Mind your own business?

Would you, like Clara Chow, want to own and operate a business?

If so, you’ll have to decide if you will do it alone and form a proprietorship, or form a partnership with a business associate. You might even form a corporation. How do you decide which form of business organization is best for your situation? In this activity, you will take a look at each of them.

Your turn

Brainstorm as many different types of business ownership you can think of. In your brainstorm include businesses from your community and country of origin.

How many different types of business organizations were you able to list? In this learning activity, you’ll begin by reviewing and expanding on your knowledge of a sole proprietorship. Then, you’ll look at a partnership and a corporation.

Types of business ownership

Sole proprietorship

A sole proprietorship is a business owned by one person who is legally responsible for its debts and legal obligations. This means that the owner’s personal property is at risk if the business has financial difficulties.

In a sole proprietorship, the owner has unlimited personal responsibility for the debts and legal obligations of the business.

Here are some advantages and disadvantages of a proprietorship:

Advantages	Disadvantages
Personal satisfaction	Personal responsibilities
Owner gets all the income	Limited capital
Possible tax savings	Unlimited personal liability
Ease of formation and dissolution	Lack of continuity

A sole proprietorship does not pay taxes on its net income. The owner adds the net income to their other personal income and pays personal income tax on the total. If the net income is low, this can be an advantage. However, when net income becomes fairly high, there may be a tax advantage in switching to a corporate form of ownership.

Partnership

A partnership is a business owned by two or more people. Some examples include small businesses, and partnerships between doctors or lawyers. There can be any number of partners in a partnership. In a legal organization, for example, any number of lawyers may join together in a partnership. Partnerships overcome some of the difficulties of a sole proprietorship. The partners share the work, responsibility, and investment. Their talents might complement each other. Here are some advantages and disadvantages of a partnership:

Advantages	Disadvantages
Shared workload	Unlimited personal liability
More investment capital	Need for compatibility
Shared talents	Divided authority
Low start-up costs	Lack of continuity

A partnership does not pay income tax on its net income. Partners are taxed on their personal share of the net income of the partnership.

In a general partnership, the partners have unlimited personal liability for the debts of the business.

Limited partnership

The problem of unlimited personal liability is partly overcome by the formation of a limited partnership. A limited partnership has two types of partners: general partners and limited partners. The general partner(s) must assume legal responsibility for the debts of the partnership. The other partners, known as the limited partners, have no liability beyond their registered investments in the limited partnership. Usually, the general partner runs the business and the limited partners are investors who have little to do with the operations of the partnership.

Corporations

Many companies have “Limited (Ltd.)” or “Incorporated (Inc.)” in their name. Have you ever wondered why? Corporation laws in Canada require that companies use “Limited” or “Incorporated” to identify themselves as corporations. This lets the public know that this company is a legal entity separate from its owners. It can be sued and has the right to sue others. It limits the extent to which its owners are liable for the corporation’s liabilities.

A corporation has a legal existence of its own.

This limit is equal to the extent of the owners’ investment in the corporation. Meaning that if the corporation goes bankrupt the shareholders will lose only their investment and not any personal assets.

The main advantage of a corporation is that the owners have limited liability for the debts of the business. They are not personally responsible for the company’s debts.

A corporation is a legal entity and a taxpayer. Like a person, a corporation pays tax on its income to the federal and the provincial government. The income tax paid by a corporation is an expense and appears on the income statement. Of course, this reduces the net income.

Here are some advantages and disadvantages of a corporation:

Advantages	Disadvantages
Limited liability	Legal requirements
Transferable ownership	Expensive to organize
More investment capital	More heavily regulated
More talent and skills available	Double taxation of net income (corporate and personal drawings taxes)
Possible tax advantage (as taxes are generally lower for incorporated business)

Public corporation

A public corporation, for example, Manulife Financial, is one that is open to ownership from the public and is listed on one of the world’s stock exchanges. It can have any number of owners (shareholders) and it can sell bonds and shares to the public to raise capital.

Private corporation

A private corporation, for example, Giant Tiger, is limited to 50 shareholders and must obtain its financing privately. It may not use the public stock markets to raise funds. Private corporations have limited liability. Some proprietorships and partnerships change into private corporations to take advantage of the limited liability feature. By doing so, they can still control and own the business, and their personal assets are not at risk.