:
~More government regulation
~Complex form of ownership
Greater professional costs

Jim Park