BAT4m Unit 1: Review of Grade 11 Accounting September

 A business can be formed in three different ways:  Proprietorship – one owner  Partnership – two or more owners  Corporation – Many owners Forms of Business Organization Forms 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. Proprietorship Proprietorship

 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. Proprietorship Proprietorship

 Examples:  What are pros and cons of proprietorship?  Advantage: full control, 100% profit  Disadvantage: unlimited liability, single responsibility (heavy burden on the owner) Proprietorship Proprietorship

 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. Partnership Partnership

 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) Partnership Partnership

 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) Partnership Partnership

 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. Corporation Corporation

 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 Corporation Corporation

 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 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, BE1-3  Page 36 P1-3 Income Trust