[MUSIC PLAYING]
Hi.
Else here.
Just what are the different types of business entities?
And exactly what are the pros and cons of each?
The three most common forms of business organizations
are proprietorship, partnership, and corporation.
Many businesses start off as a proprietorship or partnership
and, as they grow, they may choose
to become a corporation because of the benefits
of the corporate structure.
Proprietorship is a business owned by one person.
There are many benefits of the proprietorship
form of business.
It's simple to set up, costing between $60 and $100.
to register provincially.
You can start with very little money.
I started my own business with less than $5,000
of personal savings and no debt.
The owner has full control over the business.
They make all the decisions and answer
to no one but themselves and their customers--
and their creditors if they happen to borrow money.
There are also drawbacks to a proprietorship.
When the owner dies, often so does the business.
Any profits from the business are
reported on the owner's personal income tax return,
and they're taxed at personal income tax
rates, which are often high.
Finally, the owner has unlimited liability.
What does that mean?
It means that the company and the owner
are not legally separate.
If a customer, supplier, or creditor sues the company,
the owner is being sued personally.
If the company has debts, they're
considered the personal debts of the owner.
The owner can lose everything owned by the business,
but also all of their own personal assets,
including their house, car, and personal savings.
Unlimited liability means that a proprietorship is not
a separate legal entity from the owner,
but the accounting records of the business
are totally separate from the personal records of the owner.
What does that mean?
Well, if the owner of a business has a car for personal use,
that car will never show up on the business's
financial records.
Proprietorships are the most common form
of business organization.
Every two years there's approximately half
a million new start ups in Canada.
Many of the businesses you see everyday are proprietorships.
A partnership is an unincorporated business
owned by multiple people.
The advantages are very similar to the proprietorship
form of business organization.
An additional advantage is that there may be
more startup capital available.
That's because each partner brings their own cash
to the partnership.
In a partnership, the partners share
in all the decisions and profits based on the partnership
agreement.
Partnerships have similar disadvantages
to a proprietorship.
One serious additional disadvantage
is that the debts of one partner are also
the debts of the other partners, even
if the other partners didn't know about the debt
to begin with.
Similar to proprietorship, although the business is not
a separate legal entity, the personal assets and obligations
of the partners are never reported on the partnerships'
financial records.
Personal and business records are kept totally separate.
Partnerships are another common form of business organization,
particularly for service businesses,
kind of like accountants.
Partnerships can grow to be very large.
For instance, the accounting firm KPMG
is a partnership and its globally recognized.
Corporation are businesses that are
incorporated under either provincial or federal law.
They are owned by shareholders.
There are many benefits to being a corporation.
The main benefit is that the corporation
is a separate legal entity.
They file their own tax return and they can be sued.
This means that the owners have limited liability.
They can only lose whatever they spent on their shares, never
their personal assets.
Because ownership is separate from the business
of a corporation, the life of a corporation can go on forever.
This is because transferring ownership
means selling the shares to another owner.
This also makes it much easier for a corporation
to raise money.
They can simply sell shares on the stock market.
Finally, a corporation pays corporate tax rates,
which are often significantly lower than the personal tax
rates paid by proprietorships and partnerships.
There are also disadvantages to corporations.
They're complicated, and more expensive to set
up and maintain.
There are many regulatory filings to consider.
Finally, if you own a share in a corporation,
you don't make the decisions, and you
don't get all the profits like in a proprietorship
or partnership.
Ownership and control are totally
separate in a corporation.
The board of directors and management run the corporation
and make the decisions.
The shareholders are totally separate from the running
of the company.
There are two types of corporations,
public and private.
Public corporations are ones like Canadian Tire.
Private corporations are ones like McCain Foods.
Public corporations sell their shares
on the stock exchange like the TSX, the Toronto Stock
Exchange.
Their financial statements are available to everyone.
They're published on the web.
And there can be thousands, or even hundreds of thousands
of shareholders.
This means that anyone can own shares in something
like Bank of Montreal or Royal Bank.
Since you can invest a small amount of money,
your risk of loss is low.
There are over 4,500 public companies in Canada today.
Private corporations can be very large, such as McCain Foods,
or they can be very small.
Private corporations do not have their shares available
to the public.
Because of this, they often have a hard time raising capital
to expand their business.
A private corporation's financial statements
are never made public.
You as an individual will never be
able to see the financial statements of McCain Foods.
There are over 2 million private corporations in Canada.
And they can be very large or very small,
with many private shareholders, or as few
with one or two shareholders.
So let's check out how well you understood the different forms
of business organizations.
Remember to pause the video and come up with your own answer
first.
The majority of restaurants in your neighborhood
are most likely to be--
actually, a restaurant can be any type of business.
Chains like McDonald's are corporations,
but some are partnerships, and other proprietorships.
For instance, the Thai restaurant
around the corner from me is a proprietorship,
and the fish and chip place it's a partnership.
Corporations will be the focus of this course.
Does that mean that an accounting course that
covers corporations is useless for anyone
else who wants to start their own proprietorship
or partnership?
Absolutely not.
Remember that the accounting records of any business
must be kept separate from the owners, regardless
of the form of the business.
Accounting for any type of business is basically the same.
So the content of this course is applicable to anyone
who is interested in learning about accounting,
regardless of the form of business.
This will help you to make decisions
either for your own business or the business
you work for in the future.
So why is it important to learn about the different types
of business organizations?
Because you may, one day, be one of the 250,000 individuals
who start their own business every year.
Knowing the different types of business organizations
out there, their advantages and disadvantages,
can help you to make an informed decision in the future.
In the next series of videos, we'll
be covering the different types of business activities.