Forms of Organization
Sole proprietorship: single-owner business (Less concern about creating
accounting reports b/c not reporting to shareholders. Doesn’t distinguish personal
income and company’s income (combine) – owner’s capital; os the owner’s equity
section that has one account.
Have unlimited liability – they assume all the risk if the business runs into trouble.
Partnership: two or more individuals decide to do business together.
Responsibilities are set out in the partnership agreement. Separate account for
each partner – the partner’s capital account. There also exists a drawing account
that keeps tracks of the amounts withdrawn by the partner during that period.
Have unlimited liability - assume all the risk if the business runs into trouble.
Limited partnership: limited liability for the partners
General partners: make day to day decisions for the company but
have unlimited liability.
Limited partners: limited liability but limited involvement.
Corporation: (know what a corporation is) – differs from a sole proprietorship and
a partnership in 3 ways – limited liability, taxation, and its status as a separate legal
Separate legal entity – limited liability - corporate shareholders cannot be made to
pay for the company’s debts out of their personal assets.
Articles of incorporation: after deciding where to be incorporated, this will be
issued that includes info about the type of business, how the board of directors will
be organized, who the management will be, and what kinds of shares will be issued.
MOST IMPORTANT SECTION --- > the description of the shares that will be issued --
> called authorized shares.
Issued shares: shares that have been sold by the company.
Used to specify a dollar amount for each share (par value) --- but no longer
permitted. Companies issue no par value shares – when they are issued, the total
amount received for the shares is credited to the shares account.
- basic set of rights
o profits and losses
o the selection of corporate management
o net assets upon liquidation
o subsequent issues of shares Characteristics of Preferred Shares – SEE PREP 101 FOR THIS IT’s GREAT
- have preference over common shares with regard to dividends and net
assets if the company is liquidated
- preferred shares are usually non-voting
- cumulative – if a dividend is not declared on the preferred shares in one
year, it caries over into the next year. In the second year, both the prior year’s
preferred dividend and the current year’s preferred dividend must be
declared before any common dividends can be declared. Dividends from
prior years that have not been declared are called dividends in arrears.
- Convertible preferred shares: can be converted into common shares
- Redeemable preferred shares: can be bought back by the company at a
price and time specified in the articles of incorporation, and at the issuing
- Retractable preferred shares: similar to redeemable shares in that they
can be sold back to the company at the shareholder’s option.
- Participating preferred shares: blahblah see prep101 defn
To account for when common shares are issued for cash:
Cash (A) 15 000
Share Capital (SE) 15 000
To record issuance on 1 000 shares with no par value for $15 per share.
- don’t use par value in Canada
BUT when international companies use it:
Cash (A) 15 000
Share Capital (SE) 10 000
Contributed Capital (SE) 5 000
To record issuance of 1 000 shares with a $10 par value for $15 per share.
- a company can choose to buy back some of their own shares
o might want to reduce the number of shares outstanding
o when there are fewer shares outstanding, the company’s income is
divided among fewer shares and the earnings per share therefore
- Treasury shares: shares that have been repurchased by the issuing
- Three terms used to refer to the number of company shares
o Authorized shares – maximum number of shares that can be issued by
the company (according to the articles of incorporation) – many companies may avoid this limitation by saying that they have the right
to issue as many shares as possible.
o Issued shares – shares that have been issued