Minding your Own Business Income



Income from Business

Income from Business

Business usually refers to an entity which carries on an enterprise which involves the sale or purchase of goods and services for a profit. The business can be unincorporated or incorporated.

Regardless of the business involved some of the most attractive features of any business are the tax deductions and the opportunities to split income, which, depending on the business, can be quite substantial at times.

In today's uncertain employment environment, many Canadians are choosing to earn business income rather than seek regular employment. While rapid technological changes have replaced countless jobs, they have also opened up numerous opportunities for the entrepreneurs.

As a result the small business industry has exploded over the past decade and is now the engine which drives much of our economy. It is not unusual,today, to find people with regular employment earning extra business income on the side. Which business do you choose? Are you cut out for business? are some of the many questions which should be addressed.

Regardless of the business you choose to pursue, there are Basic Fundamentals which must be mastered to ensure success.Many business owners have failed because they did not master one or more of the fundamentals.

Avoid the trap into which many would-be business owners fall

Make our Free e-zine "What You need to Know Before You Start Your Business" ,yours by completing the form on the right. Learn what it takes to be a success in business. You'll be surprised I'm sure

The simplest form of business organization is the sole proprietorship which is an unincorporated business owned and managed by one individual. This is not a passive investment but involves actively carrying on business. The business income generated by a sole proprietorship is combined with the individual's other income and taxed at the marginal tax rate. Similarly any losses can be applied against other forms of income. The Home based business is a good example of a sole proprietorship.Today this multi-billion dollar industry offers some of the fastest growing business opportunities.

Advantages of Sole proprietorships

  1. Low start up costs

  2. Less regulated

  3. Owner retains full control and is entitled to all the profits

  4. Can employ staff creating income splitting opportunities

  5. No legal costs

  6. Losses can be applied against other income.

Disadvantages of Sole proprietorships

  1. With this business structure, there is is no legal distinction between personal and business property and a sole proprietor is exposed to unlimited liability. Any claims against personal property can be extended to business property and any claims against business property can be extended to personal property. The individual is personally liable and responsible for all obligations and liabilities of the business.

  2. The fiscal year end must be December 31, year end, thus there is a loss of a preferred tax planning opportunity.

  3. Because the business is financed by proprietor, this might limit opportunities to expand.

  4. The issue of continuity. For a proprietorship to survive the owner must be solvent, legally competent and alive.

Partnerships

A partnership is an unincorporated business in which two or more parties come together to carry on an enterprise. Because this business is not incorporated, the partners assume the same risks and liability exposures as a sole proprietorship.

Any business income or any losses created by the partnership are taxed in the hands of each partner, based on their respective interests in the partnership. This is determined by the preparation of a statement of partnership income showing each partner's share. In cases where the allocations are not reasonable and the partners are not dealing at arms length, the Income Tax Act, under subsection 103(1.1), can be used to override the allocations.

The nature of the partnership income is retained as it flows through to the partners. A capital gain in the partnership is a capital gain for each partner.

The Capital cost allowance is a discretionary deduction and any decisions regarding it are made at the partnership level. The decision is binding on all partners.

Advantages of Partnerships

  1. Low start up costs

  2. Minimal regulations

  3. Work load shared

  4. No direct legal structures

  5. Flow through nature of income eliminates potential for double taxation.

Disadvantages of Partnerships

  1. Personal liability shared by all partners, regardless of which partner was involved. This might include liability for negligent acts, wrong doing and errors and omissions.

  2. Unlimited liability similar to sole proprietor

  3. Continuity: Unless stated in a partnership agreement, the withdrawal of one product terminates the partnership.

    4. Corporations Income from Property

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