chapter 5 business organization and finance economics 11
TRANSCRIPT
Chapter 5 Business Organization and Finance
Economics 11
Types of organizations
Businesses are established and financed in five ways:
-sole proprietorship (aka single proprietorship)
-partnership
-corporation
-public (government) enterprise
-cooperative
Sole Proprietorship the sole proprietorship is a form of
business organization in which one person owns and operates the business
sole proprietorships are very common in Canada, they are easy to establish
there are no general laws governing the establishment of a proprietorship; each province has its own regulations In Nova Scotia, a sole proprietorship is
actually registered as a “partnership” – but with only one partner listed, in other words it is a partnership of one
Sole Proprietorship The owner (sole proprietor) makes all
decisions about what, where, when, and how much to produce
The owner establishes the prices, hires the employees, supplies the capital necessary
The owner does what they like and collects all the profits (or incurs all losses)
The sole proprietor can say “I am the company”
Sole Proprietorship Challenges for the sole proprietor:
The size of the operation (number of employees, amount of capital invested, the output produced) is severely limited by proprietors’ financial resources and their ability to borrow money.
Proprietors are obliged to oversee the entire operation and frequently perform all the various tasks themselves For some of the tasks, the sole proprietor
may not be particularly well suited.
Sole Proprietorship Challenges for the sole proprietor:
A sole proprietorship usually requires the owner’s continuous presence Any prolonged absence on the owner’s part could
lead to serious losses for the firm
Sole proprietors face serious financial risk Legally, proprietors are entirely liable for the
losses of their business This liability is unlimited, they could lose the
capital they invested but they could also lose their homes, and any other assets with value.
often sole proprietors find it difficult to sell their business because it is hard to find someone with the necessary knowledge, skills and capital
Sole Proprietorship if the proprietor dies, goes to prison, or
becomes insane, the proprietorship is ended.
sole proprietorships are particularly appropriate when the total market is small, where large scale production is out of the question, and where operations are not routine.
sole proprietorships are common in professional services like accounting, dentistry and engineering and also in farming, restaurants, house construction and appliance repair
Partnerships
a partnership is a business organization in which two or more individuals enter a business as owners, and share the profits and losses
sometimes with a sole proprietorship, lack of capital is a problem, which is why a partnership works well because more capital can be raised
Partnerships
a partnership always has an agreement (usually written) that specifies the money, skills, and participation to be provided by each partner, as well as the type of authority each partner will have
the profits and losses can be shared equally, a 50/50 relationship, but it could also be 60/40, 80/20, etc.
Partnerships advantages a PARTNERSHIP has over the SOLE
PROPRIETORSHIP: can raise more capital so it is better able to undertake
operations on a larger scale
responsibilities can be divided and therefore handled more efficiently
shared expertise allows each partner to specialize in different types of the business
If one partner gets ill or for some other reason has to be away from the business for an extended period of time, the business continues to run under the control of another partner
Partnerships disadvantages of a PARTNERSHIP:
Partners may find it difficult to reach agreement on certain issues
Each partner is legally liable for the debts of the entire firm this liability is unlimited in that it goes beyond the
amount a partner has invested in the firm and can include the partners’ personal property
a partner cannot simply withdraw from the business whenever they like, they must be bought out
each time a partner resigns or dies, a new agreement must be drawn up
Corporations
a corporation is a form of business organization that has an existence of its own separate from those who created or own it
there are two main types of corporations: Crown and business
Crown corporations are owned and controlled by some level of government (for example the CBC)
Corporations a business corporation is owned and
controlled by private individuals
the weaknesses of the sole proprietorship and the partnership led to the formation of the corporation
the corporation is considered an entity under the law it has all the legal rights and responsibilities of an adult
person a corporation can hold property in its name, enter into
contracts, and sue or be sued in a court of law
officials act on a corporation’s behalf
Corporations advantages a CORPORATION has over the
SOLE PROPRIETORSHIP and PARTNERSHIP:
the legal right to limited liability, people who have invested in a corporation are not personally liable for all its debts the investment is all they lose
companies attach the word Limited (Ltd.) or Incorporated (Inc.) to their company name to indicate to suppliers and customers that the owners have limited liability for corporate debts
when a corporation wants to grow it must raise funds (capital) one way of raising capital is to retain earnings of a corporation rather
than distributing them in the form of dividends to owners
another way to raise capital is to issue securities ; there are three main types of securities that corporations offer to the public:
the common share, the preferred share and the bond
CorporationsCommon Shares
if you purchase one or more common shares in a corporation than you become part owner of that corporation
this means you get a right to vote in the affairs of the company and a right to share in the profits
voting power and share of the profits depends on the number of shares held (owned) compared to the total number of shares that have been issued
one share = one vote if the corporation goes under, the shareholders are
paid last (all other financial obligations of the firm are met first)
CorporationsPreferred Shares stock issued by a corporation that shows ownership of a
company
preferred shareholders don’t get a vote in the affairs of the corporation
preferred shares are more secure than common shares
promised a fixed return on investment
if the company goes under, you get paid before common shareholder
CorporationsBonds a written promise to pay a stated sum of money at some time in the future
until that time interest is paid on stated dates bonds are the most secure of the securities bondholders are not part owners, they are more like creditors if the corporation folds, debt to bond holders is repaid before the preferred and
common shareholders generally bonds give a lower return than common and preferred stock
all corporations must issue common stock, but they don’t have to issue preferred shares or bonds
ultimately control of the corporation is with the common shareholders however, for large corporations with thousands of shareholders there are too many
people to actually make any decisions so a board of directors is elected by vote of the shareholders (one vote for each
share owned) the board of directors then elects the officers of the board (VP, treasurer,
President, etc.) the board of directors performs a “watchdog” role they are responsible to
shareholders for the officers they elected to run the company
Corporationsadvantages of the CORPORATION:
the shareholders’ liability is limited to the amount invested in the firm
usually not difficult to sell shares on the stock market
they do not need to consult other owners before selling their stock
corporations can raise a lot of capital
can take advantage of mass production, marketing, and automation
Corporationsdisadvantages of the CORPORATION
in theory the corporation is under democratic control of the shareholders, but in practice a small group may control it effective control may rest in the hands of the minority
corporations are more expensive to establish, have to pay a fee to be incorporated federally or provincially
costs of auditors, accountants, and lawyers are also high
double taxation as a firm it pays federal and provincial taxes on its profits after-tax profits paid to shareholders are also subject to federal
and provincial taxes
The Stock Exchange an organized market where listed stocks can be bought or sold
a stock exchange is an actual building that provides a marketplace for the buying and selling of stocks
traders work on the floor of the exchange, executing their clients’ orders to buy or sell listed shares
the stock exchange does not set the price of stock, prices reflect the public opinion and worth and potential of a company
there are four stock exchanges in Canada: since
(21%) Montreal 1832(75%) Toronto 1852(3%) Calgary 1913(1%) Venture (Vancouver)
http://www.tmx.com/en/about_tsx/
The Stock Exchange (1%) Vancouver 1907 the TSE (Toronto Stock Exchange) is the fifth largest in the world Canadian stock exchanges involve trading shares that have already been sold
to the public by stockbrokers acting on behalf of corporations that wish to raise money
Canadian laws and stock exchange rules control the activities of corporations and stockbrokers to ensure fair and honest dealings as well as full disclosure of information
the Canadian Securities Commission and provincial securities commission The Dow Jones industrial average is the best known and most widely quoted
indicator of the general trend of stock market prices in the US Since 1928 the Dow has been based on the closing prices of the thirty major
US corporations from sectors considered most representative of the US economy GM, IBM, Exxon, McDonalds, Texaco, Boeing, Coca-Cola, Amex
The Dow is widely used to track the movement of stock prices on the NYSE Canadian stock exchanges also publish indicators of the general trend in
stock prices The 300 composite index (known as TSE 300) is the widely known and
commonly used in Canada The TSE 300 measures changes in the prices of 300 leading and
representative Canadian stocks
Cooperatives
A cooperative (also co-operative or co-op) is an autonomous association of persons who voluntarily cooperate for their mutual social, economic, and cultural benefit. Cooperatives include non-profit community
organizations and businesses that are owned and managed by the people who use its services (a consumer cooperative) and/or by the people who work there (a worker cooperative).
Cooperatives
The primary purpose of co-operatives and credit unions is to meet the common needs of their members, whereas the primary purpose of most investor-owned businesses is to maximize profit for shareholders.
Cooperatives
Co-operatives and credit unions use the one-member/one-vote system, not the one-vote-per-share system used by most businesses.
Cooperatives
members vote on how a cooperative should be run and what should be done with its savings or profits
in recent days, places like Just-Us Coffee Roasters Co-Op in Wolfville, making money doing socially responsible coffee trade
not only do they provide employment and generate sales opportunities, its buying practices ensure a better life and better environment for people in Central and South America
strength: democratic control and loyal members
weakness: difficulty remaining competitive with private firms
http://www.justuscoffee.com/our-co-op/beginnings
Cooperatives
http://www.mec.ca/AST/ContentPrimary/AboutMEC/AboutOurCoOp/PricingPolicy.jsp
Public Enterprise
public enterprise - a business organization wholly or partly owned by the government and controlled through a public authority.
Some public enterprises are placed under public ownership because it is thought the service or product should be provided by a government monopoly. Utilities (gas, electricity, etc.), broadcasting, telecommunications,
and certain forms of transport are examples of this kind of public enterprise.
Public Enterprise
some public enterprises, though owned by government, are given a certain degree of autonomy to operate without government interference and to operate in a manner similar to a corporation
such semi-independent public enterprises are called Crown Corporations
Public Enterprise
Examples of crown corporations include the Canadian Broadcasting Corporation, Canada Post, and ViaRail.
Former crown corporations before their privatization include Air Canada and Petro-Canada.