Section One: Methods of Carrying on Business

Introduction

There are several legal forms to choose from when selecting the best means of structuring your business. Carefully considering the various options before you start may save time and money later.

Sole Proprietorship

Sole proprietorship exists where an individual carries on business for his or her own account – that is, operates and owns the business as a sole person.

A proprietor cannot employ himself or herself. Benefits and obligations are the responsibility of the sole proprietor.

Sole proprietorships are registered with the government if the business differs from the owner=s personal name. Business names are registered with the Provincial government.

Partnerships

A partnership is defined as two or more persons, whether individuals, partnerships or corporations, carrying on business together.

A partnership is not a legal entity separate from its partners. In other words, one partner’s actions bind all the partners of the partnership.

Each partner in a partnership is liable for all debts of other partners and the partnership to the full extent of their own personal assets during the time one is a partner.

Partnerships are registered with the Provincial government.

There are two types of partnerships:

1. General Partnerships

Three criteria must be met for a general partnership to exist:

  • It must be a business.
  • The business must be carried on with a “view to profit”.
  • There must be an agreement to carry on business in common and to share the profits.

2. Limited Partnerships

Liability of each limited partner is restricted to the amount of money or other property which that partner contributes or agrees to contribute to the limited partnership.

A limited partner is basically a passive investor rather than an active participant in the operation of the limited partnership and business.

Return from the partnership is limited to payments of money.

If a limited partner takes part in control of the partnership, that partner loses limited liability and becomes a general partner.

General partners do not have limited liability.

Corporations

A corporation with share capital is the business entity used most frequently to carry on commercial activities.

A corporation is a separate legal entity separate in law from its owners, the shareholders of the corporation. The shareholders obtain shares in the corporation by providing the corporation with money, property or services.

Shareholders are only responsible for the debts of the corporation if the shareholders guarantee the payment of the corporation’s debts.

An individual may be both a shareholder and an employee of the corporation.

The corporation is managed by the directors and officers of the corporation who are not required to own shares in the corporation.

A corporation may be registered or chartered by either the Provincial or Federal governments.

Other Forms of Business Structures

Co-ownership is the name given to a situation where two or more persons own property jointly.

Each co-owner owns and is free to deal separately with his or her interest in the property unless that interest is limited by contract with the other owners.

A joint venture involves a combination of resources by two or more persons in order to conduct a commercial venture jointly under agreed rules.

A joint venture may take the form of a co-ownership property, a partnership, a limited partnership or a corporation.

The major objective of a joint venture is that each participant is able to protect his or her interest in the joint venture.

A franchise is an arrangement established by contract where one person, the franchisor, grants a right to another person, the franchisee, to use a trademark and/or the services of the franchisor and/or requires the franchisee to conduct its business in accordance with prescribed operating methods and procedures controlled by the franchisor.

A franchisor provides the franchisee with know-how and expertise. This may include training, furnishing of management and accounting systems, site selection, construction of premises, provision of inventory, administration of advertising and marketing programs.

The franchisor maintains continuing interest in the franchisee’s business. The franchisor has a continuing right to receive compensation from the franchisee through fees, lease payments, or by the sale of products to the franchisee for resale.

A license is a contractual arrangement where the owner of a patent, trademark, copyright, know-how or technical data grants to another person the right to use this property in consideration for royalty fees.

The licensor has little or no control over the licensee’s business.

Licensees and franchisees are independent contractors and not employees of the licensor/franchisor.

Franchisees have greater freedom and control their own business.

Non-profit organizations include groups having religious, philanthropic, charitable, scientific, artistic, social, professional or sporting objectives. They may operate as unincorporated associations.

However, members of a group wish to create an organization which is more definite and permanent, then the association of the individuals may be incorporated without share capital (that is, the corporation has no shares.)

Incorporation affords the members of the association freedom from liability for the debts and obligations of the group and it permits them to hold real estate.

Unincorporated organizations can only hold real estate through a trustee.

Incorporation of a non-profit organization also enables the group to sue, be sued and to contract as an entity.

The following chart summarizes the possible advantages and disadvantages of the different types of business ownership.

Table 1: Legal Forms of Business Ownership

Business Type Advantages Disadvantages
Sole Proprietorship
  • Easy startup
  • Inexpensive startup
  • Possible tax benefits
  • Direct control
  • Profits to owner
  • Privacy of information
  • Easy dissolution
  • Unlimited liability
  • Limited capital
  • Limited life
  • Management difficulties
Partnership
  • Easy startup
  • Inexpensive startup
  • Tax benefits
  • Added capital
  • Combined management skills
  • Unlimited liability
  • Reduced individual control
  • Limited life
  • Frozen investment
Corporation
  • Limited liability
  • Continuous life
  • Easy transfer of ownership
  • Ability to attract funds
  • Range of management and skills
  • Expensive and complicated formation
  • Taxation
  • Charter restriction
  • Little secrecy
Co-operative
  • Democratic control
  • Limited liability
  • Pooled capital resources
  • Range of management and skills
  • Employee ownership with insurable earnings
  • Expensive and complicated formation
  • Limited liability
  • Taxation as corporation
  • Charter restriction
  • Little secrecy

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