Chapter 4 Key Definitions
The three major forms of business ownership are: Sole Proprietorship, Partnership and
1Sole proprietorship: a business owned and operated by one person without forming a
A) Ease of starting and ending the business: to start, all you need is buying the equipment and let
people know that you are in business and if you want to stop you simply do.
B) Being your own boss: working for others is not as exciting as this, your mistakes are yours
and only harm you, and so are your victories.
C) Pride of ownership: deserving all the credit for taking the risks and providing needed
D) Retention of company profit: all the revenues are yours and you do not share them with
E) No special taxes: all the profits are taxed as a personal income for the owner and they can
claim any business losses against other earned income.
F) Less regulation: they are less regulated and less costly than corporations.
1) Unlimited liability: the owner and the business are considered one and any debts and damages
are the owner’s responsibility.
2) Limited financial resources
3) Management difficulties
4) Overwhelming time commitment
5) Few fringe benefits
6) Limited growth
7) Limited lifespan
8) Possibly pay higher taxes
2Partnership: a legal form of business with two or more parties.
Types of partnership: 1) General partnership: all owners share in operating the business and the liability for debts.
General partner: the owner (partner) that has an unlimited liability and is active in managing the
2) Limited partnership: with one or more general partners and one or more limited partners.
Limited partner: the owner (partner) that only invests money in the business but doesn’t have any
managerial role or liability for losses other than the actual investment which he makes.
Limited liability: the responsibility for the limited partner\owner and shareholders to up to only
the amount that they have invested in the business.
1) More financial resources
2) Shared management and complementary skills and knowledge
3) Longer survival
4) Shared risk
5) No special taxes
6) Less regulation
1) Unlimited liability
2) Division of profits
3) Disagreement among partners
4) Difficult to terminate
Partnership agreement: legal document which specifies the rights and responsibilities of each
5) Possibly pay higher taxes
3Corporations: a legal entity with authority to act and have liability separate from its owners.
• Liability: the responsibility to pay all normal debts because of a court order or law, for
performance under a contract, or payment of damages to a person or property in an
Types of corporations: 1) Public corporation: allowed to issue stock to the public and its shared are listed on stock
2) Private corporation: is not allowed to issue stock to the public, its shares are not listed on
stock exchange, and it is limited to 50 or less shareholders.
1) Limited liability
2) More money for investment
4) Perpetual life
5) Ease of ownership change
6) Separation of ownership from management
1) Extensive paperwork
2) Double taxation
3) Two tax return
5) Difficulty of termination
6) Possible conflicts with shareholders and board of directors
7) Initial cost
Other types of corporations:
1Professional Corporation: is a Canadian controlled private corporation engaged in providing
professional services. The member must be part of a profession that is governed by a
professional body that allows its members to practice through a corporation. Professions that can
incorporate include accountants, architects, lawyers, doctors, and engineers. Individuals who
incorporate do not issue shares to those outside of their business. Limited liability is a benefit but
the major benefit of professional corporations is tax advantages: professional corporations can
benefit from the Small Business Deduction, income splitting with family members, and the
capital gains exemption for qualifying small business corporation shares (if shares are later sold).
2Nonresident Corporation: A nonresident corporation conducts business in Canada but has its
head office outside Canada. For example: foreign airlines are nonresident corporations. 3Nonprofit Corporation: is formed for charitable or socially beneficial p