4 What are the differences and similarities between a sole-proprietorship, partnership, corporation, and trust?
Wahaj Awan and Marc Kampschuur
A sole-proprietorship has one owner `individual’ who has unlimited personal liability for the business.
A partnership involves two or more `persons’ who combine resources for the business and share profits and losses.
A corporation is considered to be a separate legal entity (person) 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). Defined as an `individual’ in the ITA.
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. |
Owned by one or many shareholders. |
Trustees hold legal title and manage trust property on behalf of beneficiaries who hold equitable title. |
|
Profit or losses |
All profits go to the sole owner. Owner cannot take a salary. |
Profits split by owners either equally or pre-determined terms set out out in the shareholders agreement. Can pay salaries. |
Dividends declared and given to shareholders. Can pay salaries. |
Profit can be retained in trust or paid to beneficiaries. |
|
Liability |
The owner has unlimited personal liability. |
Owners have unlimited personal liability unless a limited partner in a limited partnership |
Shareholders liability is limited to investment. Director liability may extend to tax and environmental misfeasance. |
The trustee has a fiduciary duty for managing 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)
References and Resources :
- ITA – 98(5), 248(1), 108(1)
- Article – “Sole proprietorship, partnership, corporation…?” (Author: Government of Canada)
- Article – “T3 Trust Guide – 2019” (Author: Government of Canada)
- Competency map: 6.1.1
January 2019
