Forms Of Business Organization Flashcards
What is reporting entity concept?
Separation of business and personal records. Economic activity that can be identified with a particular company be kept separate and distinct from the activities of the owner(s) and all other economic entities. This applies to proprietorships, partnerships and corporations.
Describe a proprietorship?
Business owned by one person, no partners. Simple to set up. Has control over the business. Mostly small amount of $$$ (capital) needed to start in business. Unlimited liability: personally liable (responsible) for all debts of the business. Owner/proprietor also receives all profits, losses, suffers etc of the business. Life of business is limited to life of owner. Business profits are reported as self-employment income & taxed on owners’s personal income tax return. However, the business records of the proprietorship must be separate from owners personal activities.
Describe a partnership?
A business owned by more than one person. Often formed because one person has limited economic resources to initiate or expand the business or because partners bring unique skills or resources to the partnership.
How is a partnership formalized and what does it outline?
Through a written partnership agreement that outlines the formation of the partnership, partner’s contributions, how profits and losses are shared, provisions for withdrawals of assets and/or partners, dispute resolution, and partnership liquidation.
What are the disadvantages of a partnership?
Each partner generally has unlimited liability for All debts of the partnership, even if one of the partners created the debt.
What is unlimited liability in a partnership?
Any of the partners can be forced to give up his/her personal assets in order to repay the partnership debt just as can happen to an owner in a proprietorship.
What are assets? Examples?
Are resources that provide future economic benefits. Ex: cash, investments, house, furniture, car and the like.
How are profits in partnership reported as?
Similar to a proprietorship, the profits of the partnership are reported as self-employment income and taxed on each partner’s personal income tax return. In addition, the reporting entity concept requires that partnership records be kept separate from each partner’s personal activities.
Partnerships are typically used to organize professional service businesses like?
Lawyers, doctors, architects, engineers and accountants.
How is furniture an asset? ~
Furniture is considered both an expense and an asset. It is an expense at first because you need furniture to run your company, you don’t want your client to walk into a bare office, that would look unprofessional. Being an expense helps out around tax time, make sure you keep that receipt, you will pay less GST at year end because you spent GST on that purchase, plus it will make your revenue go down (which looks good, because the less revenue it looks like you make the less takes you have to pay at the end of the year).
After the furniture is paid for, it is an asset because you can sell it for money if needed.
As an investor in a corporation, what do you receive? How do individuals become owners of shares?
Receive shares to indicate your ownership claim. Individuals can become owners of shares (shareholders) by investing relatively small amounts of money.
Since a corporation is a separate legal entity, its life is indefinite. What does this mean?
That means it continues on regardless of who owns its shares. It is not affected by the withdrawal, death, or incapacity of an owner, as is the case in a proprietorship or partnership.
Why is buying shares in a corporation especially a large corporation often more attractive than investing in a proprietorship or partnership?
Because shares are easier to sell.
What are advantages of a corporation?
Limited liability, ease of transferring ownership and indefinite life to name a few- make it easier for corporations to raise capital compared with proprietorships and partnerships.
What is the difference in paying personal income tax between proprietorships/partnerships and corporations?
Proprietorships and partners pay personal income tax on their respective shares of the profits, while corporations pay income tax as separate legal entities on any corporate profits. Corporations may also receive a more favourable income tax treatment than other forms of business organization.
