FORMS OF BUSINESS OWNERSHIP
Chapter 6
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Sole Proprietorship: a business that is owned, and usually managed, by one person.
Partnership: a form of business with two or more parties, who agree to operate an entity jointly.
Corporation: a legal entity with authority to act and have liability separate from its owners.
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Three basic forms of business ownership
Sole proprietorship
One person owning and operating a business, without forming a corporation.
In a sole proprietorship, the business and the owner are a single entity.
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Advantages
Ease of start/end
Be your own boss*
Pride of ownership*
Leave legacy*
Retain profit*
No special taxes
Fewer regulations
Disadvantages
Unlimited liability
Limited financial resources
Difficulty in mgmt.
Time commitment
Few fringe benefits
Limited growth
Limited life span
Sole proprietorship
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* These are also present in a wholly owned corporation, but not as simply
Unlimited liability
When you work for others, it is their problem if the business is not profitable.
When you own your own business, you and the business are considered one. You have unlimited liability; that is, any debts or damages incurred by the business are your debts, and you must pay them.
When you have a sole proprietorship, you have unlimited liability.
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partnership
General Partnership
A partnership in which all owners share in operating the business and in assuming liability for the business’s debts.
General Partner - An owner (partner) who has unlimited liability and is active in managing the firm.
Limited Partnership
A partnership with one or more general partners and one or more limited partners.
Limited Partner - An owner who invests money in the business but does not have any management responsibility or liability for losses beyond the investment.
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Advantages
More financial resources
Shared Management
Longer Survival
No special taxes
Disadvantages
Unlimited liability
Division of profits
Disagreements among partners
Difficult to terminate
partnership
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forming a partnership
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Choose your partner carefully, do not be joined with someone who does not share your values.
Partnership agreement in writing, stating expectations and contributions.
Agree how it will end, before it begins…
corporations
A legal entity created when articles of incorporation are registered with the (federal or provincial) government.
Ownership is derived from holding shares, each share gives the holder one vote. (some exceptions)
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How owners affect management
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Types of corporations
Private: not traded on any stock exchange, limited number of stockholders.
Public: shares are traded on one or more stock exchanges
Other Types
Professional Corporations for professional activates, (doctors, lawyers, accountants etc.)
Non-resident: has its head office outside of Canada
Personal Services: for an athlete or entertainer to take advantage of corporate tax rates
Non-profit: universities, hospitals, charities, etc.
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Advantages
More money for investment
Limited liability
Separation of ownership/mgmt.
Ease of ownership change
Perpetual life
Size
Disadvantages
Initial cost
Paperwork & complexities
Two tax returns, possibility of extra tax
Termination/closure difficult
Stockholder and board conflict
corporation
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Corporate expansion: Mergers and Acquisitions
A merger is the result of two firms forming one company.
An acquisition is one company’s purchase of the property and obligations of another company.
A vertical merger is the joining of two firms involved in different stages of related businesses.
A horizontal merger joins two firms in the same industry and allows them to diversify or expand their products.
A conglomerate merger unites firms in completely unrelated industries.
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Types of Mergers
[Catch Figure 6.6]
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franchises
Some people are not comfortable starting their own business from scratch. They would rather join a business with a proven track record through a franchise agreement.
A franchise agreement is an arrangement whereby someone with a good idea for a business (the franchisor) sells the rights to use the business name and to sell a good or service (the franchise) to others (the franchisee) in a given territory.
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Advantages
Management and marketing assistance
Personal ownership
Recognized name
Financial advice & assistance
Lower failure rate
Disadvantages
High start-up costs
Shared profit
Management regulation
Coattail effects
Restrictions on selling
Fraudulent franchisors
franchises
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Franchise contract
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Franchisor, Inc.
Branded Product/Service
Performance
Monitoring
$
franchisor
Assigns and protects territory
May provide financial aid/advice
Offers merchandise/ supplies at competitive prices
Provides training/support
Protects and develops brand
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franchisee
Pays upfront costs (business set-up to specific standards)
Makes monthly/royalty payment to franchisor
Runs business by franchisor’s rules/procedures
Buys materials from franchisor/approved supplier
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How to avoid a franchise lemon
Research officers & their business experience
Get summary of any bankruptcy & litigation
Estimate all costs to set up franchise
Review franchise contract and three most recent financial statements
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Owned by the members
Pay no income taxes
Profits are shared amongst the members
Co-workers, farmers, fishermen, consumers, etc. band together to form “co-ops”
Co-operatives
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