AFM273 Chapter Notes - Chapter 1: Limited Liability Partnership, Dividend Tax, Double Taxation

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CORPORATE FINANCE 2ND CANADIAN EDITION (BERK ET AL.) TEXTBOOK NOTES
JASSYPHEE
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
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CORPORATE FINANCE 2ND CANADIAN EDITION (BERK ET AL.) TEXTBOOK NOTES
JASSYPHEE
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
 / dividend inside RRSP
Hopefully when you withdraw in the
future, there is a lower tax rate on
that income
    Taxes/ share
    taxes/ share
outside RRSP
/share of the $5 earnings
remain
    

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
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Document Summary

Sole proprietorships: business owned and run by 1 person. Small in terms of revenues, profits and people employed. No separation between firm and owner; taxed at personal level and limits ability to raise money from investors. Life of business limited to life of owner. Income taxed at personal level according to ownership. 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. 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.

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