Textbook Notes (367,893)
Canada (161,477)
MGTA01H3 (583)
Chapter 4

CHAPTER 4.docx

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Management (MGT)
Chris Bovaird

CHAPTER 4: UNDERSTANDING LEGAL FORMS OF BUSINESS ORGANIZATION ORGANIZING OPTIONS (FORMS OF BUSINESS OWNERSHIP) -4 forms of legal ownership available: 1) THE SOLE PROPRIETORSHIP -sole proprietorship: business owned and operated by one person -legally considered to be an extension of yourself (not a separate legal entity) -may be small (lemonade stand) or large (steel mill) -majority of businesses in Canada are in this form -but only accounts for only small proportion of business revenues ADVANTAGES OF A SOLE PROPRIETORSHIP -freedom; sole proprietors answer to no one but themselves -easy to form; don’t even need to register to start operating -simplicity of legal setup procedures makes this form appealing to self-starters -low cost start-up -tax benefit; losses can be deducted from income the proprietor earns from personal sources other than business DISADVANTAGES OF A SOLE PROPRIETORSHIP -unlimited liability: personal liability for all debts of the business (major drawback) -if business fails to generate enough cash, bills must be paid out of owner’s pocket -lack of continuity: sole proprietorship legally dissolves when owner dies -depends on resources of one person whose managerial and financial limitations may constrain the business -sole proprietors often find it hard to borrow money to start up or expand -bankers fear they won’t be able to recover loans if owner becomes disabled 2) THE PARTNERSHIP -partnership: form of organization established when 2 or more persons agree to combine their financial, managerial, and technical abilities for purpose of operating a business for profit -business owners may wish to work together as partners for tax reasons -2 basic types of partnerships: -general partnerships: type of partnership in which all partners share in profits and have say in managing business; all persons personally liable for debts and other liabilities of the partnership -if partnership doesn’t have enough money or other assets to satisfy debts, partners must pay debt from own personal assets -limited partnerships: type of partnership with at least 1 general partner (who has unlimited liability) and one or more limited partners -general partners: partners who are actively involved in managing firm and have unlimited personal liability for debts and liabilities -limited partners: don’t participate actively in managing business; share some profits; no personal liability for debts and liabilities of partnership -therefore can only lose original investment in partnership (general can lose much more) -if a limited partner does participate in managing business of partnership, limited partner becomes a general partner and loses protection of limited liability ADVANTAGES -ability to grow by adding talent and money -easier time borrowing funds -can invite new partners to join by investing money -simple to organize with few legal requirements -all must begin with an agreement of some kind; written, oral or even unspoken -wise partners insist on written agreement answering these questions: How will disagreements be resolved? Who invested what sums of money in partnership? Who will receive what share of partnership’s profits? Who does what and who reports to whom? How will the partnership be dissolved? How would leftover assets be distributed among partners? -agreement is strictly private document -no laws require partners to file an agreement with some gov’t agency -partnerships not regarded as legal entities; therefore partners are taxed as individuals DISADVANTAGES -greatest drawback: unlimited liability; each partner held personally liable -if any partner incurs debt, even if others know nothing about it, they’re all liable if offending partner can’t pay up -lack of continuity; when one partner dies/pulls out, partnership dissolves legally even if other partners agree to stay to continue the business -difficulty of transferring ownership; no partner may sell out w/out other partners’ consent -life of a partnership may depend on ability of retiring partners to find someone compatible with other partners to buy them out -provides little/no guidance in resolving conflict b/w partners 3) THE CORPORATION -corporation: business that’s a separate legal entity that’s liable for its own debts and whose owners’ liability is limited to their investment -has indefinite lifespan -can be defined as “an artificial being, invisible, intangible and existing only in contemplation of law” -may sue and be sued, buy, hold, and sell property, make and sell products to consumers and commit crimes and be tried and punished for them -shareholders: persons who own shares in a corporation—real owners of corporation -profits may be dist
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