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Chapter 4

Chapter4- Forms of Business Ownership.docx

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Dave Swanston

October, 4, 2013 Chapter 4- Forms of Business Ownership Starting a Small Business  Liability- For a business, it includes responsibility to pay all normal debts and pay because of:  A court order or law  Performance under a contract  Payment of damages to a person or property in an accident Major Forms of Business Ownership Sole Proprietorships  Sole Proprietorship- A business that is owned and operated by one person, without forming a corporation  Advantages  Ease of starting and ending the business o Buy or lease needed equipment and put up announcements o No decision disputes but may have to get a permit from local government  Being your own boss o Mistakes and victories are all yours  Pride of ownership o Owner deserves all the credit for taking risks and providing needed products  Retention of company profit o You can earn as much as possible and not have to share that money (except for government in taxes)  No special taxes o Profits are taxed as personal income of owner who pays the normal personal income tax on that money o Can claim any business losses against other earned income which would decrease the personal taxes they need to pay  Less regulation o Less regulated than corporations and administration is less costly  Disadvantages  Unlimited Liability- The risk of personal losses o Unlimited Liability- The responsibility of business owners for all of the debts of the business which must be paid (by home, car, etc)  Limited Financial Resources Funds available are limited to the funds that owner can gather  Management Difficulties o Difficult to attract qualified employees to help run business because it cannot compete with salary and benefits offered by larger companies  Overwhelming Time Commitment Owner must spend long hours working; its a way of life  Few Fringe Benefits October, 4, 2013 o No paid health insurance, disability insurance, sick leave, vacation, etc  Limited Growth o Expansion is slow since it relies on owner for creativity, business know-how, and funding  Limited Lifespan o If owner dies or retires, business does not exist unless it is sold or taken over  Possibly Pay Higher Taxes o If income > $400,000, it will pay higher taxes than if it was a corporation Partnerships  Partnership- A legal form of business with two or more parties  Two types of partnerships are: 1. General Partnership- A partnership in which all owners share in operating the business and in assuming liability for the business’s debts 2. Limited Partnership- A partnership with one or more general partners and one or more limited partners  Two types of partners 1. General Partner- An owner who has unlimited liability and is active in managing the firm 2. Limited Partner- An owner who invests money in the business but does not have any management responsibility or liability for losses beyond the investment  Limited Liability- The responsibility of a business’s owners for losses only up to the amount they invest; limited partners and shareholders have limited liability  Advantages  More Financial Resources o Pool money + credit to make it easier to pay rent, utilities, and other bills o Designed to help raise capital (money)  Shared Management and Pooled/Complementary Skills and Knowledge o Provide different skills and perspectives  Longer Survival o Being watched by partner can help business person become more disciplined  Shared Risk o Shared financial risks in starting business and ongoing risks as business grows  No Special Taxes o Profits are taxed as personal income of owners who pay normal income tax on that money and any losses can be used to decrease earned income from other sources (same as sole proprietorship)  Less Regulation o Less regulated than corporation  Disadvantages  Unlimited Liability o Liable for partners’ mistakes as well as your own and can lose homes, cars, etc  Division of Profits o Profits are not always divided evenly (ex. One = more money and other = more time in business and both ask for a larger share of the profits)  Disagreements Among Partners o Not enough effort is spent at the creation of the partnership delineating the nature of the relationship through a partnership agreement  Difficult to Terminate October, 4, 2013 o Not easy to get out; who gets what and what happens next, etc o Partnership Agreement- Legal documents that specifies the rights and responsibilities of each partner  Absence of documents = provincial/territorial laws will determine terms of the partnership  Possibly Pay Higher Taxes o May be paying higher taxes if it is profitable than if it was a corporation Corporations  Corporation- A legal entity with authority to act and have liability separate from its owners  Owners (shareholders) are not liable for debts of corporation beyond the money they invest  Two types of corporations (In Canada): 1. Public Corporation- Corporation that has the right to issue shares to the public, so its shares may be listed on a stock exchange o Can raise large amounts of capital, regardless of size 2. Private Corporation- Corporation that is not allowed to issue stock to the public, so its shares are not listed on stock exchanges; limited to 50 or fewer shareholders o Don’t need much financing but want to take advantage of limited liability o Ex. Sun Life Assurance of Canada, Katz Group, Honda Canada, etc  Private Corporations > Public Corporations:  Private corporations pay lower rate of federal tax on the first $400,000 of active business income than would be paid by an unincorporated business, due to the small business deduction  Private corporations can issue stock to family members, making them co-owners; good way for owner to prepare for retirement by gradually transferring ownership and responsibility to those who will be inheriting the business  Advantages  Limited Liability o Owners are responsible for losses only up to the amount they invest o Don’t incorporate if intention of having a corporation is a way to avoid debts because sole proprietorship/partnerships debts remain personal liabilities even after they are taken over by corporation  More money for Investment o Raise money by selling ownership (stock) to anyone interested; build plants, buy materials, hire people, etc o Borrow money from individual investors by issuing bonds o Easier to obtain loans from financial institutes since lenders find it easier to play value on company by reviewing how shares are trading  Size o Large corporation with numerous resources have worldwide opportunities o Can be involved in many businesses at once so that if one is not doing well, the negative impact on total corporation is lessened  Perpetual Life  Death of owners does not terminate the corporation; separate entity  Ease of Ownership Change  Sell stock to someone else to change owners  Ease of Drawing Talented Employees  Offer benefits (pension, dental plan, stock options) to attract skilled employees October, 4, 2013  Separation of Ownership from Management  Able to raise money from different investors without getting them involved in management  Disadvantages  Extensive Paperwork o Prove that expenses and deductions are legitimate; process many forms and keep detailed financial records, minutes of meetings, etc  Double Taxation o Income taxed first before distribution to shareholders, then shareholders pay tax on income (dividends) they receive  Two Tax Returns o If individual incorporates, must file both corporate and i
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