Business Organizations

Sole proprietorship

An individual managing a business independently; business is not a separate legal entity

How are sole propietorships created?

An individual obtains a business license and registers a business name (optional)

Pros of sole proprietorship (5)

'- Simple, fast, inexpensive start-up cost

- Few ongoing reporting obligations

- Less government regulation

- Low overhead

- Insurance reduces risk

Cons of sole proprietorship (6)

'- Personally responsible for all debt and business obligations

- All assets (including personal) are at risk of loss

- Unlimited liability to the world at large; includes vicarious liability

- Income reported

- Little brand protection

- No continuity in owner's absence (no successors)

Vicarious liability

The liability of an employer for the acts/omissions of an employee

Partnership

Parties pool resources to make a profit in an ongoing business; business is not a separate legal entity

How are partnerships created?

Actions (including unintentional) or agreements of the parties

General partnership (GP)

Parties share management, expenses, profits; formal agreement

Pros of general partnership (5)

'- No registration required

- Few ongoing reporting obligations

- Income/expenses shared by the partners (in different proportions)

- Division of labour and risk

- Combines resources and expertise

Cons of general partnership (5)

'- Each partner is liable for the actions of all partners; all assets are at risk and vicarious liability applies

- Each partner is an agent for all partners

- Partnership agreement does not limit liability to the world at large (deep pockets)

- Partners are fiduciaries and must act in the interest of the partnership

- Little opportunity to defer income tax liability

Fiduciary

A party with legal obligations to act in the interest of the partnership even if it goes against their self-interest or causes harm to self

Limited partnership (LP)

Partnership between a general and limited partner

Limited partner

Only contributes capital (money, equipment) and has no part in manageing the business; They cannot be liable for more than the amount of capital contributed

General partner

Manages the business and is fully liable for the debts/obligations of the business; Entitled to a greater share of the profits

Pros of limited partnership (4)

'- Few ongoing reporting obligations

- Income/expenses shared by the partners (in different proportions)

- Liability and risk for LP are limited to the invested capital

- Broader management base ensuring continuity of the business

Cons of limited partnership (5)

'- Partners are fiduciaries and must act in the interest of the partnership

- Little opportunity to defer income tax liability

- Easy to lose LP status by participating in the business (providing services/knowledge) or if liability converts to unlimited

- Partnership agreement limits marketability of LP units

- Difficulty finding like-minded partners

Limited liability partnership (LLP)

Combines GP and LP; all partners actively manage the business; each partner is only liable to the world at large for the money they invested; limited vicarious liability

Corporation

A legal 'person' separate from its members/shareholders; has all the powers of a person and an independent existence; unlimited life expectancy; can acquire assets/debt, enter into contracts, sue/be sued

How are corporations created?

Application for incorporation following articles of incorporation (one director and one shareholder minimum); Inc./Corp./Ltd. in its name

Distinguishing characteristics of a corporation (2)

'- Limited liability: no member can be held personally liable for debts/obligations of the corporation beyond invested amount of share capital

- Perpetual succession: corporation is a separate legal entity so its existence does not depend on the continued membership of any shareholder

Piercing the corporate veil

A legal concept where courts disregard a corporation as a separate legal entity to hold shareholders/directors personally liable

Professional corporation

Must comply with ongoing obligations of its regulatory body and employ licensed persons in that profession (i.e. shareholders must be professionals)

Shareholder

Power to vote for director(s); entitled to profits/dividends of shares

Directors

Fiduciaries to the company; must perform due diligence to limited liability

Pros of corporation (5)

'- Tax advantages; income treatment can be deferred or sprinkled

- Limited liability; separate legal entity

- Ownership is transferrable

- Continuous existence

- Easier to raise capital

Cons of corporation (5)

'- Closely regulated with many ongoing reporting obligations

- Most expensive form of business to organize and higher start-up costs

- Extensive record-keeping obligations (legal/accounting)

- Shareholders/directors may be held legally responsible (piercing the corporate veil)

- Personal guarantees undermine limited liability advantage

Risk mitigation strategies for business organizations (4)

'- Establish corporation or LP

- Invest via registered secured debt and minimize investment in share capital

- Hold assets in a company separate from the parent company

- Obtain insurance coverage