October 5 , 2012
Lecture 4 – Forms of Business Ownership
70% of Canadian business are incorporations
Sole proprietorships – individuals working for themselves
o One person owning and operating a business, without forming a
o Personal income
o Possible to write off expenses
o “my” income/expenses
o Anything that happens in that business happens to the personal self
No separation between business and self
o Personal liability for any activity
o Make sure insurance covers
Ease of start/end- Just need the required equipment or work
space to start. May need permit or license for some businesses
but it is always easy to get and stopping is just as easy as
Be your own boss- You make all the decisions, and all the
mistakes will be yours and it will affect you and all the victories
will be yours.
Pride of ownership- Sole proprietorships deserve all the
credit for taking the risks and providing needed products
Leave legacy- Can be passed down to your kids and family.
Retain profit- All profit goes to you and you wont have to
share it with anyone except the government for taxes.
No special taxes- All taxes are counted as personal income tax
and it lower than corporate taxes. Also can claim losses from
business to decrease tax.
Fewer regulations- Less regulations, and administration is
Unlimited liability- The risk of bearing 100% of loss. Any
debt, damage is for you to pay, it has to come from your
pockets and can lead to selling your house, car, and everything
else you own if your business goes down.
Limited financial resources- Limited to the funds you have
and what you can bring from loans, and how much you raise.
Difficulty in mgmt.- Many sole proprietors don’t have the
skills to a good management skills such as inventory records,
accounting records, tax records, and so forth. Hard to get
someone because corporations pay better for accountants ect. Time commitment- You as the sole owner will have to work
extra hourse if needed, and this means no vacation or sick
days. Gets in the way of family life for many sole owners.
Few fringe benefits- Loses or doesn’t get the benefits for
working for corporations. No health insurance, no disability
insurance, no sick leave, no vacation pay.
Limited growth- Expansion is often slow, because it depends
on the creativity, funding, and the business mind of the owner.
Limited life span- The business dies if you dies, unless it is
bought or taken over by your heir. Valuable leases and
contracts may not.
o Access to resources
o Brings expertise
o Share workload
o Do not bring in friends if you feel they wont be an asset to the
When other people are brought in, it leads to conflict
o Several main types of partnership
Each person has a role to play (Ex. Marketing,
Only a financial partner
No management responsibility or liability losses beyond
Liability= amount they put into business
o Limited partner expects their investments back
o Partnership agreement spells out the terms of
each partner (Ex. Percentage…)
Lawyers are needed for the agreements
Could still lead to conflict
o More financial resources- 2 or more people can bring in
more funds. It is cheaper to split bills between 2 or more
o Shared mgmt.- You can divide work hours and benefit
from free time to expand business or take a day off.
o Longer survival- Partnerships last much longer than sole
proprietorships because being watched by a partner can
make other partners more disciplined. o Shared risk- All partners share the risk and divide losses.
Includes financial risk and ongoing or future risk.
o No special taxes- As like sole proprietorship, there are no
special taxes for partnership, owners pay personal income
tax, and losses can be deducted.
o Less regulation- Less regulated than corporations
o Unlimited liability- Each partner is liable for losses. It
doesn’t matter who was in charge of what. If the business
goes down everyone goes down.
o Division of profits- Has to split all profits between
partners. Creates conflict because profits are not always
divide evenly, depends on how much each partner
o Disagreements among partners- Multiple owners so one
cannot make all the decisions, everyone will have to agree
in order to move on.
o Difficult to terminate- Very hard to terminate because
everyone will have to agree as well.
Shotgun clause – one of us is going to buy this business
– single number on a piece of paper in envelope – bigger
Master Limited Partnership
Taxed as a partnership
Corporation – although the word corporation makes people think of big
businesses such as bmo, it is not necessary to be big to incorporate
Obviously, many corporations are big; however,
incorporating may also be beneficial for small
o Limited liability- The damage and loss to the
corporation is separate from the owners, it will
not affect the personal pockets of the owner, and
they wont have to sell their house, cars etc.
o More money for investment
o Separation of ownership
o Ease of ownership change
o Perpetual life
o Initial cost
o Two tax returns o Termination difficult
o Stockholder and board conflict
o Double taxation
o Possible conflict with stockholders and board of
Board of directors
o Hold CEO accountable for achieving goals of the org.
Types of Corporations:
Professional Corporations: A professional corporation is a Canadian-
controlled private corporatism engaged in providing professional services.
Ex. lawyers, archite