Forms of Business Organization
What does “form of business organization” mean or refer
to?
Why is the decision on the form of organization one of the
most critical decisions made by the person starting a
business?
Why is the decision on the form of ownership unique to
and fundamental to the capitalist (market, consumer
sovereignty) economic system?
Commerce 100: Canadian Business
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Forms of Business Organization
There are three generic (basic) ways to form a business:
Sole proprietorship: unincorporated business which is
owned and operated by one person.
Partnership: unincorporated business which is owned by
more than one person.
Corporation: incorporated business (distinct or separate
legal entity) owned by one or several persons
Are any of these forms of organization the best in all
situations?
Commerce 100: Canadian Business
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Forms of Business Organization
Sole Proprietorship
Advantages
- Easy to start and wind-up
- Being your own boss, easy to resolve issues (as owner
managed)
- Reduced government filing requirements (legal an tax)
Disadvantages
- Limited access to financial resources
- Unlimited liability
- Difficult to sell or pass on to successors
- Limited managerial expertise (generally no separation
of ownership and management)
- Higher marginal tax rate on surplus earnings than
corporation
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Forms of Business Organization
Partnership
Advantages
- Relatively easy to start
- Increased access to financial resources
- Increased access to managerial and technical skills
Disadvantages
- Unlimited liability
- Prone to disagreement between partners
- Difficult to wind-up
- Higher marginal tax rate on surplus earnings than
corporation
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Forms of Business Organization
Corporation
Advantage
- Increased access to financing
- Limited liability
- Ease of transfer of ownership interest
- Perpetual life
- Ability to separate ownership from management
- Can be very large, economies of scale
- Relatively cheap to start
- Lower marginal tax rate on surplus earnings than
proprietorship or partnership
Disadvantage
- Significant legal and tax filing requirements
- Complex to start as separate legal entity
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Corporate Governance
As corporations are separate a distinct legal entities, there
needs to be a way for shareholders to exercise control
over the corporation. This governance is achieved by:
1. Each common share has one vote. The vote is used to
elect members to the Board of Directors. The more
shares you have, the more votes.
2. The elected directors hire the president and other
senior (executive) officers of the company. The Board
approves strategic initiatives of the corporation and the
annual operating budget.
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Corporate Governance
3. The president and other senior officers regularly meet
(at least 1/4ly) with the Board to inform them of
achievement of the corporation.
 Compare predicted and actual results
 This holds senior management accountable.
4. Board approves salary and bonus for officers. Seeks to
ensure that officers are acting in ways which enhance
the value of the corporation.
5. The officers set the objective and goals for the
corporation. These are approved by the Board. Officers
hire and supervise managers and employers
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Forms of Business Organization
Private corporations: a corporation whose shares are not
traded in the public (stock) market.
Public corporation: a corporation whose shares are traded
in the public (stock) market.
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Forms of Business Organization
Advantages of being a private company:
1. Privacy, need not disclose financial or other information to
the public.
2. Fewer requirements to file information with the government
(other than income tax return) and a few other statutory
filings.
3. Not distracted by the short term fluctuations of the stock
price, can focus on long term goals.
4. Avoid the need to meet (anonymous) shareholders requests
and scrutiny. Can act much like your own boss, accountable
to yourself or a limited number of individuals who you
generally know personally.
5. Relative easy to govern, not affect by Sarbane-Oxley Act or
other similar legislation.
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Forms of Business Organization
Disadvantage of being a private corporation:
1. Limitations in access to financial (equity) capital.
2. Owner/manager cannot diversify risk, has all their
savings invested in the business.
3. Difficult to sell ownership interest or get out.
4. Difficult to get professional management (limited
separation of ownership from management).
5. Generally lacks the assistance of independent and
qualified outside directors; poor(er) governance.
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