Types of Business Types of Business OwnershipOwnership

Which type is Best for Your Venture?Which type is Best for Your Venture?

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Forms of Business Forms of Business OwnershipOwnership

One of the first decisions that One of the first decisions that you will have to make as a you will have to make as a business owner is how the business owner is how the

company should be structured company should be structured

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Consider These Consider These CriteriaCriteriaThe vision of ownership regarding the The vision of ownership regarding the

size and nature of the businesssize and nature of the business

The level of control owners wish to haveThe level of control owners wish to have

The level of "structure“ owners are The level of "structure“ owners are willing to deal withwilling to deal with

The business's vulnerability to lawsuits. The business's vulnerability to lawsuits.

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Consider These Consider These CriteriaCriteriaTax implications of the different Tax implications of the different

ownership structuresownership structures

Expected profit (or loss) of the Expected profit (or loss) of the businessbusiness

Whether or not owners need to re-Whether or not owners need to re-invest earnings into the businessinvest earnings into the business

Your need for access to cash out of Your need for access to cash out of the business for yourself the business for yourself

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What Are The What Are The Choices?Choices?A legally constructed business A legally constructed business may take one of the following may take one of the following forms:forms:

Sole ProprietorshipSole Proprietorship

PartnershipPartnership

CorporationCorporation

FranchiseFranchise5

Sole ProprietorshipsSole Proprietorships

The vast majority of small business The vast majority of small business start out as sole proprietorshipsstart out as sole proprietorships

These firms are owned by one personThese firms are owned by one person Usually the individual looks after the Usually the individual looks after the

day-to-day running the business. day-to-day running the business.

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Sole ProprietorshipsSole ProprietorshipsSole proprietors own all the assets of Sole proprietors own all the assets of

the business and the profits the business and the profits generated by itgenerated by it

They also assume complete They also assume complete responsibility for any of its liabilities responsibility for any of its liabilities or debtsor debts

In the eyes of the law and the public, In the eyes of the law and the public, you are one in the same with the you are one in the same with the business business

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Sole ProprietorshipsSole ProprietorshipsADVANTAGESADVANTAGES DISADVANTAGESDISADVANTAGES

quick, easy, and inexpensive quick, easy, and inexpensive to establishto establish

limited in terms of employee limited in terms of employee compensation planscompensation plans

only requires registration and only requires registration and appropriate licensesappropriate licenses

all business income is taxableall business income is taxable

owner makes all decisionsowner makes all decisions profits may be taxed at a profits may be taxed at a higher rate than for an higher rate than for an incorporated organizationincorporated organization

owner includes all business owner includes all business profits/losses with personal profits/losses with personal incomeincome

harder to raise capital than harder to raise capital than for a partnership or a for a partnership or a corporationcorporation

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PartnershipsPartnershipsIn a Partnership, two or more people In a Partnership, two or more people

share ownership of a single business. share ownership of a single business. Like proprietorships, the law does not Like proprietorships, the law does not

distinguish between the business and distinguish between the business and its owners. its owners.

All partners may or may not be All partners may or may not be actively involved in the day-to-day actively involved in the day-to-day operation of the venture. operation of the venture.

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PartnershipsPartnershipsEach partner contributes something Each partner contributes something

toward the partnership: toward the partnership:

Startup money Startup money Material resources Material resources Talent Talent Specialized skill Specialized skill Experience Experience Specific knowledge Specific knowledge Business contacts.Business contacts.

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Partnership AgreementsPartnership AgreementsPartners should create a legal

partnership agreement that outlines:

The time and capital each will contribute

How decisions will be made How profits will be shared

(percentage) How disputes will be resolved How future partners will be admitted

to the partnership How partners can be bought out Terminating the partnership

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Types of PartnershipsTypes of Partnerships

General PartnershipGeneral Partnership

Partners divide responsibility for Partners divide responsibility for management and liability, as well as management and liability, as well as the shares of profit or loss according the shares of profit or loss according to their internal agreement. to their internal agreement.

Equal shares are assumed unless Equal shares are assumed unless there is a written agreement that there is a written agreement that states differently. states differently.

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Types of PartnershipsTypes of Partnerships

Limited PartnershipLimited PartnershipMost of the partners have limited Most of the partners have limited

liability based on the extent of their liability based on the extent of their investmentinvestment

Limited input regarding management Limited input regarding management decisionsdecisions

Most partners are investors for short Most partners are investors for short term projects, or for investing in term projects, or for investing in capital assetscapital assets

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Types of PartnershipsTypes of Partnerships

Limited PartnershipLimited Partnership

This form of ownership is not often This form of ownership is not often used for operating retail or service used for operating retail or service businessesbusinesses

Forming a limited partnership is more Forming a limited partnership is more complex and formal than that of a complex and formal than that of a general partnershipgeneral partnership

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Types of PartnershipsTypes of Partnerships

Joint VentureJoint Venture

Acts like a general partnership, but is Acts like a general partnership, but is clearly for a limited period of time or clearly for a limited period of time or a single projecta single project

If the partners in a joint venture If the partners in a joint venture repeat the activity, they will be repeat the activity, they will be recognized as an ongoing partnershiprecognized as an ongoing partnership

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Types of PartnershipsTypes of Partnerships

Silent PartnershipSilent Partnership

One or more visible peopleOne or more visible people

A person might invest money in the A person might invest money in the partnership but do not take an active partnership but do not take an active part in the management of itpart in the management of it

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PartnershipsPartnershipsADVANTAGESADVANTAGES DISADVANTAGESDISADVANTAGES

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

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CorporationsCorporationsA corporation is constituted by law A corporation is constituted by law

and is considered to be a distinct and is considered to be a distinct legal entity from its shareholderslegal entity from its shareholders

This means it is separated and apart This means it is separated and apart from those who own itfrom those who own it

A shareholder’s liability for the A shareholder’s liability for the corporations debts are limited to his corporations debts are limited to his or her investmentor her investment

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CorporationsCorporationsThe goal of a corporation is to The goal of a corporation is to operate a business for profit operate a business for profit and to distribute the profits and to distribute the profits among the shareholdersamong the shareholders

A corporation can be taxed; it A corporation can be taxed; it can be sued; it can enter into can be sued; it can enter into contractual agreementscontractual agreements

The owners of a corporation The owners of a corporation are its shareholdersare its shareholders

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CorporationsCorporationsThe shareholders elect a The shareholders elect a board of directors to oversee board of directors to oversee the major policies and the major policies and decisions of the corporationdecisions of the corporation

The corporation has a life of The corporation has a life of its own and does not its own and does not dissolve when ownership dissolve when ownership changes changes

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CorporationsCorporationsADVANTAGESADVANTAGES DISADVANTAGESDISADVANTAGES

corporations have an corporations have an unlimited life, so day-to-day unlimited life, so day-to-day business continues despite business continues despite the illness or death of their the illness or death of their ownersowners

more costly to set up more costly to set up because of government fees, because of government fees, name searches, legal feesname searches, legal fees

ownership is easily ownership is easily transferred transferred

requires more formal annual requires more formal annual activities (annual meeting, activities (annual meeting, minutes, report)minutes, report)

profits can be removed from profits can be removed from the corporation in the form of the corporation in the form of dividends, which can be a tax dividends, which can be a tax benefit to the ownerbenefit to the owner

losses cannot be used by the losses cannot be used by the owner to offset personal owner to offset personal incomeincome

the corporation can arrange the corporation can arrange for employee benefits such as for employee benefits such as group insurance or registered group insurance or registered pension planspension plans

owner’s personal assets can owner’s personal assets can still be seized by the lending still be seized by the lending agency if he or she has put agency if he or she has put up personal collateral for a up personal collateral for a business loanbusiness loan

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FranchisesFranchisesA firm expands into new A firm expands into new markets by selling the rights markets by selling the rights to use the company's name to use the company's name and products to individualsand products to individuals

Franchising company Franchising company provides training services provides training services and an advertising campaign and an advertising campaign for the purchaser of the for the purchaser of the franchisefranchise

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FranchisesFranchisesPurchaser agrees to meet Purchaser agrees to meet certain quality standards, certain quality standards, provide certain products, provide certain products, and pay a franchise fee to and pay a franchise fee to the franchising organizationthe franchising organization

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FranchisesFranchisesADVANTAGESADVANTAGES DISADVANTAGESDISADVANTAGES

Smaller than usual capital investment

Possible high franchiser fee

Prior public acceptance of product

Some loss of independence

Better than average profit margins

Possible difficulties in canceling contract

Management assistance

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