Every business needs a legal form, and Ontario businesses generally choose from three. A Sole Proprietorship is a business owned by one person; the proprietor has unlimited personal responsibility for the debts and legal obligations of the business — if the business cannot pay a debt, the owner's personal assets are at risk. A Partnership is a business owned by two or more people, governed by a Partnership Agreement that outlines the rights and responsibilities of the partners, the amount of capital or assets to be contributed by each partner, how profits and losses are to be shared, and how the partnership will be dissolved.
- A General Partnership: all partners have unlimited liability.
- A Limited Partnership: has two types of partners — general partners (unlimited liability, active management) and limited partners (liability limited to their investment, typically not involved in day-to-day management).
A Corporation is a form of business ownership that is a separate legal entity — legally distinct from the people who own it. This is the single biggest difference from a proprietorship or partnership: if a corporation cannot pay its debts, its Shareholders (owners of shares in a corporation) normally only stand to lose what they invested, not their personal assets.
| Term | Definition |
|---|---|
| Share Certificate | A form issued by a corporation indicating the number of shares owned |
| Board of Directors | A group of persons, elected by the shareholders, who are responsible for the operation of the corporation |
| Private Corporation | An incorporated business whose shares are not publicly traded and are held by a small number of shareholders |
| Common Shares | Have one vote per share but no guaranteed dividend |
| Preferred Shares | Do not have voting rights but have prior claim on assets and net income over common shares |
| Par Value | The nominal value of a share of stock as indicated in writing on the share certificate |
Shareholders elect a Board of Directors to run the corporation on their behalf, rather than managing it personally the way a sole proprietor or partner might. A corporation whose shares are widely traded on a public stock exchange is a public corporation; one whose shares are held by only a small group of people is a Private Corporation.
Retained Earnings and Dividends
Retained Earnings is an equity account containing the balance of undistributed net income — profit the corporation has earned over the years but chosen to keep in the business rather than pay out. A corporation may choose to distribute some of that profit as Dividends — the distribution of a company's profits to its shareholders. The Statement of Retained Earnings provides a complete description of changes in the Retained Earnings account, typically: opening balance + net income for the year − dividends declared = ending balance.
Costing in a manufacturing company
A manufacturing company's costs are grouped into three categories that a merchandiser never needs, because a merchandiser buys finished goods instead of building them. Direct Materials are items that become part of the finished product (the wood in a chair). Direct Labour is the cost of all employees who work directly on changing the raw materials into finished products (the wages of the person operating the saw). Overhead Costs include all production costs other than direct materials and direct labour (factory rent, factory utilities, equipment maintenance, a factory supervisor's salary).