Business Organizations - Presentation Flashcards
What are the three basic types of business organizations?
- Sole proprietorship
- Partnership
- Corporation
What is a business?
An organization or enterprising entity engaged in commercial, industrial, or professional activities
What is defined as an “Individual”?
Any person or legal entity that can do the things that ahuman person is usually able to do in law - such as enter into contracts, sue and be sued, and own property
(can be companies, corporations, etc)
What is a Creditor?
A person or company to whom money is owed
What is Liability?
The extent that assets are available to satisfy creditors
What is Limited Liability?
Liability limited only to business assets
What is Unlimited Liability?
Where personal assets are also available to satisfy creditors
What is Sole Proprietorship?
- Individual Owner
- No Separate legal entity
- Unlimited personal liability
- One level of tax
What is a Partnership?
- Two or more persons are owners
- No separate legal entity
- Unlimited joint and several liability
- One level of tax
What is a corporation?
- Any number of shareholders
- Limited personal liability
- It’s a separate legal entity
- Two levels of tax
What are some advantages of a Sole Proprietorship?
- Inexpensive to set up
- Income goes directly into your pocket
- Management decisions are made by yourself
- Minimal regulation
- Can hire employees or contractors if you need help
What are some disadvantages of a Sole Proprietorship?
- Unlimited personal liability
- Losses directly attributed to the sole proprietor
- Profit is taxed as personal income
- More difficult to transfer ownership of the business
- Limited means to raise capital (bank loans will be processed as personal loans)
What are the 4 requirements to set up a Sole Proprietorship?
- Business name
- GST registration
- Business checking account
- Liability Insurance
What are the advantages of a Partnership?
- Broader skills
- Deeper Resources
- More contacts
- Share of business risk with partner(s)
- Share of management responsibility
What are the disadvantages of a Partnership?
- Liability can be an issue
- Inability to transfer ownership
- Difficult to raise capital
- Profit of partnership taxed as personal income
What are the 3 types of Partnerships in Canada?
- General
- Limited
- Limited Liability
What is a General Partnership?
The most common type of partnership - A business arrangement between 2 or more individuals who share the profits and liabilities of the business
Each partner is fully personally liable for the debts, contractual obligations, and torts in the partnership
What is a Limited Partnership?
A partnership consisting of one or more general partners who have unlimited liability, and one or more limited partners who have limited liability, depending on their contribution to the partnership.
A corportation often forms the general partner, and individuals form the limited partners
What is a Limited Partner?
One who contributes financially and may occasionally provide advice, but is not otherwise involved in the business (operationally).
Why do businesses often use limited partnerships?
To raise money as a limited partnership will attract more investors
What is a Limited Liability Partnership?
A partnership that gives the partners more liability protection than they would have as general partners.
If a client feels wronged and sues a LLP, what would be at risk?
Only the assets of the partner who worked with or on that client
What fields are LLP’s normally allowed in most provinces?
High-risk professional environments such as lawyers, accountants, architects, or doctors
What is Partial Shield protection?
LLP protection in some provinces which limits the partners from acts of negligence, wrongful acts or omissions, malpractice, or misconduct committed by other partners during the provision of services.
What is Full Shield protection?
LLP protection in some provinces which protects the partner from all claims against the partnership, whether contractual or through the malfeasance of other partners. Partners are still liable for their own wrongful acts.
What is a Corporation?
- Legal entity of “person” or “individual” separate and apart from shareholders
- Shareholders own the corporation through shares and appoint directors
- Income and losses are separated from the owners (shareholders)
- Directors oversee management of the corporation
- Directors appoint the company officers
- Officers manage the day to day operation of the corporation
How is a Corporation formed?
- Created by fulfilling the formal requirements of either a federal or provincial statute
- Foreign corporations can be recognized under federal and provincial statutes
- Cost - filings and incorporation
- Residency – where are the directors
What are the jurisdictions of Federal, Provincial, and Foreign corporations?
Federal Corporations: can carry out business throughout Canada
Provincial corporations: can only carry on business as a right in own province
Foreign corporations: must register if carrying on business in province
What are the advantages of a Corporation?
- Shareholders (owners) have limited personal liability
- Liability limited to the value of shares purchased in the corporation
- Corporation is immortal
- Ability to raise capital
- Taxed independently of shareholders
- Potential tax benefits
What are the disadvantages of a Corporation?
- Limits on transferring money (profits) to share holders
- Two levels of tax
- Overhead cost of incorporation (cost of filing, shareholder meetings, preparation of financial records etc)
- Filing requirements
What are the two levels of tax in a Corporation?
- Income earned by corporation is first taxed at its corporate tax rate
- Corporate after-tax funds are distributed as dividends to investors and are subsequently taxed as personal income at tax rates subject to federal and provincial dividend tax credits (To recognize tax has already been paid by corporation)
Describe the levels of Corporate Governance:
Directors: responsible for supervising and making decisions for the activities of the corproation
Officers: responsible for the day-to-day operation of the corporation
Shareholders: participate in management through election of directors
What are the criteria and duties of a Director?
- no criminal record
- can’t be bankrupt
- Must be at least 18 yrs old
- honesty
- good faith and best interest of the corporation
- only has duty to corporation, employees, and creditors
Can one person act as a director, officer, and shareholder simultaneously in a Corporation?
Yes - common in many small businesses
What is the CEO?
The chief executive officer that acts under the direction of the board of directors. They are responsible for the overall daily activities of the corporation and typically sign major contracts, approve business arrangements, etc.
What is the CFO?
The chief financial officer - they handle the corporation’s financial issues and present them to shareholders
What are the two significant characteristics officers have in a Corporation that directors don’t?
Officers:
- have authority to legally bind the corporation
- are generally not personally liable for lawful actions taken on behalf of the corporation
