Tax Considerations for New Businesses

The new entrepreneur, even if he has previous experience in business as an employee or senior manager or executive of a large corporation, often has little more than a general awareness of legal and tax issues involved in starting up a business. The entrepreneur will be relying on his accountant and lawyer to recommend an appropriate structure and provide advice as to the tax implications. This article serves only a simple fact sheet to provide a basic starting point.Experts should certainly be consulted to provide any needed information.

Each type of business structure requires a different tax layout.The different tax treatment of different forms of enterprises can be a significant factor in choosing a business structure. These factors can be as important as liability concerns.

Sole Proprietorship

The tax structure used between an individual and a sole proprietorship is basically the same.Except the fact remains that the sole proprietorship takes on a distinct legal entity of its own.Many small businesses or those just beginning choose this as the best form of tax structure to begin with.The tax payer under the current tax act (this changes frequently) is required to compute his income in the tax year from all business related ventures.Anything that falls under the auspices of the business whether showing profit or loss is required to be declared.It should be noted in this regard that "income from a property" does not include capital gains or losses arising from the disposition of property. The profit so determined is merely the starting point for the computation of the taxpayer's income for the year from such sources and is subject to modification by numerous other provisions. Many of these other provisions have the effect of altering the bottom line or concept of "profit". Finally, it is important to remember that, unlike corporations, tax on individuals is levied at graduated rates.

Partnership

Business carried on in partnership, although distinct accounting entities, like sole proprietorship do not have a separate legal personality and are not taxpayers as such. The income from partnership must be reported by the partners in their personal capacity. The current tax act declares that the income level at the partnership level must be computed as though the partnership were a separate person.This requires the partnership to compute its income from various sources, as well as any net capital loss, non-capital loss, farm loss and restricted farm loss, where applicable, for the fiscal period of the partnership. Each partner is then required to recognize his share of the income and loss components in his own tax return. The official tax act does not require the partnership to file a tax return showing income computation and allocation among the partners.The partnership itself may choose to do this so that each partner can correctly and accurately report his or her shares of the partnership income.The partnership return to be filed by the partners must contain such information as the income or loss of the partnership, the names of partners, their shares of income or loss of the partnership, etc. Partnerships with five or fewer members are not required to file an annual Partnership Information Return.

Joint Venture and Co-Ownership

The taxation of joint ventures or co-ownership is a function of their nature in law.
Transactions on joint account or other forms of joint venture are commonplace in commercial practice. Whether or not such transactions amount to partnership may not be so easily determined. Many joint ventures are determined to be partnerships and then the partnership rules as discussed above apply to them. Generally it is determined that a joint venture is usually carried out in corporate form.Thus most of the taxation rules apply here as they would to a general corporation.

Corporations

A corporation is a "person", and therefore a "taxpayer" in its own right.This is regardless of how many shareholders there are in any one corporation.The concept that a corporation is a legal entity separate and distinct from its shareholders gives rise to difficult problems in taxation. Since a corporation is a separate entity, its property, assets and liabilities belong to, or flow from, the corporation. This is so even if there is only one shareholder of the corporation who owns all of its issued and outstanding shares. The "one person company" is no less of a corporation and a separate legal identity than a publicly-held corporation. The implication of this is that there are 2 stages of taxation where a corporation is involved. The first stage of taxation is at the corporate level and the second stage of taxation is at the shareholder level. These will be dealt with totally separately.

As any new business owner can see there are an endless number of options to consider when determining the tax structure of a new business.