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philosophy, and other factors will arise. If these differences become serious disputes and are unresolved, the partnership may need to be terminated, with all the financial and personal trauma involved. It is difficult for future partners to foresee whether or not personalities and methods of operating will clash.

      (d) Relative difficulty in obtaining large sums of capital. This is particularly true of long-term financing when compared to a corporation.

      (e) Partnership agreement problems. The larger a partnership becomes, the more complex the written agreement has to be to protect the rights and identify the responsibilities of each partner. This can result in additional administration and legal costs.

      (f) Difficulty of disposing of partnership interest. To withdraw capital from the business requires approval from all other partners. This takes time and involves legal and administrative expenses.

      2.2c Kinds of partners

      An ostensible partner is active in the business and known as a partner.

      An active partner may or may not be ostensible as well.

      A dormant partner is inactive and not known to be a partner.

      A secret partner is active but not known as a partner.

      A silent partner is inactive and not known as a partner.

      A nominal partner (partner by estoppel) is not a true partner in any sense, not being a party to the partnership agreement. A nominal partner, however, presents himself or herself as a partner, or permits others to represent him or her as a partner. A nominal partner, therefore, is liable to third parties as if he or she were a partner.

      A sub-partner is a person who is not a member of the partnership but contracts with one of the partners to represent that partner by participating in the firm’s business and profits.

      A limited or special partner risks only his or her agreed investment in the business, assuming that statutory formalities have been complied with. As long as he or she does not participate in the management and control of the enterprise or in the conduct of its business, the limited partner is generally not subject to the same liabilities as the general partner.

      2.3 Corporation

      A corporation is a legal entity, with or without share capital, which can be established by one or more individuals or other legal entities. It exists separate and distinct from these individuals or other legal entities. A corporation has all the rights and responsibilities of a person with the exception of those rights that can be exercised only by a natural person.

      2.3a Advantages

      (a) Limited liability of shareholders. Shareholders’ personal assets are separate from the business and cannot be seized to pay outstanding business debts incurred by the corporation. There are exceptions, but these relate primarily to issues of fraud.

      (b) Flexibility for tax planning. Various tax advantages are available to corporations that are not available to partnerships or proprietorships. Tax planning must be undertaken with the help of a professional accountant.

      (c) Corporate management flexibility. The owner or owners can be active in the management of the business to any desired degree. Agents, officers, and directors with specified authority can be appointed to manage the business. Employees can be given stock options to share in the ownership, which can increase their interest and give them an incentive to make the business work.

      (d) Financing more readily available. Investors find it more attractive to invest in a corporation with limited liability than to invest in a business whose unlimited liability could involve them to an extent greater than the amount of the investment. Long-term financing from lending institutions is more readily available, since lenders may use both corporate assets and personal guarantees as security.

      (e) Continual existence of corporation. A corporation continues to exist and operate regardless of the changes in the shareholders. The death of a shareholder does not end the corporation. Continual existence is also an effective device for building and retaining goodwill.

      (f) Ownership is readily transferable. It is a relatively simple procedure to transfer ownership by share transfer unless there are corporate restrictions to the contrary.

      (g) Draws on expertise and skills of more than one individual. As in a partnership, more partners or shareholders contribute diverse talents. However, a corporation is not required to have more than one shareholder.

      2.3b Disadvantages

      (a) Extensive government regulations. There are more regulations affecting a corporation than a sole proprietorship or partnership. Corporations must report to all levels of government.

      (b) Activities limited by the charter and bylaws. Depending on the jurisdiction, charters can be very broad or can severely restrict a company’s activities.

      (c) Manipulation. Minority shareholders are potentially in a position to be exploited by the decisions of the majority of the company.

      (d) Expense. It is more expensive to establish and operate a corporation due to the additional documents and forms that are required. As well, operating losses stay in the corporation.

      2.3c Corporate purposes

      Some jurisdictions require that the articles of incorporation include a statement of the purposes of the corporation. When you provide a list of the purposes of the corporation, make sure that you define them expansively. Don’t restrict the activity of your corporation. A general clause should be included that allows the corporation to expand into any business activity permitted by law. A competent lawyer can help you prepare this document so that you maximize your corporate options.

      2.3d Shareholders’ agreement

      A shareholders’ agreement involves the same concepts of protection as a partnership agreement. Many of the provisions outlined in the partnership agreement are also included in the shareholders’ agreement. There are additional provisions frequently covered in the shareholders’ agreement, including:

      (a) A restriction on the transfer of shares

      (b) A buy-sell provision setting out the formula for buying and selling shares in the company

      (c) A provision on personal guarantees of corporate obligations

      (d) A provision on payback by the corporation of shareholders’ loans

      (e) A provision giving shareholders the entitlement to sit as a director or nominate a director as their representative. This protects minority shareholders from lack of managerial information and provides them with a directorship vote or veto on corporate decisions. If you intend to be a majority shareholder, you may not wish to volunteer this provision.

      Many shareholders believe that corporate bylaws set out the recipe for resolving problems within the corporation and between the shareholders, directors, and officers in some magical way. In fact, the bylaws generally cover formulas for resolving disputes in a few circumstances only. It is the shareholders’ agreement that expands the protections to resolve fairly any disputes between shareholders.

      If you intend to incorporate and have one or more additional shareholders in your corporation, you should get your lawyer’s advice on a shareholders’ agreement to protect your interests.

      2.4 S corporation (United States)

      If you live in the United States, you may wish to consider the advantages

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