ITA research and Tax Payable
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:
| Characteristics | 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.
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Author: Wahaj Awan, March 2019
Author: Simran Sandhu, June 2019
References and Resources
References and Resources
How to choose the right structure for your business. (2024, September). BDC. https://www.bdc.ca/en/articles-tools/start-buy-business/start-business/advantages-different-business-structures.
ITA – 98(5), 248(1), 108(1)
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