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Final

Legal Forms of Business Introduction to the types of business, everything from sole proprietorship to public corporation. includes examples and diagrams/charts


Department
Business
Course Code
BU111
Professor
Jim Mc Cutcheon
Study Guide
Final

Page:
of 9
L7 BU111 12/10/2011
Legal Forms of Business Ownership
Most of the advantages and disadvantages of these come from a legalistic perspective
Unincorporated
The law today in Canada does not differentiate between the owner of an
unincorporated business and the business itself
legally seen as being one and the same
if a business becomes bankrupt, creditors may take personal assets since
individual and business are one and the same
this unlimited liability of owners is the biggest disadvantage to unincorporated
businesses
Sole Proprietorship
Business that is owned or operated by one person for his/her private profit
Partnership
Business that is owned or operated by more than one person for their private
profit
Incorporated
Private- can't sell shares to public
Public-can sell shares to the public
an entity created by law that has a legal status which is both separate and distinct
from that of its owners and possessing all of the rights of an individual
a newly created corporation is a new legal entity
bankruptcy gives creditors the right to take only corporate assets, not the personal
assets
major advantage is the limited liability which protects all personal assets
creates a sort of “corporate veil”, between corporation's assets and personal assets
Personal vs. Corporate Tax System
unlike the personal tax system, corporations are taxed in Canada on the basis of a
fixed rate system
regardless of how much money the corporation makes, tax rate is the same
Federal Tax: 18% Ontario Tax: 12% Total Tax: 30%
Unincorporated businesses are legally viewed as a component of the total income
of the owner(s), therefore taxed same as income
L7 BU111 12/10/2011
When to Incorporate: Tax Perspective
once personal marginal rate reaches 31.15% bracket, you will lose money from
not being incorporated
a net income of $40,970 will move business into this bracket, so this is the point
where incorporation will save you money
Private Corporation Tax Rates: Small Business Rate
applied on the first $500,000 made per year
Federal Rate: 11% Provincial Rate: 4.5% Total: 15.5%
Conditions to Gain Small Business Rate
must be a Canadian controlled private corporation
must retain earnings to retain savings
profits taxed at this 15.5% must be left in the business in the form of retained
earnings
if they are taken out and distributed in the form of dividends, they will be taxed a
second time at a rate of 25% gross up and 13.3% Fed and 4.5% Prov down
to obtain max benefit, leave money in the business
Do not incorporate business until the point you are sure that it will generate a profit year
in and year out.
Any losses incurred as a sole proprietorship/partnership may be written off as deductions
to tax payable due to personal assets and business assets being the same.
Traditional Forms of Business Ownership
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9
4
17
87
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20
40
60
80
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Sole Prop. Partnership Corporations
Most Common Forms of Business
Active
Sales
L7 BU111 12/10/2011
Sole Proprietorship
Advantages
SPID FGT
Easy to form and 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
Government support (small businesses)
Disadvantages
CCUM
Unlimited liability
Difficulty in raising capital
Lack of continuity
Management limitations
Partnerships
An unincorporated business owned and operated by more than one person for his
or her private profit
Always formed by agreement
Can be verbal or written (should be in writing)
Called a Partnership Agreement
Legal document that outlines all of the rights and responsibilities of the partners
oDesigned to prevent future misunderstanding between partners
oShould serve as a basis for resolving conflicts or disagreement between
partners
Contents of Partnership Agreement
Names of all partners
Type of partner (general or limited)
Initial financial contribution of each partner
How profits will be allocated
Process to be followed if adding a partner
Process to be followed if one partner wants to withdraw his or her investment