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Business form part 3

posted Jul 29, 2014, 4:53 PM by Surendra Dhanpaul
It was too much information to put in one blog entry part 2 and so I decided that I will split this section. 

Liability
This is the extent to which creditors have claims against assets. Limited Liability means that creditors cannot claim against personal property. Unlimited Liability means that a person is directly liable to creditors for his debts and therefore creditors can claim against his house and land.
  • Sole Proprietor – he has unlimited liability.
  • Corporation – it has limited liability.
  • Partnership – can have either limited or unlimited. It can also have both.
See illustration 3

Profits
  • Sole Proprietor – all profits belong to the owner.
  • Corporation – profits belong to the Corporation.
  • Partnership – profits belong to the individual partners split in agreed ratio.

Taxation
  • Sole Proprietor – since all profits belong to the owner, taxes are only assessed once.
  • Corporation – taxes are assessed and payable twice. First, after profit is computed the company has to pay corporation tax. This is charged at 35% on profit and no allowance is given to this artificial person. After corporation tax is paid, it is time to distribute profit to shareholders. This is called dividends. If the value of dividends payable to shareholder is greater than allowances then the company has to deduct income taxes accordingly. This is the principle of double taxation.
  • Partnership – partners are responsible for paying their own taxes on profits received. The computation is similar to those of the sole proprietor.
See illustration 4

Property and expenses allowed
  • Sole Proprietor – only expenses that lead to the generation of revenue is allowed. Personal rent, fuel for personal vehicle, etc are not allowed since these do not lead to the generation of revenue (unless you can prove otherwise).
  • Corporation – any expense incurred to a property in the name of the Corporation is chargeable as expense to the Corporation. This is a good thing since you can be living for free in the name of the Corporation.
  • Partnership – this is based on the agreement between partners whether the expense should be incurred by the partnership or not. For example, partners may agree on specific fuel limit, rent limits, etc. so as to avoid conflict in interest.

Employees and being employees
  • Sole Proprietor – being and employee or putting himself/herself on payroll is pointless and makes no difference in calculation of income taxes. Remember, the owner is the business. If the business is in the name of the husband, the wife can earn a salary and charge as expense and visa-versa.
  • Corporation – if the shareholder is employed by the company then this will reduce profits and the amount of corporation taxes that the company has to pay. However, this will have no effects on personal income tax. Note also, directors are not entitled to salary, however, since one person can form a company he or she can be the manager, who is an employee of the company.
  • Partnership – salaries (if any) are specified in the partnership agreement. Much care should be taken by both partners in determining salaries as this affects the profits but has no effects on personal income tax.

Tax avoidance tip – Tax avoidance is done by means of allowance such as allowance for working through lunch, meals provided when persons work through lunch, station allowance or out-of-town allowance and a travelling allowance. All should be in proportion to the basic taxable income and justifiable.

End
  • Sole Proprietor – when the proprietor of a business dies, the business dies too. It may be transferred by means of will or other documents, but, the licences will also have to be transferred out of its previous owner to its current owner’s name. This in it self is the closing of one business and starting of another.
  • Corporation – it doesn’t die if the shareholder dies. This is the concept of unlimited life. It can be wound up by shareholder voluntarily or forced into receivership. Receivership does not mean that the Corporation is completely closed, it has only ceased operation and assets are now dissolved (sold for cash) in order to pay liabilities. Receivership is usually called for when dealing with the bank.
  • Partnership – ends every time a new partner enters of an old one leaves, thereon forming a new partnership.
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