Chapter 6 - Legislation Governing Business Organizations

Question 1

What are the 3 basic types of business organizations?

Answer 1

• partnership
• sole proprietorship
• corporation

Question 2

What is not a characteristic of a sole proprietorship?

Answer 2

The owner employs themself in the business.

Question 3

Under what business structure(s) can business owner’s personal assets be seized to fulfill obligations of the company?

Answer 3

1. A partnership
2. A sole proprietorship

Question 4

List four advantages of corporations over the other legal business structures discussed.

Answer 4

1. A corporation is a separate legal entity from the owners.
2. The owners can limit their liability.
3. A corporation has perpetual succession.
4. A corporation owns its own property.

Question 5

What are the possible legal structures for businesses?

Answer 5

1. sole proprietorship
2. partnership
3. corporation

Question 6

What are the characteristics, advantages and disadvantages of a sole proprietorship?

Answer 6

• oldest and simplest business legal structure
• single owner
• usually small and localized
• the owner cannot employ themself
• may be a requirement to obtain a licence from various levels of government.
• may also be a requirement to register under the Business Names Act (BNA), if the sole proprietor has given the business a name other than their own name.
• All benefits and obligations associated with the business are the responsibility of the owner.
• the riskiest business legal structure for an individual.
• Any income or loss from a sole proprietorship is included in the sole proprietor’s personal income and is taxed at the rate applicable to the owner as an individual.

Question 7

What are the characteristics, advantages and disadvantages of a partnership?

Answer 7

Advantages
●It is easy and inexpensive to set up.
● Ongoing legal and accounting fees are relatively low.
● A partnership agreement allows the terms of ownership and operation to be clearly spelled out.
● There are minimal regulatory requirements.
● The partners can pool their personal
capital in order to finance the business; the business is not reliant on the personal finances of one person.
● The tax reporting system is simple.
● Business losses are deductible from the partners’ taxable

Disadvantages
● The partners are jointly and severally liable for the business liabilities.
● Partners are each individually responsible for the business actions of the other partners; this is risky if
one or more partners proves to be incompetent or unreliable.
● While it is fairly easy to transfer ownership from one partner to a new partner, it is not as easy as with a corporation.
● There are no tax advantages for the partners when the business makes a profit.
● There are reduced income-splitting opportunities with the partner’s family members; the partners can only pay family members for actual work performed.

Question 8

What are the different types of partnership?

Answer 8

• general partnership
• limited partnership
• limited liability partnership

Question 9

What are two basic elements that are prescribed for the formation of a partnership.

Answer 9

1. an agreement
2. partnership formalities

Question 10

What are the characteristics, advantages and disadvantages a corporation?

Answer 10

Advantages:
●There is limited personal liability for shareholders.
● There is the ability to retain more profits in the business due to lower taxes on earnings.
● There are income-splitting and tax deferral opportunities.
● There is continuity of management and organization.
● It is easier to change ownership by the transfer of shares.
● It is easier to access capital and ongoing financing.

Disadvantages:
● There are significantly higher costs of set-up and organization.
● There are higher ongoing professional costs for legal counsel and filing corporate tax returns.
● There are considerable recordkeeping requirements.
● There is significant government legislation and regulation.
● Operating losses cannot be used to reduce the personal tax liability of shareholders.