4 What are the differences and similarities between a sole-proprietorship, partnership, corporation, and trust?

Wahaj Awan

A sole-proprietorship has one owner who has unlimited liability for the business.

A partnership involves two or more people who combine resources for the business and share profits and losses.

A corporation is considered to be a separate legal entity from its shareholders. For tax purposes a corporation is a “Person”.

A trust or estate usually has beneficiaries that benefit from it. A trust can include an inter vivos trust (gifted during one’s lifetime) and a testamentary trust (given because of someone’s death) as explained in ITA 108(1).

The following table outlines some of the similarities and differences of the different tax entities:

Sole proprietorship

Partnership

Corporation

Trust

Ownership

A single owner

Two or more owners

Usually owned by many shareholders

Owner passes the ownership to a trustee

Profit or losses

All profits go to the sole owner

Profits split equally, or by pre-determined terms amongst the owners

Dividends declared and given to shareholders

Beneficiaries of the trust benefit from the profit

Liability

The owner has unlimited liability

Usually split amongst the owners based on the terms

Limited liability – individuals are not usually directly liable for activities within the corporation

The trustee responsible for operating the trust

Decision-making

All decisions for the firm are made by one owner

Owners in the partnership are responsible for the decisions

Board of director and shareholders

The trustee

Tax

Owner is taxed on his personal income/profit from the company

Owners are taxed on their respective incomes

A corporation is taxed as a “person”

A trust is taxed as a “person”

See ITA – 82(1), 96(1), 104 for an in-depth explanation of how types of entities are taxed.

Interactive content (Author: Wahaj Awan, March 2019)

Interactive content (Author: Simran Sandhu, June 2019)

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January 2019

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