MCkercher. Frequently asked questions

A partnership is similar to a sole proprietorship with one major difference being a partnership involves involves multiple people owning a business. In a standard partnership, each partner is personally liable for the partnership. Partners carry on business on the understanding that they will share in the profits or losses of the business.

Partnerships often have a business name by which the partnership is known to the public. This business name must be registered with Information Services Corporation.

A partnership may also be formed as a limited liability partnership. This form of partnership limits some of the personal responsibility of the partners for the acts of the partnerships and their fellow partners.

One major advantage of a partnership is the flexibility to it provides to the partners of the organization in determining how to organize and structure the management of the firm. A second major advantage is that some partnerships may receive tax advantages compared to other forms of businesses.

A sole proprietorship is where one individual personally owns all the assets of a business and is responsible for all the business’ debts. There is no separate legal entity in a sole proprietorship situation so if the business is successfully sued, the person obtaining a judgement against the business can collect from the sole proprietor’s personal assets. This is known as personal liability.

Sole proprietors generally carry on business under a business name, a name which their business is known to the public. This name must be registered with Information Services Corporation and a check must be done to ensure that the name is available.

Limited Liability – One of the primary advantages of operating a business under a corporate structure is that a corporation provides limited liability protection to the owners of a business.

The law views a corporation as having its own separate legal identity. This separate legal identity can provide protection to the personal assets of shareholders from the creditors of the business.  In most circumstances, the only risk faced by shareholders in the event of default is losing their initial investment and the value of their shares in the corporation.

Tax Benefits – There are numerous tax benefits available to owners that operate a business under a corporate structure.

For businesses that operate under a sole proprietorship or partnership structure, business income is taxed as part of the personal income of the owners of the business. For businesses that operate under a corporate structure, business income is taxed at a corporate tax rate. Having business income taxed at the corporate tax rate may result in less total income tax having to be paid.

The taxes paid by business owners may be deferred by keeping the profits of a business in a corporation rather than having to pay the profits directly to the business owners. This can allow a business owner to defer having to pay income tax on the profits of a business until such time that it is more tax advantageous for them to do so.

A corporation with a properly structured distribution of shares may be able to attribute income between shareholders in a manner that provides tax advantages to its shareholders.   For instance, profits of a family business may be distributed through a corporation to family members in a manner that provides an overall tax advantage by distributing more income to those family members that fall under lower personal income tax brackets.

Continuing Existence – A corporation will continue to exist following the death of an owner.  This gives a corporation a continuing existence that allows for greater long term planning and stability for the business.  Shares of a corporation may be transferred to family members or others following the death of an owner, which can be beneficial for estate planning purposes.

Organizational Structure – A corporation is controlled by its shareholders who invest money in the corporation in exchange for shares. The number of shares an individual holds in a corporation determines how much control he or she has over the corporation.

Using a corporation to organize the ownership structure of a business can allow for more complex ownership arrangements for the business to be made. This may facilitate a greater ability for the business to raise capital through issuing shares and bonds in the corporation to investors.  The corporate structure allows investors to have an ownership stake in the business without necessarily being involved in the operations or management of the business.   While shareholders have ultimate control of the corporation, the majority of corporate decisions are made by the corporation’s directors and officers. Directors are elected by the shareholders at the corporation’s annual meeting. Once elected, directors make decisions regarding the direction and management of the corporation by majority vote.