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Rotman Commerce (1,103)
RSM219H1 (86)
Lecture

Ch 11 Forms of Organisation.docx

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Department
Rotman Commerce
Course
RSM219H1
Professor
Martin Ralph
Semester
Winter

Description
Ch 11 Forms of Organisation 12/04/2013 11:33:00 AM Digging into components of shareholders’ equity in a corporation -How the ownership interest is measured and disclosed in the financial statements - when a company raises more capital by issuing new shares, how the new issuance would affect current holdings. Forms of Organizations 1. Sole Proprietorship: single-owner business - All profits and losses belong to the owner, and all decisions are made under the owner’s direction - Business and owner are same legal entity - Less concern with reporting to shareholders - Sole proprietors are required o combine the profits or losses from their business with their personal income. Profits are taxed as owner’s income - Little reason for the owner to distinguish the initial investment from the earnings retained in the business (No other shareholders) - Unlimited liability (both business assets and personal property) - Not taxed at the business level but it is included in the owner’s personal tax return - Must close down or sell the whole business - Owner’s equity section only has one account – owner’s capital; it is used:  when the owner puts new capital into it,  when the business earns income  when the owner withdraws cash (withdrawal accounts) 2. Partnership: two or more individuals agree to conduct business together - Rights and responsibilities are specified in a document called partnership agreement - Partners are required to keep a separate account for each partner called the partner’s capital account . Each period, profits or losses must be distributed among the partners’ capital accounts. - • Drawings account is an account that keeps track of the amounts withdrawn by the during the period. It is then closed to the capital account of the specific partner. Such withdrawals are not taxable - Unlimited liability - Not taxed at the business level but it is included in the owner’s personal tax return - Limited capital with the assets contributed by the owners and the profits earned and not withdrawn - If you want to withdraw , you must convince other partners to buy you out or your ownership interest - Limited partnership: allows partners to assume different responsibilities and risks in a partnership. a. General partners make day-to-day decisions about the business, share in profits and losses, and have unlimited liability b. Limited partners have limited liability and limited involvement in the partnership. c. New form: LLP; limited liability partnership: limited person liability: partners are liable for their own acts and the acts of those who work under them. 3. Corporation - Limited liability for shareholders; the most a shareholder can lose is the amount they invest in the business - Taxation - Separate legal entity; legally separated from its shareholders. - Has a board of directors, the ultimate decision makers in the business, elected by the shareholders, and select the management team that runs the day-to-day operations. - The corporate tax is in addition to the personal income tax that the shareholders pay on their personal income when they receive dividends or when they sell their shares - Required to pay the tax in the year of income is earned - Tax rates vary by the type of income earned and the size of the business - Tax that are paid by the individual shareholders on dividends or capital gains is deferred until dividends are received or the shares are sold, it is taxed at individual level - Double taxation = when the corporate pays taxes on corporate income when it is earned, and when the shareholders pay taxes on dividends distributed by the corporation - The individual portion can be deferred if the profits are not paid out in the same year they are earned. - • Incorporation: the process of becoming a corporation requires a lot of paper work and regulation. - Corporations can raise additional capital easily than other types of form by issuing more shares or bonds. - Easy to changer ownership interest compared to the two other forms. - You can sell your shares on the stock market if the company is public - Or you can sell your shares to other existing owners or a new owner. - A lot of additional costs such as filing corporate tax returns, audited financial statement, regulatory costs. Corporations Most owners are absentee shareholders, not involved in daily operations; they require certain types of legal protection provided by the laws of the jurisdiction. Companies decide where to be incorporated, then the founding investors will prepare a document called the • articles of incorporations which include information about: - What type of business the company will conduct - How the board of directors will be organized - Who the management will be - What kinds of shares will be issued - Other relevant information Shares: the most important section of the articles of incorporation - • Authorized shares; the maximum number of shares that the company can issue - • Issued share: shares that have been sold - Increasing the number of authorized shares requires a change in the articles of incorporation, which requires a vote by the shareholders - Many companies establish an unlimited number. - • Par value: the dollar amount that attaches to each share; it is credited to the shares account and the excess is credited to an account called • additional paid-in capital/ contributed surplus in excess of par - • Legal Capital: the amount credited to the shares account - Most companies now issue no par value shares, the total amount received for the shares is credited to the shares account. This results in a larger amount of legal capital that must be maintained in the company and provides greater protection for creditors - The articles of incorporation also specify the classes or types of shares that can be issued by the company; it provides information about the authorized, issued, and different types of shares. - Corporations issue shares and bonds through a firm of investment bankers, known as underwriters - • Prospectus: a legal document that discusses the details and features and shares being issued 1. Common Shares/ ordinary shares: the class of shares that represents the company’s basic voting ownership rights. They carry a basic set of rights that allow the owner to share _____ proportionately: a. Profits and Losses - different classes of shares are entitled to different portions of the earnings, no restriction on their rights to share in earnings, once the claims of the creditors and the preferred shareholders have been satisfied - The EPS, Earnings per share figure= net earnings / Average number of shares outstanding during the year; provides a measure of performance that all shareholders can use - Corporations reports dividends per share b. The selection of corporate management - Common shareholders have the right to vote on the selection of the board of directors; one share per vote; - The board of directors represents the shareholders; they hire/fire the top level management & declare the dividends - They are responsible for the financial information that is prepared by management c. Net assets upon liquidation: the right to share the net assets upon liquidation: - If a company goes bankrupt or liquidates, there is an established order in which creditors and shareholders are paid. - Common shareholders come last; whatever is left is divided proportionately based on their relative number of shares among them - They bear the highest risk but reap the largest benefit if there is a substantial sum left over d. Subsequent Issues of Shares: • Pre-emptive right : the right to share proportionately in any new issuance of shares; - This must be stated in the articles of incorporation - Allows current shareholders to retain their proportionate interest while new shares are issued just so the investors with a controlling interest (>50%) will not lose the controlling interest if the new shares were issued to other investors -A protection for a minority or non-controlling interest 2. Multiple Classes of Shares- Preferred Shares/ Preference Shares: shares that have preference over common shares with regard to dividends - When dividends are declared, they will receive them before common shareholders do; normally some preference over net assets - Preferred shares are usually non-voting - May be stated as a dollar amount per share; if it is a $2 preferred share issue, it would pay a dividend of $2 per share per year or as a percentage of the issue price of the preferred share - Cons of a fix
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