BAT4mBAT4mUnit 1: Review of Grade Unit 1: Review of Grade

11 Accounting11 AccountingSeptember 4 2014

A business can be formed in three different ways:Proprietorship – one ownerPartnership – two or more ownersCorporation – Many owners

Forms of Business OrganizationForms of Business Organization

When a business is owned by one person, this business is called proprietorship.

The owner is usually the operator (manager) of the business.

Examples are convenient store, barbershop, plumbers, farmers and mechanics.

Usually only a small amount of money is needed to start in business as a propritorship.

ProprietorshipProprietorship

The owner takes all profits, and all loss.

In the eyes of the law, owner = business

The owner is personally liable (responsible) for all debts.

Remember to honor entity principle = business activities must be recorded separate from the personal activities.

ProprietorshipProprietorship

Examples:

What are pros and cons of proprietorship?

Advantage: full control, 100% profit Disadvantage: unlimited liability,

single responsibility (heavy burden on the owner)

ProprietorshipProprietorship

When a business is owned by two or more owners, it is called partnership.

Typically, a partnership agreement defines the initial investments of each partner, the duties of each partner, how net income (or net loss) will be divided, what the settlement will be if a partner dies or withdraws etc.

The records of business activities must be kept separate from the personal activities.

PartnershipPartnership

Each partner generally has unlimited liability for all debts of the partnership, even if one of the other partners created the debt.

In the eyes of the Law, business = partners

In order to avoid the unlimited liability aspect, some people choose LLP. (chapter 12)

PartnershipPartnership

Examples: Public accounting firm, Dentists, Medical Clinic, Law firms, High Tech companies in early stage

What are the pros and cons of partnership?

Advantage: less work for partner, synergy effect due to talent combination and money addition.

Disadvantage: share the profit, unlimited liability, can lead to ugly situation (divorce)

PartnershipPartnership

Corporation is a business which is organized as a separate legal entity under law.

The owners are not personally responsible for the debts of the company.

Its ownership is divided into (transferable) shares or stocks.

The owners of the shares (shareholders) have limited liability because they risk losing only the amount that they invested.

CorporationCorporation

Corporations have unlimited life. Public corporations: Their shares

are traded in public exchange. For example Wal-Mart, Blackberry, Facebook etc

Private corporations: Their share are not traded in public exchange. For example, Enterprise rent a car, McCain Foods

CorporationCorporation

It is a special or limited purpose corporation which is set up specifically to invest in income producing assets (such as real estate).

The trust pays out most of its earnings to investors, who are called unit-holders.

It does not pay any corporate income tax.

Unit holders pay personal income tax on the cash

Income TrustIncome Trust

One quarter of the top 500 companies in Canada are income trusts.

Examples are A&W, The Brick, Yellow Pages

Classwork Page 30 BE1-2, BE1-3Page 36 P1-3

Income TrustIncome Trust