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Midterm Review #2 Includes all material from after midterm, very detailed

15 Pages

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Jim Mc Cutcheon

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Business 111 Final Review Study Notes Legal Forms of Business Ownership: Incorporated Business: corporation: an entity by law that has a legal status such that is separate and distinct from that of its owner and possesses same rights as an individual, owned by shareholders - Private Corporation: hybrid form of ownership o Legal Restrictions: Must have less than 50 shareholders(therefore restricts capital) Shares cant be offered to general public or publicly traded(not TSX) Transfer of shares are restricted(must be approved by Board of Directors) o Advantages: Perpetual life(business can last forever) Limited liability(bank needs collateral such as sole) *Tax advantages* - 15.5% on first $500,000 o Disadvantages: More difficult and costly to form, difficulty in raising capital(bank wants collateral, cant sell and distribute shares) Personal guarantees may result in unlimited liability for owner Management limitations(only one person) *Increased administration, record keeping, and government regulations* Dual tax of corporate profits(different dividend rate) - Public Corporation o Advantages: limited liability of owners(shareholders) Easier to obtain capital(sell shares), ease of transferability of ownership Perpetual life(death of shareholder has no effect) Greater efficiency of management(hire specialists, ease of replacing) o Disadvantages: Loss of secrecy(legally required to publish annual reports, union sees, competitors see) Increased record keeping(shareholder records, proxy voting, annual meeting, government forms) Lack of personal involvement by employees Annual reports must be audited by CA firm(timely, costly) More heavily regulated by government Dual taxation of profits if distributed as dividend Once at 30%, again at gross-up 44%, 18% fed, 6.4% prov. credit Unincorporated Business: law in Canada doesnt differentiate between owner and business itself, therefore in financial trouble, creditors can take personal assets of owner, should incorporate when you know you will make profit this year and the following years(when taxable income is above $40,970 - Sole Proprietorship: operated by one person for their own private profit o Advantages: Easy to form and dissolve, freedom, satisfaction, personal incentive Owner has sole claim on all profits, speed of decision making Secrecy, government support, tax advantages(losses can be written off) o Disadvantages: Unlimited liability, difficulty in raising capital(bank needs lots of collateral) Lack of continuity(owner gets sick or dies, business gone) Management limitations(only skills in certain areas but not all) Taxation disadvantages(based on personal rates that are higher than small business rate) - Partnership: two or more people o Partnership Agreement: (get a lawyer!) Legal document outlining all rights and responsibilities of partners Serves as basis for problem solving and how certain issues will be handled Contents: Names of partners Type of partner o Limited: Liability is their investment, whatever you pay is max you will lose, strictly an investor Not active in management o General: All partners have joint and several liability All partnerships need at least one Actively involved in the day to day management Joint liability all are equal liable for debts Several liability if one unable to pay, other needs to pay for them Initial financial contribution of each partner How profits will be divided, process for adding and removing partner o Advantages: Relatively easy to form(need partner agreement) Larger availability of capital, personal involvement, satisfaction Diversification of management skills, secrecy Tax advantages(losses can be written off) Owners have shared claim on profits, therefore high level of incentive o Disadvantages: Unlimited liability, management conflicts, slower decision making Difficulty in raising capital, tax disadvantages(personal tax rates are higher) Difficulty withdrawing ones investment, you can either Sell interest to outsider but partners need to agree Have one partner buy your interest off you, but you get screwed Sell all assets of business and equally distribute earnings, end of business, better to sell business than to liquidate Factor Sole Prop. Partnership Large Public Corpn Small Private Corpn Ease of Formation Easy Easy Not really hard Hard Incentive/Satisfaction High High Low High Simplicity/Speed High High Slow Slow Tax Treatment Losses written Losses Dual, but 30% Dual, but 15.5% off, personal written off, rate personal rate Government Treatment Lots Good More Heavily reg Govt regulations Secrecy High High Low Yes, dont publish Liability Unlimited Unlimited Limited(shareholders) Unlimited Continuity/Withdrawal Lack Difficult Perpetual Life Perpetual Life Ability to Raise Capital Difficult Difficult Easy Difficult Management Ability Limitations Limitations Great efficiency Limitations Personal Tax System: (includes unincorporated businesses) o As an individuals taxable income increases, the tax rate increases also, includes federal, provincial, surtax o The profits earned are viewed as one component of the total income of the owner(s) Corporate Tax System: - Public: Total combined rate is fixed at 30%(18% federal and 12% provincial) - Private: Small Business Rate is 15.5% on first $500,000, from $500,000 on rate is 30% o Rules: Must be Canadian controlled private corporation Profits taxed at 15.5% must be left in business in form or retained earnings Once taken out of business as dividend, will be taxed a second time at 25% gross-up, 13 1/3% fed, 4.5% prov. credit Forming a Corporation: expensive only if lawyer(needed for large corpns) - Federal Incorporation: o Fee $200, right for business and head office anywhere in Canada, business # and GST# automatically assigned, annual filing fee(Corpn Info Return $40) - Provincial Incorporation: o Fee $300, right for business and head office anywhere in Ontario, apply for business # and GST#, no filing fee
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