Forming a Corporation verus a sole proprietor or partnership


The third legal business form is known as a Corporation. A corporation, sometimes referred to an limited company, tends to be more sophisticated than a sole proprietorship and a partnership. A corporation differs from the other two structures in that it is a separate legal entity, distinct from its shareholders, officers and directors. A corporation has a separate and continuous existence while managers, shareholders and directors may come and go. Because it is considered to be a separate entity, a corporation must file its own tax return with the IRS or Revenue Canada (depending on the county).

The cost of incorporation and having a name search conducted ranges between $600 - $1,200. Lawyers are generally more involved with incorporating a company relative to that of a sole proprietorship or a partnership.

Although the formalities are somewhat more complex, most entrepreneurs with growth-oriented businesses incorporate. In addition, businesses that are large scale and are expected to expand rapidly generally incorporated in order to protect themselves against higher risks.

Capital of a corporation is contributed through shareholder's investments. The ultimate control of the company is in the hands of the shareholders who generally meet once a year and who elect a Board of Directors for the company. The Directors usually meet once a month to oversee major corporate policies. In addition, the Directors appoint Officers who hire management to run the day to day operations. In most small corporations, the shareholders are also the Board of Directors and management. In addition, the owner of a corporation may be the only shareholder in the company.

Unlike, a sole proprietorship and partnership, the profits of a corporation does NOT flow directly through to the owners. If the owners are also employees of the business, they can receive a salary from the corporation (unlike the owners of a sole proprietorship or a partnership who must take drawings, not salaries). These salaries are recorded in the corporation's books as expenses and therefore reduce the corporation's taxable income. Each owner, however, must claim their salary from the corporation as personal income. In essence, the owners of a corporation who receive salaries from the business are taxed twice; at the corporate level and at the personal level. The corporate level, however, tends to be much lower.

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