Lesson 2: Types of Business Organizations
Legal Studies 3050
Section 1: Starting a Small Business
Lesson 2: Types of Business Organizations
When you think of a small business, you probably think about grocery stores, gas stations, restaurants, hair stylists, pharmacies, bookstores, etc. These businesses are often located in your neighbourhood and you patronize them because of their convenience and accessibility. They are an important part of every community and an essential vitality of our society.
In this segment, we will examine several types of business ownership and the factors that must be taken into consideration in choosing between them. As we progress through this information, think which type would be the most appropriate choice for the Twin Peaks Guest Ranch.
Forms of Business Organizations
The vast majority of businesses are organized in one of the following ways:
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a partnership — either general or limited
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a corporation — also referred to as a limited company
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a franchise
It is important to note that corporations differ from proprietorships and partnerships in that the company is considered to be a legal entity that exists independently of its owners, who are commonly referred to as shareholders.
| Sole Proprietorship | Partnership | Corporation | |
|---|---|---|---|
| Overview | •One person business ownership. •Business and personal assets and liabilities are combined. •All revenue and expenses are reported on your personal income tax. |
•One or more people business ownership. •Business and personal assets and liabilities are combined. •All revenue and expenses are reported on your personal income taxes. •Legal partnership agreements can be drawn up to limit liabilities between partners. |
•One or more people form a separate legal entity. •As a director or shareholder of a corporation, you will not be personally liable for the debts, obligations or acts of the corporation. |
| Advantages | •Easy and inexpensive to register •Regulatory burden is generally light •Minimal working capital required for start-up •Some tax advantages if your business is not doing well (for example, deducting your losses from your personal income, and a lower tax bracket when profits are low) •All profits go to you directly |
•Fairly easy and inexpensive to form a partnership •Start-up costs are shared equally with you and your partner(s) •Share in the management, profits and assets •Tax advantage — if income from the partnership is low or loses money (you and your partner(s) include your shares of the partnership in your individual tax returns) |
•Limited liability •Ownership is transferable •Continuous existence •Separate legal entity •Easier to raise capital than it might be with other business structures •Possible tax advantage as taxes on profit may be lower for an incorporated business than personal income taxes. |
| Disadvantages | •There is no legal difference between you and your business •Income is taxable at your personal rate and, if your business is profitable, this could put you in a higher tax bracket •Lack of continuity for your business if you are unavailable •Can be difficult to raise capital on your own |
•There is no legal difference between you and your business •Unlimited liability (if you have business debts, personal assets can be used to pay off the debt) •You are held financially responsible for business decisions made by your partner(s); for example, contracts that are broken |
•A corporation is closely regulated •More expensive to set up a corporation than other business forms •Corporate records required, including documentation filed annually with the government |