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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, hmm, 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 a proprietorship, although the business is not
a separate legal entity, the personal assets and obligations
of the partners are never reported on the partnership's
financial records.
Personal and business records are kept totally separate.
Partnerships are another common form of business organization,
particularly for service businesses,
hmm, kind of like accountants.
Partnerships can grow to be very large.
For instance, the accounting firm KPMG is a partnership,
and it's globally recognized.
Corporations 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's 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 two million private corporations in Canada,
and they can be very large or very small
with many private shareholders or as few as 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 others proprietorships.
For instance, the Thai restaurant
around the corner from me is a proprietorship.
And the fish and chip place, it's a partnership.
So we've already covered all the different business
organizations.
Students at this point are often clear about what
kinds of businesses would choose to be
a proprietorship or a public corporation
but not so clear about the choice between the partnership
and a private corporation.
Why would a company choose to be a partnership when
a private corporation would mean they have limited liability?
To better understand this, let's review why we incorporate.
One is the lower taxes that corporations pay.
Two is the limited liability.
The shareholders' personal assets
are protected because the company is
a separate legal entity.
Three is the income splitting.
If I want some of my family or friends
or extended family to share in the profits of the company,
it's much easier to do in a private corporation.
Are there any drawbacks to a private corporation?
Absolutely.
A private corporation is a separate legal entity,
and it has ownership rights.
As a shareholder, you actually don't own anything directly
except for your shares.
The corporation owns everything.
You don't.
Even if you're the president and you
own 100% of the corporation's shares,
you're an employee and a shareholder but nothing else.
Now, let's look at what's good about a partnership.
One is you might not be able to afford to set up a corporation.
Partnerships are relatively cheap to set up and administer.
Sometime it's just a simple partnership agreement.
Two is tax reasons.
Yes, corporations do have lower tax rates.
But you might set up a partnership first
because any losses from a partnership
are reported as business income on your personal income tax
return.
If you have losses from an early startup,
they can be placed against other income
that you earn, say from a full-time job
while you run this partnership part time.
Three is that a partnership is much easier to dissolve.
If you plan to run a business for only a period of time,
it's much easier to break down a partnership
than it is to break down a private corporation.
Are there any businesses who are set up as a partnership
because they can't become a private corporation?
Actually, pretty well anyone can set up a private corporation.
In Canada, not only can businesses
become private corporations but so can dentists, lawyers,
doctors, or accountants.
Limited liability, tax benefits, and income sharing
might make it the right way to go
even though it is more complex than a partnership would be.
So which is better, a partnership or a corporation?
Well, each situation is unique, so we can't
say which would be the best.
The choice between a partnership or a corporation
depends on many things.
You have to analyze the business itself and decide.
For instance, would liability be an issue for the company?
Or is tax minimization important?
As an example, say a company sells mining equipment.
If there's an accident due to their equipment malfunctioning,
a lot of people might get hurt.
A private corporation might be the way to go.
What about a doctor?
The tax benefits available to a private corporation
might make it a good idea for the doctor
to incorporate, even with the higher costs of incorporation.
For instance, a doctor who makes $200,000 a year
can pay significantly less taxes if they
incorporate as a private corporation in Ontario.
Note, incorporation doesn't provide
a doctor with protection from losses
due to professional negligence.
So which would be best, partnership or corporation?
There are over two million private corporations in Canada.
And we don't even know how many partnerships there are
because it can't be tracked.
There are probably hundreds of thousands.
Individuals who are choosing between a private corporation
and a partnership must look at the pros and cons of each
and given their individual circumstances
decide which works for them.
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 owner's, 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.
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