RSM219H1 Lecture Notes - Limited Liability Partnership, Limited Liability, Legal Personality
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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
- 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
- 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
- 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withdrawn by the during the period.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profits earned and not withdrawn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
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.
- Limited liability for shareholders; the most a shareholder can lose is
the amount they invest in the business
- 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
- 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.
Most owners are absentee shareholders, not involved in daily operations;
they require certain types of legal protection provided by the laws of the
Companies decide where to be incorporated, then the founding investors will
prepare a document called the • articles of incorporations which include
- 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
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: 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. Sole proprietors are required o combine the profits or losses from their business with their personal 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) 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 owner withdraws cash (withdrawal accounts: partnership: two or more individuals agree to conduct business together.