Chapter 6 – Forms of Business Ownership.docx

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Business Textbook March 5th, 2012
Chapter 6 Forms of Business Ownership
Starting a Small Business
One key success in starting a new business is understanding how to get the resources you
need. There are 3 major forms of business ownership:
1. Sole proprietorship
2. Partnerships
3. Corporations
Sole proprietorship: a business that is owned and operated by one person, without
forming a corporation. The business and the owner are a single entity. Almost 24% of all
registered businesses in Canada fall under this form of ownership.
Partnership: A legal form of business with two or more parties.
Corporation: a legal entity with authority to act and have liability separate from its
owners. Have the largest share of business revenue.
Liability: for a business, it includes the responsibility to pay all normal debts and to pay:
1. Because of a court order
2. Because of law
3. For performance under a contract
4. For damages to a person or property
Sole Proprietorship
Advantages being your own boss and setting your own hours, as well all:
1. Ease of starting and ending the business All you need is buy or lease the needed
equipment and put up some announcements saying you are in business. To stop,
you simply stop.
2. Being your own boss
3. Pride of ownership
4. Retention of company profit You can earn as much as possible and not have to
share it with anyone (except the government, in taxes.)
5. No special taxes All profits are taxed as the personal income of the owner. They
can also claim any business losses against other earned income. These losses would
decrease the personal taxes they would need to pay.
6. Less regulation As well, the administration of a proprietorship is less costly than
that of a corporation.
Disadvantages
1. Unlimited liability, the risk of personal losses the responsibility of business
owners for all of the debts of the business.
2. Limited financial resources Funds available to the business are limited to the
funds that the one (sole) owner can gather.
3. Management difficulties
4. Overwhelming time commitment
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Business Textbook March 5th, 2012
5. Few fringe benefits No paid health insurance, no paid disability insurance, no sick
leave, and no vacation pay. Could add up to 30% of income
6. Limited growth
7. Limited lifespan
8. Possibly pay higher taxes If the business’s income exceeds $400,000, it will usually
be paying higher taxes than if it was incorporated as a Canadian Controlled Private
Corporation.
Partnerships
A partnership is a legal form of business with 2 or more parties. Can be a partnership of
individuals, corporations, trusts, other partnerships or a combination of these.
General partnership: a partnership in which all owners share in operating the business
and in assuming liability for the business’s debts.
Limited partnership: a partnership with one or more general partners and one or more
limited partners.
General partner: an owner (partner) who has unlimited liability and is active in managing
the firm.
Limited partner: an owner who invests money in the business but down not have any
management responsibility or liability for losses beyond the investment.
Advantages
1. More financial resources A limited partnership is specially designed to help raise
capital (money.)
2. Shared management and pooled/complementary skills and knowledge
3. Longer survival
4. Shared risk
5. No special taxes all taxed as personal income
6. Less regulation
Disadvantages
1. Unlimited liability
2. Division of profits there is no set system for dividing profits in a partnership, so
profits are not always divided evenly.
3. Disagreements among partners
4. Difficult to terminate partnership agreement: legal document that specifies the
rights and responsibilities of each partner
5. Possibly pay higher taxes
Corporations
A corporation is a federally or provincially chartered legal entity with authority to act and
have liability separate from its owners. The corporation’s owners (called stock
holders/shareholders) are not liable for the debts or any other problems of the corporation
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