Different Forms of Ownership

BDP301

Choosing the Right Form of Ownership

• A new venture can be established as a: sole proprietorship, partnership, or a corporation

• Sole Proprietorship: there is only one owner. This person is entitled to all the profits, but also all the responsibilities and liabilities.

• Partnership: formal commitment between two or more people. Partners share profits and losses according to the percentages laid out in the agreement

• Corporation: A legal entity created by law and established by a corporate chart. The business stands along from the people who own it. It can be sued and incur debt.

Sole Proprietorship

Advantages Disadvantages

• Quick, easy and inexpensive to establish

• Only need a registration and appropriate license

• Owner makes all the decisions

• Owner includes all profits/losses with personal income

• Limited in terms or benefits and compensation

• All business income is taxable (taxed at a higher rate than corporations)

• Harder to raise capital

PartnershipAdvantages Disadvantages

• Quick, easy and inexpensive to establish

• Partners may deduct business losses from whatever is earned

• Favourable tax treatment• Combines the talents and

resources of two people

• Partners assume unlimited liability for all debts/obligations

• Business and personal income are taxed

• Profits are taxed higher than corporations

• If one partner dies, the partnership automatically ends

• Depending on relationship, may be hard to come to agreements on daily operations

Corporation

Advantages Disadvantages

• Day to day business will always continue despite death or owner

• Ownership is easily transferred and does not affect licenses

• Profits can be removed which is a tax benefit

• Employee benefit and pension plans are available

• Personal liability is limited

• More costly to set up, more government and legal fees

• More annual activities (meetings, reports)

• Losses can not be used to set off personal income

• Owners personal assets can still be seized by the lending agency

Franchises

• A franchise allows owners of successful businesses to duplicate it in another location

• Each location is independently owned and operates as a chain

• Each location uses the same equipment, trademark and design and produces the same product

• A franchise can be bought by a sole proprietorship, partnership or corporation

Advantages Disadvantages

• The owner gains the franchisers knowledge, image, success, management and marketing techniques instantly

• The owner of a franchise is not allowed to run the business as they see fit. You must follow the rules and guidelines as laid out in the franchisers agreement