1.2 Forms of Business Organization

Sole Proprietorship: Cons

- Owner has unlimited liability for business debts (creditors can look beyond assets to the proprietor's personal assets for payment) - All business income is taxed as personal income - Life is limited to the owner's life span and the amount of equity that can be raised is limited to the proprietor's personal wealth => insufficient capital => cannot exploit new opportunities - Ownership is difficult to transfer since it requires that sale of the entire business to a new owner

Corporations: Pros

- Ownership (represented by shares of stock) can be readily transferred - Life is not limited (due to the ease of ownership transfer) - Shareholders have limited liability for corporation debts since a corporation borrow money in its own name (the most they can lose is what they have invested) - Ability to raise and access large sums of capital i both debt and equity markets

Partnerships: Cons

- Possible disagreements - Business income is taxed as personal income - Life is limited to the lives of the owners - Difficult to transfer ownership - General partners have unlimited liability

Partnerships: Pros

- Relatively simple and easy to start - Little regulation - Owners keep all profits - Access to more human and financial capital - Limited partners have limited liability

Sole Proprietorship: Pros

- Simplest type of business to start (starting point for many large corporations) - Least regulated form of organization - All profits go to the owner

Corporations: Cons

- Taxation - Double taxation - Relatively complex form of business - Expensive to start

General partnership

- all partners share in gains or losses - all partners have unlimited liability for all partnership debts, not just some particular share

Corporation: Characteristics

- legal entity - separate and distinct from its owners - has many rights, duties and priveleges of an actual person - can borrow money and own propoerty - can sue and be sued - can enter nto contracts - can be a general partner or a limited parner in a partnership - can own stock in another corporation

Limited partnership

- one or more general partners has unlimited liability and runs the business for one or more limited partners who do not actively participate in the business - the liability for business debts for limited partners is limited to the amount contributed to the partnership

Why are corporations superior when it comes to raising cash?

- relatively easy to transfer ownership - limited liability for business debts - unlimited life If a corporation need new equity, it can sell new shares of stock and attract new investors

Corporation organization

- shareholders and management are separate groups - the shareholders elect the board of directors - the board of directors select the managers - the managers run the corporation's affairs in the shareholders' interest - in principle: the shareholders control the corporation because they elect the directors

Four types of co-operatives

1. Consumer co-op 2. Producer co-op 3. Worker co-op 4. Multi-Stakeholder co-op

Five legal forms of business organization

1. Sole Proprietorship 2. Partnership 3. Corporation 4. Income Trust 5. Co-operative

Corporation

A business created as a distinct legal entity owned by one or more individuals or entities

Partnership

A business formed by two or more co-owners (partners)

Sole Proprietorship

A business owned by a single individual (proprietor) - most common form of business

Producer co-op

A co-op that processes and markets the goods or services produced by its members and supplies goods or services necessary to the members' professional activities e.g. independent entrepreneurs, artisans, farmers, etc.

Worker co-op

A co-op that provides employment for its members, where the employee are members and owners of the enterprise

Consumer co-op

A co-op that provides goods or services to its members e.g. retail, housing, health care, child care, etc.

Multi-Stakeholder co-op

A co-op that serves the needs of different stakeholder groups: employees, clients and other interested individuals or organizations e.g. health care, home care, social enterprises, etc.

Income Trust

A non-corporate form of business organization - trust unit holders have limited liability - not subject to corporate income tax, income is taxed only in the hands of unit holders - the debt and equity of an underlying business is held - the income generated is distributed to unit holders

Partnership agreement

An agreement that states how the partnership gains and losses are divided between the partners - can be an informal oral agreement or a formal written agreement

Co-operative

An enterprise that is equally owned by its members, who share the benefits of a co-operation based how much they use the co-operative's services

Starting up a corporation

Articles of incorporation (or a charter) and a set of bylaws must be prepared ad supplied to regulators in the jurisdiction where the firm is incorporated (Canadian firms can be incorporated under wither the federal Canadian Business Incorporation Act or provincial law)

Double taxation

Corporate profits are taxed twice - at the corporate level when profits are earned - at the personal level when profits are paid out (money paid out to shareholders in dividends is taxed as income to those shareholders)

Taxation

Corporations must pay taxes since they are legal entities

Bylaws

Rules that describe how the corporation regulates its existence - may be a simple statement of a few rules and procedures - may be extensive - may be amended or extended from time to time by shareholders

Why is limited liability sometimes regarded as a disadvantage?

While limited liability is attractive for equity investors, it may be a disadvantage for lenders because if the borrower is unable to repay its debt, limited liability blocks the lenders' access to the owners' personal assets

Corporation variation

exact laws and regulations differ from country to country, but essential features of public ownership and limited liabilities remain - joint stock companies - public limited companies - limited liability companies

Articles of incorporation

must include the corporation's: - name - intended life (can be forever) - business purpose - number of shares that can be issued

Primary disadvantage for sole proprietorships and partnerships

the ability to grow can be limited by an inability to raise cash for investment - unlimited liability for business debts on the part of the owners - limited life of the business - difficulty transferring ownership