CHOOSING THE RIGHT FORM OF OWNERSHIP ENT 12

WHAT ARE THE CHOICES? A new venture can be established as:  a sole proprietorship  a partnership  or a corporation

SOLE PROPRIETORSHIP Only one owner who is entitled to all profits and responsible for all liabilities Owner assumes unlimited liability—if it is in financial trouble, the owner’s personal assets can be used to cover any business debts

ADVANTAGESDISADVANTAGES  quick, easy, and inexpensive to establish  limited in terms of employee compensation plans  only requires registration and appropriate licensesregistration  all business income is taxable  owner makes all decisions  profits may be taxed at a higher rate than for an incorporated organization  owner includes all business profits/losses with personal income  harder to raise capital than for a partnership or a corporation

PARTNERSHIP A formal commitment between two or more people to work together to achieve the objectives of a business venture. All partners may or may not be actively involved in the day-to-day operation of the venture. Partners share profits and losses according to the percentages laid out in their partnership agreement. Each partner contributes something toward the partnership: startup money, material resources, talent, skill, experience, knowledge, or business contacts.

Types of Partnerships A general partnership is registered in the same way as a sole proprietorship. Profits or losses are divided according to each partner’s percentage of interest or ownership in the venture and are applied to personal income for tax purposes. All debts and obligations, regardless of whose responsibilities they were, are the responsibility of each partner. If in bankruptcy one partner does not have enough personal assets to cover his or her share of the losses, creditors can file claims on the personal assets of any of the other partners in the joint venture.

Types of Partnerships continued A limited partnership consists of one or more partners whose liability is limited to the amount they invested in the venture. Silent partners, who invest money in the partnership but do not take an active part in the management of it, may also be involved in a limited partnership.

Partnership Agreement The partnership agreement is a legal document that allows members of a partnership to establish rules for their relationship and to specify the conditions that will cause the partnership to dissolve. This agreement may include: initial contribution made by each partner roles and responsibilities of partners amount each partner may withdraw procedures for distributing profits/losses, dealing with death of partners, selling or liquidating the partnership, appointment of authorized persons for signing cheques and other documents, dealing with disagreements

ADVANTAGESDISADVANTAGES  quick, easy, and inexpensive to establish  general partners assume unlimited liability for all debts/obligations incurred by the partnership  each partner may deduct business losses (in proportion to the amount invested in the business) from whatever is earned within the business  both business and personal income are taxed  favourable tax treatment, especially for startup losses  profits may be taxed at a higher rate than for an incorporated organization  combines the talents and resources of two or more people  unless otherwise stated in a partnership agreement, the partnership is automatically dissolved when one of the partners dies  if the partners can’t agree on the day- to-day operation of the partnership, decisions become difficult to make

CORPORATION OR LIMITED COMPANY A corporation or limited company is a legal entity created by law, and established by corporate charter, that stands apart from the people who own it. The corporation is able to enter agreements, own land and property, and hold contracts. It can be sued and incur debts.

CORPORATION OR LIMITED COMPANY cont. A corporation is a limited company because the liability of the shareholders or owners is limited to the amount of money that they originally invested in the corporation (or what they paid for the shares they purchased). A corporation is often managed by a board of directors, which is elected by the shareholders. The board then appoints the president and other executives.

CORPORATION OR LIMITED COMPANY cont. Profits are given out to shareholders based upon the number of shares each person holds. When a corporation files the appropriate documents and gets approval to go public the shares can be publicly traded on a stock exchange. Personal assets of shareholders can’t be claimed to cover debts or obligations that the corporation incurs.

ADVANTAGESDISADVANTAGES  corporations have an unlimited life, so day-to-day business continues despite the illness or death of their owners  more costly to set up because of government fees, name searches, legal fees government fees  ownership is easily transferred  requires more formal annual activities (annual meeting, minutes, report)  profits can be removed from the corporation in the form of dividends, which can be a tax benefit to the owner  losses cannot be used by the owner to offset personal income  the corporation can arrange for employee benefits such as group insurance or registered pension plans  owner’s personal assets can still be seized by the lending agency if he or she has put up personal collateral for a business loan