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FINAL EXAM LECTURE NOTES! - SUPER detailed - comprehensive notes, NOT just what he puts on the PPT, I write down a lot of supplementary info he says as well, pretty much quotes him! - 94% on FINAL EXAM :)

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Jim Mc Cutcheon

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Forms of business ownership Partnerships Unincorporated versus incorporated o The partnership agreement businesses o Advantages and disadvantages o Legalistic distinction o Types of partners o Implications for liability of owners General and limited Taxation of different forms of ownership partners o Taxation of unincorporated Corporations: definition businesses o Formation of a corporation Profits taxed on Approaches progressive personal tax Articles of incorporation rates Required content o Taxation of corporations Federal versus Profits taxed on fixed provincial corporate rates corporation Regular corporate o Public corporation vs. private tax rates Advantages and Small business disadvantages rates o Private corporation When to incorporate from Restrictions a tax perspective Advantages and Sole proprietorship disadvantages o Advantages and disadvantages Legal forms of business ownership 2 forms of business ownership Corporation an entity created by law that possesses all the rights of the individual but has a legal status that is separate and distinct from that of its owners (shareholders) o can do all the things individually that WE can do, has its own name Unincorporated businesses o Sole proprietorship an unincorporated business that is owned and run by one individual for his or her private profit (most popular form) o Partnership unincorporated business that is owned and run by more than one person for their private profit (not limited to just two people) Incorporated businesses o Public corporation legally entitled to sell its shares to the general public o Private corporation legally is not entitled to sell its shares to the general public (has not gone through process to get approval to sell shares to the general public) Distinction between unincorporated and incorporated businesses is legalistic in nature o Its legalistic distinction will affect the personal liability of the owners o Will also affect the taxation of the business These 2 factors are the most crucial factors to consider which form of business an owner/owners will want to adopt Unincorporated businesses o In the eyes of the law in Canada, the law does not distinguish between the owners of the business and the business itself, and because of this lack of distinction, it gives rises to significant ramifications when it comes to personal liability and taxation o Huge disadvantage: law does not distinguish between the business and the owners: thus, businesses will have an unlimited liability o Ex. Joe has a business, can easily differentiate between his personal assets (house, car) and his business assets (store, equipment). If Joes business in trouble and insufficient to pay the claims of creditors, Joe has to pay creditors by selling off his personal assets such as house, car etc. This is called unlimited liability Corporations o A legal entity that is created by law that possess all the rights of an individual but has a legal status that is separate from the individual o Corporate veil separates the personal assets and business assets o Therefore, creditors can only look at the assets of the business to satisfy their claims, creditors has no right to his personal assets, you have protected your personal assets Taxation Unincorporated business o Businesss profits are taxed under personal tax law (graduated/progressive system) o Business profits equals owner profits o Profits of business is just added to the personal taxable income Incorporated business o Taxed on the basis of corporate tax system (FIXED rate system, NOT progressive) o Federal (19%) and Ontario tax (14%), thus fixed corporate rate is 33% o (calculation is online) Tax comparison: large public corporation versus proprietorship Assume $750 000 in profit, pubic corporation = $247 500 in tax Whereas sole proprietorship, taxed on progressive system will pay 331 360 The tax differential is 83 860, however they made the same profit Private corporation tax rates 2009 small business rate on first 500 000 o Federal government gives 17% reduction on the 28% federal tax and provincial gives 8.5 reduction, total is 16.50% tax rate Small business tax rates RULES o Must be Canadian controlled private corporation (50% of stock outstanding must be held by Canadians) in order to be eligible for the reductions o In order to be eligible for the 16.5% rate, must retain earnings to retain savings Rates changes for income above 500 000 Once go above 500 000, then federal rate jumps to normal 19% and provincial 14% Once go above 500 000, they take back the 42 500 benefit they gave you if you made less than 500 000, they will now add a surtax of 4.250% on every dollar after 500 000, until they have recaptured their 42 500 (this means once you get to 1.5 million dollars in profit, they have gained back their 42 500 (33% + 4.250%), then once you get PAST 1.5 millions, tax rates go back to normal less the surtax) Traditional forms of business ownership Businesses often start off as a sole prop. Or a partnership, then they start to realize the drawbacks unlimited liability and taxation problems Begin to consider moving business to private corporation Then once get to a certain point in private corporation where you are restricted to the ability to create capital because you cannot sell your shares, then you move towards public corporation, in order to sell shares to the general public You do not incorporate a business until they are profitable, and will be profitable for future years o Any losses that you suffer in an unincorporated business can be written off other sources of taxable income o Ex. Income from other sources, $50 000, if sole prop generates a loss of 5000, then that loss can be written off as a direct expense against any other sources of income that you are producing, therefore, your taxable income will now be 45 000 tax deduction o These loses can actual finance the business itself If you incorporate a business, if it suffers loss of 5000, the 5000 loss can NOT be written off, tax for the year would be 0%, however you can take the 5000 loss, and write it off for future years (ex. Next year 20 000, 5000 will reduce taxable income to 15 000) o Can carry a loss forward for a max of seven years, or you can write the loss off in past years (max of 3 years, thus you redo your taxes) just not your current year Most common form of ownership is sole proprietorships (74%)... but which has the largest sales? o Sole prop only account for 9% of total sales, partnerships (4%), corporations (87%) Sole Proprietorships - Advantages (4) Easiest form to establish and dissolve because there are no legal restrictions to establish a sole prop, only requirement is that business is legal and in some cases, get a business license Owner has sole claim on all profits and must bear all losses max level of incentive, freedom and personal satisfaction, speed of decision making (no need to get approval from others etc) Tax advantage losses can be written off against other sources of personal income Max levels of secrecy, no need to public disclose financial statements (balance sheets, income statements) Disadvantages (5) Unlimited liability of owner personal assets are at risk, creditors can seek your personal assets Lack of continuity in the event of the death or long term illness of the owner Difficulty of raising capitals cant sell shares, difficult to get bank loans unless you have collateral o No capital to expand Severe management limitations contribute to keeping sole prop small lack of knowledge in finance, taxation, business etc. Tax disadvantages taxed on the basis of personal rates that are higher than the small business rate charged to private corporati
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