Question

Three friends have just graduated with Bachelor of Management degrees from Athabasca University. One wants to start a restaurant but is worried about the potential liability involved with serving food to other people. The second wants to work as a subcontractor in a building trade and expects to have her potential liability covered by the contractor’s insurance plan and through the Workers’ Compensation Board. The third wants to team up with a couple of other graduates to create a financial services firm to provide insurance, financial planning services, and bookkeeping assistance. She wants to make sure that the partners have a strong incentive to work together to make good decisions and to grow the business for the benefit of all the service providers.

            What form of business organization would you suggest for each friend, and why?

Answer 1

For the first friend who wants to start a restaurant, incorporating a company is suggested because companies have limited liability. That is, the liability of the shareholders is limited to the amount of their investment in the company, and does not extend to their personal assets. Since the friend is worried about potential liability, incorporating a company for the restaurant business is recommended.

For the second friend who wants to work as a subcontractor, a sole proprietorship is suggested because the potential of liability is covered by insurance and Workers’ Compensation Board. A sole proprietorship required very few formalities to get started and operate, and avoids the hassles and paperwork involved in incorporating a company. Therefore, this is recommended.

For the third friend who wants to create a financial services firm, a partnership firm is suggested. This is because each partner can be given a share in the firm, which would create incentives for the partners to work together to grow the business.