Business Types

Question 1

What are the 3 business types?

Answer 1

1. sole proprietorship
2. partnership
3. corporations

Question 2

What is a sole proprietorship?

Answer 2

• one person owns the entirety of the business (can have employees)
• carries on as individual
• income tax treated as their own
• responsible for all net losses and sole proprietor makes all the business decisions

Question 3

What is a partnership?

Answer 3

two or more person jointly or together carry on a common business with the objective being to share profits and losses

• falls under “law of agency” - one partner is liable for the wrong doing of the partner
• cannot put in the agreement that will indemnify and save harmless the other partners because an outside 3rd party who is suing the partnership is not bound by the partnership agreement

Question 4

What is a corporation?

Answer 4

• its own entity
• cannot incorporate to avoid liability (but instead carry liability insurance)
• composed of shares
• must file income tax under this entity
• created under provincial statue, prov business corp act or under fed business corp act

Question 5

What are articles of incorporation?

Answer 5

name
directors of company
share structure

Question 6

What are bylaws?

Answer 6

rules of operation

Question 7

Why should you incorperate?

Answer 7

• on going business that never dies
• succession is simple
• limits the liability of shareholders
• tax avoidance
  corporate vs personal tax rates
  paying yourself dividends versus wage
  hiring family members (can do this with proprietorship)
  capital gains (750,000 lifetime capital gains exemption on small business shares, farms and fishing operations)

Question 8

What is a balance sheet?

Answer 8

statement of financial position at a specific point in time

method of capturing health of a practice

Question 9

What are two main categories of a balance sheet?

Answer 9

assets
liabilities + equity

Accounting equation:
assets = liabilities + shareholder equity
or
Equity = assets - liabilities

Question 10

What is a financial statement?

Answer 10

standardized method for reporting on the financial status of a business
needed for loans, buying/selling a business

Question 11

What are three main parts of a financial statement?

Answer 11

balance sheet - point in time
income statement - over period of time
cash flow statement - over period of time

Question 12

what is a financial statement analysis?

Answer 12

can be as simple and as complicated as you want

• current ratio
• debt equity ratio
• AR turnover
• inventory turnover
• AP turnover

Question 13

What are three types of practice valuations?

Answer 13

market approach - buying a house, comparative value
asset approach - estimate assets including goodwill (trust - having clients you built up)
Income approach - based on cash flow (buyer assumes fair wage and whatever is left over determines the value of the practice, level of risk, pay off in 4 years)