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MGTA01H3 (583)
Chapter 4

Chapter 4.docx

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Department
Management (MGT)
Course Code
MGTA01H3
Professor
Chris Bovaird

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(Reading) Week #5-#6 | Chapter 4 Understanding Legal forms of Business Orientation ORGANIZING OPTIONS (FORMS OF BUSINESS OWNERSHIP) The Sole Proprietorship - Most common form of ownership - Sole proprietor: - makes all decisions - keeps all profits - responsible for all debts - sole proprietorship - A business owned and operated by one person. Advantages of a Sole Proprietorship - Easy to set up: - No regulatory requirements - No mandatory accounting needs - Cheap to set up: - $60 - $70 if registered / $0 if not - Does not need to be registered - Management / ownership clear - freedom is considered to be the most important benefit of a sole proprietorship - sole proprietors answer to no one but themselves since they don’t share ownership - tax benefits are another attractive feature since the business and the proprietor are legally one and the same Disadvantages of a Sole Proprietorship “Unlimited” Liability - Your “personal” responsibility is unlimited. - Your financial responsibility: - Not limited to value of the job. - Not limited to value of assets used on job - If things go wrong, you can be sued for $$$ - You could lose your house, car, life savings - unlimited liability - Personal liability for all debts of the businesses. - personally liable (responsible) for all debts incurred by the business - if the business fails to generates enough cash, bills must be paid out of the owner’s pockets - another disadvantage is lack of continuity since the business legally dissolves if the owner dies - it is also dependent on the resources of one person whose managerial and financial limitations may constrain the business - it is also harder to borrow money to start up or expand, as bankers fear that they might not be able to recover the money The Partnership Partnership Agreements - Normally includes: - how much $$ each partner contributed - what each partner must do - how the partners paid - how profits distributed - Between partners only. Not binding on others General Partnership - Simplest form of Partnership - All partners share in ownership - All partners share in management - All partners: unlimited liability for debts - All partners: personal liability for debts Limited Partnership - Partnership with: Partners who take no part in management of business - Limited Partners supply $$$ only - (Can lose only their investment) - partnership - A form of organization established when two or more persons agree to combine their financial, management and technical abilities for the purpose of operating a business for profit. - general partnership - A type of partnership in which all partners are jointly liable for the obligations of the business. - limited partnership - A type of partnership with at least one general partner (who has unlimited liability) and one or more limited partners. The limited partners cannot participate in the day-to-day management of the business or they risk the loss of their limited liability status. - general partner - Partners who are actively involved in managing the firm and have unlimited liability. - Partners who don’t participate actively in the business and whose liability is limited to the amount they invested in the partnership. Advantages of a Partnership - Two (or 3) heads better than one - More resources - More credibility - More contacts - the ability to grow by adding talent and money - somewhat easier to borrow funds than sole proprietorship - inviting new partners is accomplished by having them invest money - simple to organize, but are dependent on an agreement of some sort (oral, written or even unspoken) Disadvantages of a Partnership - Conflict (more than 1owner) - Personal liability - Unlimited liability - unlimited liability since by law, each partner may be held personally liable for all debts incurred in the name of the partnerships - if any partner incurs a debt, even if other partners know nothing about it, they are all liable if the offending partner held responsible pays up - related drawback is difficulty of transferring ownership - no guidance in resolving conflicts The Corporation - Most sophisticated way to organise - Does require paperwork and fees - For businesses that want: - larger number of owners - split between
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