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Lecture Notes From Mid-Term to Final Includes everything from lectures after the midterm until the end of the course in great detail. Everything that Jim elaborated on is included.

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Jim Mc Cutcheon

BU 111 Notes: Lectures 12 - 24 Lecture 12 Legal forms of Business Ownership Unincorporated: sole proprietorship & partnership Incorporated: public & private Major differences between the two are the legalities of how they are run and operated Unincorporated: the law does dont differentiate the business from owner, but instead they are one of the same (Joes assets are the business assets) o Therefore major disadvantage is the unlimited liability meaning your personal assets are at risk, creditors have claims to them to satisfy your debts Incorporated: in contrast, if the business is a corporation, it is a separate and distinct entity that is separated from the owner, the creditors can only look to the assets of the business o Therefore major advantage is limited liability - personal assets are protected (Corporate Veil) Personal vs. Corporate Tax System Unlike the personal tax system, corporations are taxed in Canada on the basis of a fixed rate system, no matter how much you make the rate stays the same o Public Corporation Tax Rates: Federal Tax Rate: 38% Less: Provincial Abatement: 10% Federal Rate before Reduction: 28% Less: General Rate Reduction: 10% Total Federal Tax Rate: 18% Ontario Provincial Tax Rate: 12% Total Combined Rate: 30% Taxation of Unincorporated Businesses o Since they are legally viewed as one of the same, therefore the profit earned by the business are just added to the proprietors total income, therefore it is all taxed on the basis of personal tax laws o Taxable Income = Total Income Deductions Therefore a proprietorship pays more tax When to incorporate from a tax perspective? o Once your business make more than $40 970 you should because the personal marginal tax rate is higher than the corporations except for this bracket Private Corporation Tax Rates: you receive a small business deduction and the total combined rate is 15.50% o There are rules for this rate though: must be a Canadian controlled private corporation must retain earnings to retain savings (money must stay in the business, if you do you must pay tax on what you take out) double taxation note that when you receive dividends from a private corporation, the gross up is 25% and the credit is 13 1/3 % federal and 4.5% provincial rates change for income above $500 000, amount in excess receives 30% total combined rate When to incorporate from a tax perspective? As soon as your business becomes profitable! Lecture 13 Traditional Forms of Business Ownership 74% of ownership in Canada is sole proprietorship, only 9% of sales though 9% is partnership, 4% of sales 17% is corporation, 87% of sales Sole proprietorship: Advantages: easy to form and to dissolve, owner has sole claim on all profits, high levels of personal incentive, freedom and satisfaction, speed of decision making, maximum levels of secrecy, tax advantages (any losses generated can be written off against other sources of income), government support (numerous programs in place to support small businesses) Disadvantages: unlimited liability, difficulty in raising capital, lack of continuity (because the business is so closely tied to the individual, if something was to happen to them, the business dies), management limitations (lack attributes and skills to run business), tax disadvantages (personal tax rates are higher than corporations) Partnerships: (always formed by an agreement, verbal or written) Partnerships Agreement written agreement, legal document that outlines all of the rights and responsibilities of the partners, designed to prevent future ill will and misunderstanding between partners, should serve as a basis for resolving conflict or disagreement This agreement can include but limited to the following: type of partner (general or limited), initial financial contribution, how profits will be allocated, process to be followed if adding another partner, process if partner wants to withdraw Advantages: relatively easy to form (needs a partnership agreement), larger availability of capital, high level of personal involvement and satisfaction, potential diversification of management skills and responsibilities, tax advantages (same as sole proprietorships) Disadvantages: unlimited liability, potential managerial difficulties/conflict, slower decision making, difficulty in withdrawing ones investment (3 ways: sell share to an existing partner, to sell the shares to an outside partner, liquidate the business/terminate business), difficulty in raising capital, tax disadvantages (personal rates) Different typed of partnerships: General all partners have joint (all partners are equally liable for the debts of the business) and several (if one partners assets are insufficient to cover his/her share of liability, then the other partner may have to cover their debts as well as their own) Limited legally must have at least one general partner, limited partners liability is equal to their investment, limited partners not active in management (seen strictly as an investor) Private Corporations: Legal restrictions must have less than 50 shareholders, shares cant be offered to the general public, shares cant be publicly traded, transfer of shares is restricted...must be approved by the companys board of directors Advantages: perpetual life, limited liability, tax advantages, secrecy (no auditing) Disadvantages: more difficult and costly to form, difficulty in raising capital, personal guarantees may result in unlimited liability, management limitations, increased administration, record keeping and government regulations Lecture 14 Public Corporations: Advantages: Limited liability of owners (shareholders), easier to obtain capital (can sell shares in the capital market), ease of transferability of ownership, perpetual life, greater efficiency of management (hire functional specialists, ease of replacing non-performing managers) Disadvantages: loss of secrecy (legally required to publish annual reports), increased record keeping (shareholder records, proxy voting, annual meeting of shareholders, government forms), lack of personal involvement by many employees, annual report must be audited by CA firm (costly and very time consuming), dual taxation of corporate profits if distributed to owners in the form of dividends, more heavily regulated by government Forming a Corporation: Federal Incorporation Fee $200, right to carry on business under corporate name anywhere in Canada, head office can be anywhere in Canada, Business # and HST # automatically assigned, annual filing fee: Corporation Information Return (fill it out and give them info, then pay $40) Provincial Incorporation Fee $300, right to carry on business under corporate name anywhere in Ontario, head office anywhere in Ontario, must apply for Business # and HST#, no annual filing fee Articles of Incorporation: All Canadians have the legal right to incorporate their business Only requirement is that the articles of incorporation must be completed and filed with government must include a name, chosen legal delegation (limited, Ltd., corporation, corp., incorporated, Inc.), NUANS search $20 (automated name search that makes sure its not in existence), description of business activities, # of directors, director information (names, addresses), classes of shares and # authorized, registered office of corporation (where are corporate records are kept), Corporate Governance and Corporate Structure: Corporate Governance: a set of processes, policies and procedures that will determine how a corporation will be administrated and controlled on behalf of its shareholders o Traditionally has focused on the policies and procedures used by a corporations board of directors to oversee the activities of management o However a more contemporary view expands the role of the BOD o Suggests that the BOD administers and controls the corporation on behalf of its shareholder, but also on behalf of all the organizations stakeholders Corporate Structure: there are three groups involved in way on which a typical corporations is structure, shareholders, the BOD and upper management o Interactions between groups: shareholders elect BOD, BOD oversees upper management (hire/select/terminating) Shareholder rights right to share in any dividends, pre-emptive right, rights in liquidation, right to receive an annual report, voting rights: major issues, annual election of BOD, any issues brought before the annual meeting of shareholders Role of the Board of Directors to represent the interest of the shareholders (watchdog function), to select or appoint and if necessary fire upper management, to exercise final
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