Chapter 4 – Understanding Legal Forms of Business Organization
ORGANIZING OPTIONS (FORMS OF BUSINESS OWNERSHIP)
-Four options are available: the sole proprietorship, the partnership, the corporation, and
The Sole Proprietorship
-The sole proprietorship is a business owned and operated by one person.
- Majority of businesses in Canada are sole proprietorships yet this form of ownership
accounts for only a small portion of total business revenues.
-Easy to form
-The simplicity of legal setup procedures
-Tax benefits – the losses can be deducted from income the proprietor earns from
personal source other than the business.
-Unlimited liability – personal liability for all debts of the business.
-Lack of continuity – the business legally dissolves when the owner dies
-Hard to borrow money to start up or expand
-A partnership is formed when two or more persons operate a business for profit.
-General partnership is a type of partnership in which all partners are jointly liable for the
obligations of the business.
-Limited partnership is 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 partners are partners who are actively involved in managing the firm and have
-Limited partners are partners who don’t participate actively in the business and whose
liability is limited to the amount they invested in the partnership.
-The partnership agreement is strictly a private document.
-The ability to grow by adding talent and money
-Easier time borrowing funds
-Can also invite new partners to join by investing money
-Simple to organize, with few legal requirements
-All partners are liable when debt is incurred even if they know nothing about it
-Difficulty of transferring ownership
-Provides little or no guidance in resolving conflict between the partners.