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BU111 Study Guide - Midterm Guide: Tax Rate, Sole Proprietorship, Privately Held Company

Course Code
Jim Mc Cutcheon
Study Guide

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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 don’t differentiate the business from owner, but instead they are
one of the same (Joe’s 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

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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
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 one’s investment (3 ways: sell share to an existing partner, to

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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 can’t be offered to the general
public, shares can’t be publicly traded, transfer of shares is restricted...must be approved by the
company’s 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:
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