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BU111-After_Midterm - Forms of Business Ownership...

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1 Forms of Business Ownership Unincorporated Business – Sole Proprietorship, Partnership 2 or more Incorporated Business – Private corporation , Public corporation Chartered Accountants are not allowed to be incorporated Private corporation is not allowed to sell its shares to general public Public corporation is allowed Legalistic Distinction between incorporated/unincorporated Legally an unincorporated business is not distinguished from its owners, they are considered one entity. The law sees no distinction between owners’ personal assets and his business’s assets. If the business declares bankruptcy, creditors are legally entitled to the business and the owners assets, the owner has unlimited liability Corporation exists as a separate legal entity from its owners. And incorporated business has a separate legal entity possessing the same rights as an individual. The owner has limited liability and therefore if a business goes bankrupt, the owner will not go bankrupt personally Tax on Business Income Unincorporated are taxed based on the personal tax law system because the business profits are personal income Corporations are taxed based on corporate tax laws(fixed rate system) Private are taxed lower than public corporations due to the small business tax deduction Federal surtax only applies to corporations As business grows larger, tax system is unfavorable for unincorporated businesses Corporate tax rates of a “small“ business apply on first $400 000 Province reduction of 8.5% and fed reduction of 16%, overall rate is 18.62% small business reduction 50% of shares must be under Canadian, known as Canadian controlled business must be private must reinvest into business if income is taken out, other taxes apply rates change for income >$ 400 000 When to incorporate from a Tax Perspective (Sole Proprietorship vs Private Corp) Assume that ALL income comes from the business: Lowest Tax bracket ($0-~$36,000 in 2008) yields 21.05% Results in ~$8060 at the highest range of the tax bracket
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2 Compared to PRIVATE CORPORATION: Results in ~$8090 in the same net income range Makes sense to stay unincorporated Higher tax brackets (> $36,000 in 2008) yields > 31.15% Assume that the business income is only PART of the total: Stay unincorporated while business is in a loss position – the losses would be written off against employment income. Sole Proprietorship Advantages 1. Ease of starting/stopping/liquidation 2. No legal restrictions to start a sole proprietorship 3. Satisfaction of working for oneself 4. Maximum levels of incentive (possess all profits ) (but also loss more) Disadvantages 1. Limited capital – banks, private savings 2. Lack of continuity – if the individual becomes sick/die, the business dies 3. Unlimited liability 4. Management limitations Rare to find in one person all attributes to expand and generate business Partnership Partnership Agreement c can be verbal but highly unadvisable
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BU111-After_Midterm - Forms of Business Ownership...

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