Chapter 3 Entrepreneurship

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Chapter 3Entrepreneurship Forms of Business
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• Do you have parents, close relatives or friends
  who are in business?
• Do they have co-owners?
• Have they incorporated?
• Do you happen to know why they made the decisions
  they do (or can you speculate on why)?

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. Heinz and Kurt Wagner
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Todays Plan

• Three main forms of business
• Sole proprietorship v partnership
• Incorporating v not incorporating
• Mergers acquisitions

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Sole Proprietorship

• an unincorporated business owned by one
  individual
• can have employees
• examples

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Partnership

• an unincorporated business with two or more
  owners
• partnership agreement
• each partner is jointly and severally liable

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Partnership

• jointly and severally liable on 1,000,000
  lawsuit

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Corporation

• separate legal entity
• how you make one
• federal Canada Corporations Act
• provincial Companies Act of PEI
• limited liability
• many corporations are wholly owned

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Sole proprietorship v partnership

• Working with other people
• (by definition), but important difference
• partners may
• have complementary skills
• have money
• why not just hire people with complementary
  skills instead of taking them in as partners?
• why not just borrow money instead of taking the
  people with money in as partners?

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Sole proprietorship v partnership

• Working with other people (contd)
• nowadays usually need partners if the business
  is more than small-scale
• disadvantages when partners cant get along

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Sole proprietorship v partnership

• Formal Agreements
• in partnership should have partnership
  agreement
• in sole proprietorship dont need one
• partnership agreements
• dont need to share profits equally
• e.g. Mr. Moneybags and Mr. Sweat
• death
• retirement
• shot-gun arrangements

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Sole proprietorship v partnership

• Formal Agreements contd
• Do you think the shotgun clause is a fair way to
  handle a break-up?
• many of these arrangements can apply to
  shareholders too

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Incorporation Issues

• Limited Liability
• a main advantage of incorporating
• blurs
• when bank requires shareholder to pledge personal
  assets
• insurance could cover lawsuits
• personal liability
• (e.g. payroll taxes)

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Incorporation Issues

• Tax Considerations
• a main advantage of incorporating
• personal taxes
• based on tax brackets
• generally high
• corporate taxes
• if CCPC and active business
• first 300,000 about 20
• otherwise about 42
• dividends top up tax assuming 20 was paid

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Incorporation Issues

• Tax Considerations contd
• main things to remember
• before dividend is paid
• income below 300,000 taxed at low rate
• income above 300,000 taxed at about the same as
  the personal rate
• after dividend is paid
• income below 300,000 combined taxes (corporate
  personal) are about the same as the ordinary
  personal rate
• income above 300,000 combined taxes (corporate
  personal) are much higher than the ordinary
  personal rate
• bonus down
• startup losses

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Incorporation Issues

• Administration Costs
• cost of incorporating
• annual costs tax returns, appointing directors
  and officers
• for large businesses these costs are trivial
• for very small businesses can be prohibitive
• NORMALLY incorporate unless business is very
  small

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Incorporation Issues

• Withdrawal of Funds
• from sole proprietorship or partnership easy
• from corporation often is taxed as though it is
  a dividend
• solution for corporations make most of your
  investment in the corporation by way of a loan

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Incorporation Issues

• Changing the Form of Business
• sole prop or partnership corp EASY!
• corp sole prop or partnership PROBLEM!

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Mergers Acquisitions

• Mergers (of corporations)
• exchange shares of old separate organization for
  shares of new combined organization
• Acquisitions
• method 1 acquirer issues shares in exchange for
  shares of the acquired company
• method 2 acquire shares for cash
• method 3 acquire assets for cash
• Outcomes often bad

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Dads last acquisition

• didnt work out too well