Setting up Your Home Business: Sole Proprietorship, Partnership or Corporation?

If you are thinking of starting a home based business, first off, you’ll have to think about how you will set up your business.

There are three types of business structures:

• sole proprietorship
• partnership
• corporation

Sole proprietorship

Chances are if you are starting a home based business, you will want to go with the simplest kind of business structure -- a sole proprietorship. This is an unincorporated business that is owned by one person.

If you're a sole proprietor, you pay personal income tax on all revenue generated by your business and you assume all the risks of the business. Keep in mind that these risks extend to your personal property and assets.

A sole proprietorship is easy to set up. If you operate as an individual, all you need to do is bill your customers in your own name. Otherwise, you can operate under a registered business name and bill your customers in the business's name. Be sure and remember that you’ll need a separate bank account to process cheques payable to your business name.

How does a sole proprietor pay taxes?

As a sole proprietor, you pay taxes by reporting income (or loss) on a personal income tax and benefit return.

Partnership

A partnership involves two or more individuals, corporations, trusts, or partnerships that join together to carry on a trade or business.

Like a sole proprietorship, a partnership is easy to form. In fact, all you really need is a verbal agreement to form a partnership but it’s always a good idea to have an agreement in writing!

How does a partnership pay taxes?

A partnership by itself does not pay income tax on its operating results and does not file an annual income tax return. Instead, each partner includes a share of the partnership income (or loss) on a personal, corporate, or trust income tax return.

Corporation

A corporation is a separate legal entity that can enter into contracts and own property in its own name, separately and distinctly from its owners.

To set up a corporation, it’s a lot more complicated and costly. You need to complete articles of incorporation and file them with the appropriate provincial or federal authorities. As well, filing tax returns is mandatory and must include complete financial statements and schedules.