5.1 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:
|
|
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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References and Resources
- Income Tax Act, RSC 1985, c1, (5th Supp.) ss 98(5), 248(1), 108(1)
- Article – “Sole proprietorship, partnership, corporation…?” (Author: Government of Canada)
- Article – “T3 Trust Guide – 2019” (Author: Government of Canada)
- Chartered Professional Accountants. (2022). The Chartered Professional Accountant Competency Map. Part 1: The CPA Competency Map: 6.1.1
“What are the differences and similarities between a sole-proprietorship, partnership, corporation, and trust?” from Introductory Canadian Tax Copyright © 2021 by Wahaj Awan is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License, except where otherwise noted.
