4th Lecture - Forms of Business Ownership

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University of Toronto Mississauga
Communication, Culture and Technology
Dave Swanston

Chapter 4Forms of Business Ownership page 6089 Lecture 4 Each form of business ownership has advantages and disadvantages Just because a business starts in one form of ownership it doesnt have to stay in that formOne key to success in starting a new business is understanding how to get the resources you need You may have to take on partners or find other ways of obtaining moneyTo stay in business you may need help from someone with more expertise than you have in certain areas or you may need to raise more money to expandThe three major forms of business ownership are 1 Sole proprietorships2 Partnerships3 CorporationsA sole proprietorship is a business that is owned and operated by one person without forming a corporationIn a sole proprietorship the business and the owner are a single entity Almost 24 percent of all registered businesses in Canada fall under this form of ownershipWhen two or more people legally agree to become coowners of a business the organization is called a partnershipA Corporation is a legal entity with authority to act and have liability separate from its ownersThere are advantages to creating a business that is separate and distinct from the owners A legal entity with authority to act and have liability separate from its owners is called a corporation There are more than 15 million corporations in Canada and they have the largest share of business revenue by farLiability the responsibility to pay all normal debts and to pay because of a court order or law for performance under a contract or payment of damages to a person or property in an accident1Sole Proprietorships AdvantagesMost will mention the benefits of being their own boss and setting their own hours Other advantages they mention may include the followingA Ease of starting and ending the businessAll you have to do to start a sole proprietorship is buy or lease the needed equipment and put up some announcements saying you are in business It is just as easy to get out of business you simply stop There is no one to consult or to disagree with about such decisions You may have to get a permit or license from the local government but often that is no problemBBeing your own boss As noted earlier this is one of the most common reasons cited for starting a sole proprietorship Working for others simply does not have the same excitement as working for yourself You may make mistakes but they are your mistakesand so are the many small victories encountered each dayC Pride of ownership People who own and manage their own businesses are rightfully proud of their work They deserve all the credit for taking the risks and providing needed productsD Retention of company profit Other than the joy of being your own boss there is nothing like the pleasure of knowing that you can earn as much as possible and not have to share that money with anyone else except the government in taxesE No special taxes All profits of a sole proprietorship are taxed as the personal income of the owner and the owner pays the normal personal income tax on that money Another tax advantage for sole proprietors is that they can claim any business losses against other earned income These losses would decrease the personal taxes they would need to pay Understanding tax planning is an important factor in choosing the appropriate form of business organization and often requires the advice of professional accountants F Less regulation While proprietorships are regulated by the provincialterritorial governments and the proprietorship may have to be registered overall they are less regulated than corporations As well the administration of a proprietorship is less costly than that of a corporationDisadvantages of Sole ProprietorshipsNot everyone is equipped to own and manage a business Often it is difficult to save enough money to start a business and keep it going The costs of inventory supplies insurance advertising rent computers utilities and so on may be too much to cover alone Other disadvantages of owning your own business are listed on the next pageA Unlimited liabilitythe risk of personal losses When you work for others it is their problem if the business is not profitable When you own your own businessany debts or damages incurred by the business are your debts and you must pay them even if it means selling your home your car or whatever else you own This is a serious risk and one that requires not only thought but also discussion with a lawyer an insurance agent an accountant and othersB Limited financial resources Funds available to the business are limited to the funds that the one sole owner can gather Since there are serious limits to how much money one person can raise partnerships and corporations have a greater probability of obtaining the needed financial backing to start a business and keep it goingC Management difficulties All businesses need management that is someone must keep inventory records accounting records tax records and so forth Many people who are skilled at selling things or providing a service are not so skilled at keeping records Sole proprietors often find it difficult to attract good qualified employees to help run the business because they cannot compete with the salary and benefits offered by larger companiesD Overwhelming time commitment Though sole proprietors may say they set their own hours its hard to own a business manage it train people and have time for anything else in life This is true of any business but a sole proprietor has no one with whom to share the burden The owner often must spend long hours working The owner of a store for example may put in 12 hours a day at least six days a weekalmost twice the hours worked by a nonsupervisory employee in a large company Affects the sole proprietors family life EFew fringe benefits If you are your own boss you lose the fringe benefits that often come from working for others You have no paid health insurance no paid disability insurance no sick leave and no vacation pay These and other benefits may add up to approximately 30 percent of a workers incomeF Limited growth Expansion is often slow since a sole proprietorship relies on its owner for most of its creativity business knowhow and fundingG Limited lifespan If the sole proprietor dies is incapacitated or retires the business no longer exists unless it is sold or taken over by the sole proprietors heirs While the net business assets pass to the heirs valuable leases and contracts may notH Possibly pay higher taxes If the businesss income exceeds 400000 it will usually be paying higher taxes than if it was incorporated as a Canadian Controlled Private Corporation CCPC That is tax rates are more advantageous if the business is incorporated Other problems includegetting loans from the bank problems with theft problems simply keeping up with the business
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