CHAPTER 10_Form of Organization and Legal Issues
Common legal forms of organization
Sole Proprietorship: a business owned and operated by one person
Ownership of the company name and assets may be transferred
Owner gets all profits
There is generally no registration or filling fee
Freedom from interference
Unlimited personal liability
No tax free benefits
Death/incapacity of owner terminates business
Partnership: a legal entity formed by two or more co-owners who freely agree on a business for profit
- General partnership
- Limited partnership: this form consists of at least one general partner and one or more limited partner.
Limited partner: A partner in a limited partnership who is not active in its management and has
limited personal liability.
General partner: a partner in a limited partnership who has unlimited personal liability.
If people engage in active management, such as meeting, make decision, they will lose the
limited partner shield, and they will become unlimited liability.
Corporation: a business organization that exists as a legal entity and provides limited liability to its owners.
- Legal entity: a business organization that is recognized by the law as having a separate legal existence.
- Federal corporation
- Provincial corporation
- Sharing workload - Interpersonal conflicts
- Sharing emotional burden - Dissatisfaction with partner
- Procuring executive talent - Absence of one clear leader
- Sharing financial burden - Unlimited liability
- Companionship - Frustration of not calling own shots
Factors to consider in choosing among the primary legal forms of organization
Initial organizational requirements and costs
Liability of owners
Continuity of business
Transferability of ownership
Attractiveness for raising capital
Rights and Status of Shareholders
Ownership in a corporation is evidenced by share certificates, a document specifying the number of shares owned
by a shareholder.
Ownership of shares typically carries a pre-emptive right, the right of shareholders to but new shares in the
corporation before they are offered to the public.
The legal status of shareholders
Provides measure of control over the firm via vote Limits liability to investment in the firm
Can be transferred without affecting the firm’s operations
Does not give direct right to participate in company management
Limited liability of shareholders
Limited liability is a major advantage of the corporate form of organization > their financial liability is limited to
the amount of money invested in the business.
Exception is if shareholder provides guarantee to cover company debts if not otherwise paid
Death or Withdrawal Shareholders
Ownership in a corporation is readily transferable
Exchange of shares is sufficient to convey an ownership i