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Comprehensive Review Package For the Entire Course This review package was created for the 2009-2010 BU-111 Course and contains examples, definitions, and summary's of course material. This package is a great addition for the BU-111 final.

Course Code
Jim Mc Cutcheon
Study Guide

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Final Examination Review: BU-111
By: Greg Limburg & Addesse Haile
Legal Forms of Business Ownership
* Important for: People starting businesses, (entrepreneurs). People thinking they
may want to change their form of business ownership. There are two types:
Unincorporated & Incorporated
- Sole Proprietorships - Public Corporation
- Partnerships - Private Corporation
Sole Proprietorship: An unincorporated business which is owned and operated by
one person, for his/her own private profit.
Partnerships: An unincorporated business which is owned and operated then more
then one person for their own private profit. When people think of the term
partnership, they usually assume two, but there is no legal limit to the number of
partners. One example is Chartered Accountants, which means they cannot
incorporate, and will have sometimes 100 partners.
Corporation: A corporation is an entity created by law that possesses all of the
rights of an individual, but has a legal status that is both separate and distinct from
that of its owners. The owners of course are the shareholders. * Note: When you
incorporate a business, (a corporation) you are actually creating a new legal entity.
It does possess all the same rights as we do as individuals. They can enter into
contracts, own property, and can sue/be sued etc. It is almost like you have created
a new person, but it is not living/breathing.
Public Corporation: Is a corporation is one which is allowed to sell and distribute
its shares to the general public, done so on the Canadian Capital Markets. Recall that
the OSC still needs to clear the sale, but once done they will be distributed on one of
the many stock exchanges.
Private Corporation: Is a corporation which cannot sell or distribute its shares to
the general public, because they have not gone through the process being cleared by
the OSCs regulatory process. Although they have not been cleared to sell the shares
on the markets, they can still raise capital by coming directly to people on an
individualized basis, ex. Love Money. Etc.
What are the Legalistic Distinctions between Incorporated and
Unincorporated Businesses:
* In the eyes of the law, there is no separation between the owner(s) of an
unincorporated business, and the business itself. They are viewed as being
one-in-the-same. This gives rise to 2 very significant disadvantages:

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Unincorporated Businesses encounter:
i) Very pronounced liability problems
ii) Taxation Problems
Unlimited Liability of Unincorporated Businesses: Joe the barber example; there
is no distinction between personal and business assets, and as such if Joe’s business
goes under, the bank can claim his personal assets against his business expenses.
Limited Liability of Incorporated Businesses: If Joe decides to incorporate, he
erects a ‘brick-wall’ between his personal and business assets.
Taxation: The way in which the law views the designation of the business
correlated to the ways in which it views how the profits are made. That means that:
Sole Proprietorship Taxation: Since there is no separation between the business
and the owner, the profit made by the corporation just becomes part of the personal
income made by the owner. They pay this tax based on their own personal tax
bracket, within personal tax law.
Incorporated Businesses: They are based on the premise of corporate tax law,
which is not like the graduated scale of the personal taxes. Corporate tax law is a
Fixed rate system, independent of the total profits of the business.
Corporate Tax Rates: Public
Total Federal Tax Rates: 19%
Ontario Provincial Rate: 14%
Total Combined Rate: 33%
Private Corporation Tax Rates: 2009 Small Business Rate on first $500,000. Small
businesses are eligible for this deduction to 16.5% if they are
A Canadian Controlled Private Corporation. More then 50% owned in shares by
Canadian Citizens.
Must retain earnings within the company to receive savings
When to Incorporate? Evolution of Business
Sole Proprietorships & Partnership, then become a private corporation, which then
becomes a public corporation. If you are experiencing losses year after year, you
should not incorporate. Only if you can say with some degree of certainty that you
will be making repeating profits should you incorporate. This is because the losses
from the business can be written off against other sources of capital income of the
owner, but only if the business and the owner are still one. If the business does
make a loss while incorporated, what you can do is use the loss to write off some of
the taxable profits that the business generated in a different tax year. A loss in one
year can be written off against profits 3 years back, and 7 years ahead.

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Traditional Forms of Business Ownership:
Which is most common? Which has the largest sales?
Sole Proprietorship = 74% Sole Proprietorship = 9%
Partnership = 9% Partnership = 4%
Corporation = 17% Corporation = 87%
Sole Proprietor Advantages
Sole Proprietor Disadvantages
1. They are easy to form, and easy to
2. Owner has sole claim on all profits,
but is responsible for all losses.
Therefore, they have the maximum
levels of incentive.
3. High levels of freedom and personal
4. Speed of decision making.
5. Tax Advantage: any losses can be
written off against other sources of
personal income.
6. Maximum levels of secrecy, as there
is no need to publicly disclose financial
1. Unlimited liability of owner. There
is no distinction between the business
and the owner, and any losses of the
business are losses of the owner.
2. Lack of continuity in the event of the
death of long term illness of the owner.
3. Difficulty raising capital.
4. Management limitations: owners
with no knowledge of business
5. Tax Disadvantages: taxed at a rate
above that of the small business.
All partnerships are created by an agreement. This agreement can be either verbal
or written, (highly advisable).
A Partnership Agreement: is a written, legal document which is designed to
prevent future misunderstanding and ill will between partners. It also outlines
how certain issues will be handled and resolved.
Typical Contents:
1. Names of Partners
2. Type of Partners; general or limited
3. Amount of financial contribution
4. How profits will be divided
5. Procedures for adding a new partner
6. Procedures for withdrawing ones investment
Limited Partner: A limited partners liability is limited to the amount of his or her
investment in the business. Limited partners can not legally take an active role in
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