Credit Risk

Differences in Risk based on Type of Business

Article

In Canada there are three general forms of business ownership:  a sole proprietorship, a partnership, and a corporation.

Each of these forms of business ownership has advantages and disadvantages from an owner’s perspective and a creditor’s perspective.

Sole Proprietorship

The simplest form of business is the sole proprietorship, a business owned and operated by one individual. It can be operated under the owner’s name, or under another chosen name.   The credit worthiness of the company is based on the credit worthiness of the proprietor.

The General Partnership

The most common type of partnership is the general partnership. In a general partnership, all partners can be held responsible for the unsatisfied claims against each partner.

The Limited Partnership

A limited partnership is an arrangement where a person can contribute to a business without being involved in the affairs of the partnership. As a limited partner, liability to the firm or its creditors is limited to the amount invested in the firm as long as the limited partner takes no part in the management of the firm or acting on behalf of the firm. (In some provinces, only certain kinds of businesses are allowed to operate as limited partnerships.)

The Limited Liability Partnership (LLP)

In Canada, a limited liability partnership is usually only available to groups of professionals, such as lawyers, accountants and doctors. These partnership agreements are governed by specific provincial legislation. For instance, currently in Ontario, only lawyers, chartered accountants and certified general accountants may form a Limited Liability Partnership.

The Corporation

A corporation is a legal business entity that is separate from the business owner(s) who are shareholders, owning shares in the corporation.  Corporations are governed by the laws of incorporation established in that province and the corporation's shareholders. There are different forms of incorporation with specific advantages and disadvantages, but all corporations provide limited liability protection to the owner(s). In publicly traded corporations, income statements are readily available to assess the corporation’s creditworthiness.  This is not the case in privately held corporations, whose shares are not offered for sale.  In this situation, the creditor may ask for bank statements and/or other documentation to assess credit worthiness.

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Published under: Credit Risk
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