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WHITE PAPER

Types of Business Organizations

By Lionel J. Perez
President,
CorporationCentre.ca

2007 Deluxe Enterprise Operations, Inc. All rights reserved.

 WHITE PAPER: Types of Business Organizations

When you decide to operate a business, the first question to be addressed is what legal form the
business will take. There are three typical ways in which you may carry on a business: as a sole
proprietorship, a partnership, or a corporation.

Sole Proprietorship
The sole proprietship is the simplest form of operating a business. Only one owner is responsible
for making all of the business decisions and, therefore, earns all the profits, but also assumes all
of the risks and obligations.

Most sole proprietorships tend to be small and localized. The advantages commonly associated
with carrying on a sole proprietorship are the following: (1) ease in which to commence and dis-
solve the business; and (2) modest start up expenses.

There is, however, a significant disadvantage which may lead you to decide against choosing this
business form, namely, unlimited liability. The owner is personally responsible for all of the debts
and obligations incurred by the business. The owner is thus liable to the full extent of his/her
personal assets for all of the liabilities and losses which are incurred by the business. Also, the
owner is liable for the actions of employees in the course of their employment.

Most jurisdictions require that sole proprietorships register with the relevant government
department or authority under the trade name it is operating under.

Partnership
A partnership is a relationship between two or more persons carrying on a business with a view
to making a profit. The organization is usually more complex than that of a sole proprietorship
and there is more than one owner to share in the profit and/or losses.

Some groups of individuals choose a partnership as the manner in which to carry on a business
because of its ease of formation and dissolution, as well as its overall lack of formalities.

However, like a sole proprietorship, one of the primary disadvantages to choosing a partnership
as your business form, includes the unlimited personal liability of each partner for all of the debts
and obligations of the partnership. In other words, every partner is liable for all the debts
incurred by the other partners while acting in the course of business, regardless of the capital
contribution of individual partners.

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 WHITE PAPER: Types of Business Organizations

Corporation
A corporation (also called "company") is a legal entity that has its own legal personality which is
distinct from its owners (called shareholders) and the individuals who manage and run its affairs
and business (called directors and officers). The creation of a corporation occurs following the
proper filing of Articles of Incorporation (also called a Charter or Certificate of Incorporation)
with the relevant government department or authority.

Every corporation is comprised of shareholders, directors and officers. Shareholders, as the name
implies, are the ones who hold (i.e., own) the shares in the corporation. By reason of the votes
that are usually attached to the shares, the shareholders control the corporation. If there is only
one shareholder, that person has absolute control of the corporation. If the corporation has
numerous shareholders, control of the corporation depends on who has a majority of the voting
shares. However, the shareholders do not directly manage the corporation. They exercise their
influence by electing and removing directors and approving or disapproving major corporate
decisions.

One of the responsibilities of the shareholders is to elect the directors of the corporation, usually
on an annual basis. Directors need not be shareholders of the corporation. The directors are
responsible for supervising and administering the corporation's affairs, and appointing the
officers, who are in turn responsible for the day to day running of the corporation.

Lionel J. Perez is co-founder and currently oversees operations of CorporationCentre.ca -

Canada's leading corporation website for small businesses, entrepreneurs and professionals. As
an attorney, Lionel practiced corporate, commercial and technology law with a technology law
firm servicing start-ups and publicly traded corporations. Lionel holds law degrees from Osgoode
Hall Law School and the Universit de Montral and is a member of the Quebec Bar Association.

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