Chapter 3 : Canadian Forms of Business Organizations

Question 1

3 learning objectives for Canadian Forms of Business Organizations

Answer 1

1. Understand what are forms of business organizations.
2. Describe types of Canadian forms of business organizations.
3. Understand advantages and disadvantages associated with different forms of business organizations.

Question 2

What are forms of business organizations?

Answer 2

legal organization or structure a firm can adopt to achieve its goals

Question 3

Why are forms of business organizations important?

Answer 3

The legal structure of a business influences :

• the way it is taxed
• extent and distribution of its liability
• prov. and fed. laws that will govern business’s operations.
• business’ ability to raise capital

Question 4

What are the four forms of Canadian Business organizations?

Answer 4

• sole proprietorship
• partnership
• corporations
• cooperatives

Question 5

What is sole proprietorship?

Answer 5

Individual carrying business under his name.
There is no separation between the business and the individual for profits, losses, assets and personal worth. Personal assets are at risk for the liabilities of the business.

Question 6

What are the advantages of the sole proprietorship form? (6)

Answer 6

• easy and inexpensive to form
• low startup cost
• lowest amount of regulatory burden
• direct control over decision making
• tax advantages if the business is not doing well
• profits go directly to proprietor

Question 7

What are the disadvantages of the sole proprietorship form? (4)

Answer 7

• unlimited liability
• business income taxed as personal income
• lack of continuity for business if owner needs to be absent
• difficult to raise capital b/c of insufficient personal assets to act as collateral

Question 8

What is a partnership business form?

Answer 8

When two individuals decide to form a business together.

Question 9

What are the reasons for forming a partnership form business? (2)

Answer 9

• divide risks

- combine mgmt and financial resources

Question 10

The formation of business partnership acts is governed by what?

Answer 10

Provincial partnership acts : at partnership agreement must be established and it outlines the degree of ownership, the way the partnership will conduct business, divide profits, and dissolve business.

Question 11

What is the limited liability partnership? (4)

Answer 11

• a variation of the partnership form of operation
• liability of a limited partner is for debts to a specified extent only.
• limited partners contribute money or tangible assets : they have a percentage of ownership , shares in profits and losses.
• the extend of loss for limited partners is limited to the amount invested towards capitalization of the business

Question 12

What are the advantages of a partnership form of organization? (4)

Answer 12

• easy to start-up
• start-up costs can be shared and divided (written in the agreement)
• tax advantage if income from the partnership is low or negative
• general partners have an equal share in mgmt, profits and assets

Question 13

What are the disadvantages of a partnership form of organization? (4)

Answer 13

• no legal different b/n partners and the business
• difficult to find a suitable partner
• conflits w/ respect to mgmt could develop b/n partners
• general partner is held financially responsible for business decisions made by partners

Question 14

What is the corporation business form?

Answer 14

• used at both provincial and federal levels
• separate legal entity created according to fed/prov statutes
• businesses must use “Corporation, Corp., Incorporated, Inc., Limited, Ltd.” as part of their name
• in establishing a corporation, the initial shareholders provide financial capital and expertise

Question 15

How is liability when it comes to corporation business form?

Answer 15

• liability associated with a corporation is not transferred to the individuals associated with it

Question 16

Advantages of the corporation form of business? (5)

Answer 16

• liability is limited to the corporation and its assets.
• ownership of the corporation is easily transferable
• a corp. can have a continuous existence
• easier to raise capital as a corporation
• tax advantage as income rises (flat rate opposed to progressive scale)

Question 17

Disadvantages, Corporation form of business (6)

Answer 17

• closely regulated
• more expensive to incorporate compared to partnership or sole proprietorship
• required to keep extensive corporate records
• conflicts b/n shareholders and directors
• director of a corporation must be a resident of the province in which corp. is registered (canadian law)
• most complicated form of ownership to establish

Question 18

What federal legislation governs the formation and operation of cooperatives?

Answer 18

Canada Cooperatives Act

Question 19

What is the cooperative form of business? (5)

Answer 19

• owned by an association of members
• group of person seeking common product or service
• required to operate democratically
• member’s liability is limited to the amount of the share
• member has only one vote

Question 20

What does the association of members in a cooperation form of business include?

Answer 20

• consumers who use the enterprise to acquire goods and services
• producers who use enterprise to market goods they produced
• workers who use the enterprise as an employment security

Question 21

Advantages of the cooperative business form

Answer 21

• owned and controlled by members (democratic)
• members have limited liability
• profits distributed to members

Question 22

Disadvantages of the Cooperative form of business organization? (5)

Answer 22

• conflict b/n members w/ respect to mgmt of the cooperative
• decision-making process is longer (not only one person making the decisions)
• participation of the members is necessary for the cooperative to be successful
• fed and prov acts require extensive record keeping
• less incentive to invest additional capital since surpluses are paid to members based on their respective amount of business