CHAPTER 1: Coporation Textbook Note .docx

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Department
Accounting & Financial Management
Course Code
AFM 273
Professor
Andrew Ecclestone

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CORPORATE FINANCE 2DCANADIAN EDITION (BERK ET AL.) TEXTBOOK NOTES CHAPTER 1 THE CORPORATION THREE TYPES OF FIRMS Sole proprietorships: business owned and run by 1 person  Small in terms of revenues, profits and people employed  Straight forward to set up  No separation between firm and owner; taxed at personal level and limits ability to raise money from investors  Unlimited personal liability  Life of business limited to life of owner Partnerships: more than one owner  Income taxed at personal level according to ownership  All partners have unlimited personal liability  Partnership ends on death or withdrawal of any single partner unless agreement provides for alternatives such as buyout  Limited partnership: general partners + limited partners  Limited liability partnership in Canada for legal and accounting professions; limitation on partner’s liability in cases of negligence of other partners or those supervised by other partners Corporations: legally defined, artificial being (legal entity or judicial person), separate from its owners Ownership of a Corporation:  Stock, the entire ownership stake of a corporation is divided into shares  Equity, the collection of all outstanding shares of a corporation  Stockholders, receive voting rights and dividend rights equal to amount of stock owned  Equity holders, entitled to dividend payments JASSYPHEE CORPORATE FINANCE 2DCANADIAN EDITION (BERK ET AL.) TEXTBOOK NOTES  Availability of unlimited outside funding has enable corporations to dominate economy  Tax Implications: double taxation on shareholders due to taxed profits before distribution and personal income tax on share income Ex. Taxation of Corporate Earnings  Corporation earns $5/share before taxes  After taxes, earnings are distributed as dividend.  Corporate tax rate is 35%  Rate on dividend income outside RRSP is 24% Shares in RRSP Shares outside RRSP Taxes/ share Taxes/ share taxes/ share / dividend inside RRSP outside RRSP /share of the $5 earnings Hopefully when you withdraw in the remain future, there is a lower tax rate on that income  Tax reliefs in Canada, through dividend tax credit by effectively giving a lower tax rate on dividend income  Corporate is only organizational structure subject to double taxation  Exemption if all income produced flows to investors & no earnings retained (income trust) (Business and Energy no longer exempted) o Business income trust holds all debt and equity securities of corporation in trust of trust for owners called unit holders o Energy trust holds resource properties directly or holds all its debt and equity within trust o Real estate investment trust (REIT) holds real estate properties directly or holds all its debt and equity securities JASSYPHEE CORPORATE FINANCE 2NDCANADIAN EDITION (BERK ET AL.) TEXTBOOK NOTES Ex. Taxation of Income Trust  If corporation had all debt and equity held in income trust  Trust held outside RRSP pay tax rate of 46% Shares in RRSP Shares outside RRSP paid out to trust unit holders. Personal tax No personal tax, therefore 0% of Corp owes government 46% business income to government collected from unit holders OWNERSHIP VERSUS CONTROL OF CORPORATIONS Board of directors has ultimate decision-making authority  Makes rules oh how corporation should be run, management compensated, sets policy and monitors performance of company  De
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