Ch. 5.pdf

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University of Calgary
Entrepreneurship and Innovation
ENTI 201
Norman Althouse

Chapter 5 Sole proprietorship: a business that is established, owned, operated, and often financed by one person • Pros • Easy and inexpensive to form • Profits go all to the owner • Direct control of the business • Relative freedom from government regulation (more freedmen fewer legal requirements, etc) • No special taxation (no corporate taxes. Profits are taxed as personal income and are reported in the owner's individual tax return • Ease of dissolution • Cons • Unlimited liability (business owner is responsible for all debts; may have to sell personal investment to satisfy claims against the business) Difficulty raising capital (business assets are unprotected against claims of personal creditors, and business • lenders view sole proprietorship as high risk because of the owner's unlimited liability. Owners will use personal funds to finance (credit cards, securing assets (collateral) for loans or lines of credit, or selling investments). Expansion plans are also affected by the inability to raise additional funding) • Limited managerial expertise Trouble finding qualified employees (sole proprietors often cannot offer the same pay, fringe benefits, and • opportunities for advancement as larger companies can, making them less attractive to employees seeking favorable opportunities) • Personal time commitment • Unstable business life (lifespan is uncertain due to owner illness, retirement, or loss of interest. The business will cease to exist unless owner makes provisions for it to continue operating or puts it up for sale • Losses are the owner's responsibility Partnership: an association of two or more individuals who agree to operate a business together for profit > Written partnership agreement: typically includes name of the partnership, purpose, and contributions of each partner (financial, asset, skill/talent) as well as outline responsibilities and duties of each partner and their compensation structure (salary, profit sharing, etc). Should include provisions for the addition of new partners, sale of partnership interests, and procedures for resolving conflict, dissolving the business, and distributing the assets. > General partnership: a partnership in which all partners share in the management and profits. Each partner can act on behalf of the firm and has unlimited liability for all it's business obligations > Limited partnership: a partnership with one or more general partners who have unlimited liability, and one or more limited partners (liability limited to the amount of their investment; help finance business, don't act in firm's operations) > Limited liability partnership (LLP): each individual partner is protected from responsibility for the acts of other partners, and each party's liability is limited to harm resulting from that party's actions • Pros • Ease of formation • Availability of capital (more people, more funds. The partners' combined financial strength also increases firm's ability to raise finds from outside sources) Diversity of skills and expertise • • Flexibility • No special taxes (partnerships pay no income taxes. Each partner's profit or loss is reported on the partner's personal income tax return, with any profits taxed at personal income tax rates) • Relative freedom from government control Cons • • Unlimited liability (general partners) (One partner can be held personally liable for all partnership debts and legal judgements (such as malpractice) regardless of who caused them. LLPs protect individual partners from responsibility for the acts of the others, and limits partners' liability to harm resulting from their own actions) • Potential for conflicts between partners • Complexity of profit-sharing (if time, expertise, and capital are not put in equally by all partners, arriving at a fair profit-sharing formula can be difficult) • Difficulty exiting or dissolving a partnership (when a partner leaves, the value of their share is calculated and sold to another partner. To avoid conflict, partnership agreements will outline guidelines for transfer of partnership interests and buy-sell agreements that make provision for buying a deceased partner's interest. Partners can purchase special life insurance policies on each partner designed to fund such a purchase) Chapter 5 Corporation: a legal entity with an existence and life separate from its owners, who therefore are not personally liable for the entity's debts. A corporation can own property, enter into contracts, sue and be sured, and engage in business operations > must be distinguished with Ltd/Ltée, Inc, or Corp > public corporation: a corporation whose shares are widely held and available to the general public > private corporation: does not trade publicly; therefore, the shares are not available to the general public The Incorporation Process > provincial: Companies act > federal: Canadian Business Corporations Act 1. Selecting your company's name 2. Writing the articles of incorporation and filing them with the appropriate government office 3. Paying the required fees and taxes 4. Holding an organizational meeting 5. Adopting by laws, electing directors, and passing the first operating resolutions Corporate Structure >Shareholders: the owners of a corporation who hold shares of stock that provide certain rights; aka stockholders >may receive a portion of the corporation's profits in the form of dividends >each share of stock a shareholder has generally carries one vote (except multiple voting shares to retain control) >Board of directors: a group of people elected by the share holders to handle the overall management of a corporation, such as serving major corporate coals and policies hiring corporate officers and overriding e firm's operations and finances >officers of a corporation are its top management and are responsible for achieving corporate goals and policies; induce the president and CEO, vice presidents treasurers and secretary. Other titles include CFO, CIO, COO. • Pros • Limited liability (owner's (shareholder's) liability for the debts of the firm is limited to the amount if the stock they own. Creditors can only look to the assets of the corporation for payment in the event of bankruptcy. The main exception is when a shareholder personally guarantees a business obligation (most common in corporations with only a few owners • Ease of transferring ownership • Unlimited life (unlike sol proprietorship and partnerships, death or withdrawals do not affect its existence) • Ability to attract financing (dividing ownership into smaller units makes it afford lent more investors, who can purchase one or several thousand shares. Large size and stability of corporations is also attractive. These financial resources allow corporations to invest in facilities and man resources, and to expand beyond other types of businesses • Ability to attract potential employees (offer better benefit plans and opportunities. Larger companies also have the advantage of professional management opportunities (eg. accounting managers) • Con
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