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Lecture 4

LEcture 4- Forms of Business ownership

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University of Toronto Mississauga
Dave Swanston

MGM101 Lecture 4 Notes October 5 , 2012 Lecture 4 – Forms of Business Ownership  70% of Canadian business are incorporations  Sole proprietorships – individuals working for themselves o One person owning and operating a business, without forming a corporation o Personal income o Possible to write off expenses o “my” income/expenses o Anything that happens in that business happens to the personal self  No separation between business and self o Personal liability for any activity o Make sure insurance covers o Advantages  Ease of start/end- Just need the required equipment or work space to start. May need permit or license for some businesses but it is always easy to get and stopping is just as easy as starting.  Be your own boss- You make all the decisions, and all the mistakes will be yours and it will affect you and all the victories will be yours.  Pride of ownership- Sole proprietorships deserve all the credit for taking the risks and providing needed products  Leave legacy- Can be passed down to your kids and family.  Retain profit- All profit goes to you and you wont have to share it with anyone except the government for taxes.  No special taxes- All taxes are counted as personal income tax and it lower than corporate taxes. Also can claim losses from business to decrease tax.  Fewer regulations- Less regulations, and administration is less costly. o Disadvantages  Unlimited liability- The risk of bearing 100% of loss. Any debt, damage is for you to pay, it has to come from your pockets and can lead to selling your house, car, and everything else you own if your business goes down.  Limited financial resources- Limited to the funds you have and what you can bring from loans, and how much you raise.  Difficulty in mgmt.- Many sole proprietors don’t have the skills to a good management skills such as inventory records, accounting records, tax records, and so forth. Hard to get someone because corporations pay better for accountants ect.  Time commitment- You as the sole owner will have to work extra hourse if needed, and this means no vacation or sick days. Gets in the way of family life for many sole owners.  Few fringe benefits- Loses or doesn’t get the benefits for working for corporations. No health insurance, no disability insurance, no sick leave, no vacation pay.  Limited growth- Expansion is often slow, because it depends on the creativity, funding, and the business mind of the owner.  Limited life span- The business dies if you dies, unless it is bought or taken over by your heir. Valuable leases and contracts may not.  Partnerships o Access to resources o Brings expertise o Share workload o Do not bring in friends if you feel they wont be an asset to the company  When other people are brought in, it leads to conflict o Several main types of partnership  General  Each person has a role to play (Ex. Marketing, accounting…)  Unlimited liability  Limited partnership  Only a financial partner  No management responsibility or liability losses beyond investment  Liability= amount they put into business o Limited partner expects their investments back o Partnership agreement spells out the terms of each partner (Ex. Percentage…)  Lawyers are needed for the agreements  Could still lead to conflict  Advantages o More financial resources- 2 or more people can bring in more funds. It is cheaper to split bills between 2 or more people. o Shared mgmt.- You can divide work hours and benefit from free time to expand business or take a day off. o Longer survival- Partnerships last much longer than sole proprietorships because being watched by a partner can make other partners more disciplined. o Shared risk- All partners share the risk and divide losses. Includes financial risk and ongoing or future risk. o No special taxes- As like sole proprietorship, there are no special taxes for partnership, owners pay personal income tax, and losses can be deducted. o Less regulation- Less regulated than corporations  Dis o Unlimited liability- Each partner is liable for losses. It doesn’t matter who was in charge of what. If the business goes down everyone goes down. o Division of profits- Has to split all profits between partners. Creates conflict because profits are not always divide evenly, depends on how much each partner contributed. o Disagreements among partners- Multiple owners so one cannot make all the decisions, everyone will have to agree in order to move on. o Difficult to terminate- Very hard to terminate because everyone will have to agree as well.  Shotgun clause – one of us is going to buy this business – single number on a piece of paper in envelope – bigger number wins  Master Limited Partnership  Traded publicity  Taxed as a partnership  Limited liability  Corporation – although the word corporation makes people think of big businesses such as bmo, it is not necessary to be big to incorporate  Obviously, many corporations are big; however, incorporating may also be beneficial for small businesses  Why? o Limited liability- The damage and loss to the corporation is separate from the owners, it will not affect the personal pockets of the owner, and they wont have to sell their house, cars etc. o More money for investment o Separation of ownership o Ease of ownership change o Perpetual life o Size  Dis o Initial cost o Paperwork o Two tax returns o Termination difficult o Stockholder and board conflict o Double taxation o Size o Possible conflict with stockholders and board of directors  Board of directors o Hold CEO accountable for achieving goals of the org. Types of Corporations:  Professional Corporations: A professional corporation is a Canadian- controlled private corporatism engaged in providing professional services. Ex. lawyers, archite
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