Which type is Best for Your Venture?

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

company should be structured

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What is your vision?What will be the size/nature of your

business?How much control do you wish to have?What will your control structure look

like?Where could the business be

vulnerable to legal actions or ramifications?

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What are the tax implications of the different ownership structures?

What is your financial plan? (Expected profits or loss.

How long are you prepared to function at a loss?

How should profits be distributed? Should you re-invest in your company?

What salary should you pay yourself?

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A legally constructed business may take one of the following forms:

1.Sole Proprietorship

2.Partnership

3.Corporation

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Majority of small business start out.

Owned by one person Owner will usually run the day-

to-day the business.

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Sole proprietors own all the Sole proprietors own all the assets of the business and the assets of the business and the profits generated by itprofits generated by it

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

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

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ADVANTAGESADVANTAGES DISADVANTAGESDISADVANTAGESquick, easy, and inexpensive to establish

limited in terms of employee compensation plans

only requires registration and appropriate licenses

all business income is taxable

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

owner includes all business profits/losses with personal income

harder to raise capital than for a partnership or a corporation

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Two or more people share ownership. Like proprietorships, the law does not

distinguish between the business and its owners.

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

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Each partner contributes something toward the partnership:

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

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Partners 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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General Partnership Partners divide responsibility for

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

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

i.e. 50-50

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Limited Partnership Most of the partners have limited

liability based on the extent of their investment

Limited input regarding management decisions

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

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Limited PartnershipThis form of ownership is not

often used for operating retail or service businesses

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

Think Shark Tank…

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Joint VentureActs like a general partnership,

but is clearly for a limited period of time or a single project

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

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Silent PartnershipOne or more visible peopleA person might invest money in

the partnership but do not take an active part in the management of it

i.e. Less than 50% investment, etc.

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ADVANTAGESADVANTAGES DISADVANTAGESDISADVANTAGESquick, 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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Constituted by lawA distinct legal entity from its

shareholdersThis means it is separated and

apart from those who own itA shareholder’s liability for the

corporations debts are limited to his or her investment

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To operate a business for profit and to distribute the profits among the shareholders

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

The owners of a corporation are its shareholders

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

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

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ADVANTAGES DISADVANTAGEScorporations have an unlimited life, so day-to-day business continues despite the illness or death of their owners

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

ownership is easily transferred requires more formal annual activities (annual meeting, minutes, report)

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

losses cannot be used by the owner to offset personal income

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

owner’s personal assets can still be seized by the lending agency if he or she has put up personal collateral for a business loan 21

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

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

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

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ADVANTAGESADVANTAGES DISADVANTAGESDISADVANTAGESSmaller 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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