+Understanding Canadian BusinessChapter 6Forms of Business Ownership

+Learning Goals

1. Compare the advantages and disadvantages of sole proprietorship.

2. Describe the differences between general and limited partners, and compare the advantages and disadvantages of partnerships.

3. Compare the advantages and disadvantages of corporations.

+Learning Goals

4. Define and give examples of three types of corporate mergers, and explain the role and leveraged buyouts and taking a firm private.

5. Outline the advantages and disadvantages of franchises, and discuss the challenges of global franchising.

6. Describe the role of co-operatives in Canada.

+

One key to success in starting a new business is understanding how to get the resources you need.

You may have to take on partners or find other ways of obtaining money.

You may need help from someone with more expertise than you have in certain areas, or you may need to raise more money to expand.

+Sole Proprietorship

Term DefinitionSole Proprietorship

A business that is owned and usually managed, by one person.

Liability For a business, it includes the responsibility to pay all normal debts and to pay because of a court order or law, for performance under a contract, or payment of damages to a person or property in an accident.

Unlimited Liability

The responsibility of business owners for all of the debts of the business.

+Advantages of Sole ProprietorshipSole proprietorships are the easiest kind of

business for you to explore in your quest for an interesting career. Other advantages include:

+Disadvantages of Sole Proprietorship

+PartnershipsTerm Definition

Partnership A legal form of business with two or more owners.

General partnership

A partnership in which all owners share in operating the business and in assuming liability for the business’s debts.

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.

Limited liability The responsibility of a business’s owner for losses only up to the amount they invest; limited partners and shareholders have limited liability.

+ Advantages of Partnerships

1. More financial resources

2. Shared management & pooled/complementary skills and knowledge

3. Longer survival

4. Shared risk

5. No special taxes

+Disadvantages of Partnerships1. Unlimited liability

Each general partner is liable for the debts of the firm, no matter who was responsible for causing the debts.

2. Division of profits

Sharing risk means sharing profits, and that can cause conflicts.

3. Disagreements among partners

All terms of partnership should be spelled out in writing to protect all parties and minimize misunderstandings

4. Difficult to terminate

+Progress Assessment

What is the difference between a limited partners and a general partners?

What are some of the advantages and disadvantages of partnerships?

+ Corporations

Term Definition

Corporation A legal entity with authority to act and have liability separate from its owners.

Public corporation

Corporation that has the right to issue shares to the public, so its shares may be listed on a stock exchange.

Private corporation

Corporation that is not allowed to issue stocks to the public, so its shares are not listed on stock exchanges; it is limited to 50 or fewer shareholders.

+Advantages of Corporations

+Disadvantages of Corporations

+ How Owners Affect Management

+Business Regulations

Registration

Governments need to know what businesses are in operation to ensure that a wide range of laws and regulations are being followed.

Unique business names

Taxes are being paid

Articles of incorporation is a legal authorization from the federal or provincial/territorial government for a company to use the corporate format.

+Other Types of Corporations

Non-resident corporation

Conducts business in Canada, but has its head office outside of Canada.

Non-profit corporation

Formed for charitable or socially beneficial purposes.

Crown corporation

Are companies that only the federal or a provincial government can set up.

Professional corporation

Is a Canadian-controlled private corporation engaged in providing professional services.

+Progress AssessmentWhat are the major advantages and

disadvantages of incorporating a business?

What is the role of owners (stockholders) in the corporate hierarchy?

If you buy stock in a corporation and someone is injured by one of the corporation’s products, can you personally be sued? Why or why not?

+Sweet OpportunitiesYou are a consultant, and will make a recommendation as to what form of business ownership you think is best for each client.

+Liability

Liability can be an issue for sole proprietorships and partnerships when:

Debts are owed when a business fails or has financial difficulties;

If not insured, when there is loss due to disaster;

Lawsuits occur

+Finance Options

Corporations have more options when they need to obtain additional financing (loans, investments in the form of stocks and/or corporate bonds).

Sole proprietors and partners often have personal assets as their only source of money (they can maybe borrow from banks, friends, family).

+ Tax Implications

Sole proprietors and partners pay individual income tax on their companies’ earnings.

Double Taxation – a corporation is taxed as a separate entity that pays tax on its income. Stockholders also pay personal income tax on any dividends they make.

+Life of the Business

Sole proprietorships and partnerships may dissolve in the event of the death or illness of the owner.

Disagreements may lead to partnerships breaking up.

Corporations continue to exist beyond personal circumstances.

+Discussion Questions

Why do you think so many corporations begin as sole proprietorships or partnerships?

Why do you think so many sole proprietorships and partnerships become corporations?

+DefinitionsTerm Definition

Merger The result of two firms forming one company.

Acquisition One company’s purchase of the property and obligations of another company.

Leveraged buyout (LBO)

An attempt by employees, management, or a group of investors to purchase an organization primarily through borrowing.

+Vertical Merger(companies in different stages in related industries)

+Horizontal Merger(companies in the same industry)

+Conglomerate Merger(companies in unrelated industries)

+ Franchising

Term Definition

Franchise agreement

An arrangement whereby someone with a good idea for a business sells the rights to use the business name and sell its products in a given territory.

Franchisor A company that develops a product concept and sells others the rights to make and sell the products.

Franchise The right to use a specific business’s name and sell its goods or services in a given territory.

Franchisee A person who buys a franchise.

+ FranchisingAdvantages

1. Management and marketing assistance

2. Personal ownership

3. Nationally recognized name

4. Financial advice and assistance

5. Lower failure rate

Disadvantages1. Large start-up costs

2. Shared profit

3. Management regulation

4. Coattail effects

5. Restrictions on selling

6. Fraudulent franchisors

+How Much Does a Franchise Cost?

Company Cost

Snap-on Tools $25,001 - $50,000

PropertyGuys.com $50,001 - $100,000

The UPS Store $100,001 - $200,000

Great Canadian Dollar Store $200,001 - $500,000

Second Cup $200,001 - $500,000

Harvey’s $500,001 - $1,000,000

Montana’s Cookhouse $1,000,000+

+Checklist for Evaluating a Franchise

How much equity capital will you need to purchase the franchise and operate it until your income equals your expenses?

Does the franchisor offer financing for a portion of the franchising fees? On what terms?

Are you prepared to give up some independence of action to secure the advantages offered by the franchise? Do you have your family’s support?

Does the industry appeal to you? Are you ready to spend much or all of the remainder of your business life with this franchisor, offering its products or services to the public?

+Home-based Franchises

Advantages Relief from the

stress of commuting

Extra time for family activities and

Low overhead expenses

Disadvantages Feeling of isolation

Home-based franchisees feel less isolated than home-based entrepreneurs.

Experienced franchisors share their knowledge of building a profitable enterprise with franchisees.

+E-Commerce in Franchising

PropertyGuys.com is an example of a franchise that uses e-commerce

Formed in 1998 in Moncton, NB. PropertyGuys.com has built on the“For Sale by Owner (FSBO)” Internet concept.

Packages include a combination of print advertising, direct mail, electronic mail, seller’s documentation, a For Sale sign, a website listing, and a phone answering service.

+Franchising in International Markets The US is by far the most popular target for

Canadian-based franchises.

Tim Horton’s

Paul House, COO and president of Tim Horton’s plans to operate 500 stores in the US by the end of the decade. Currently, there are about 250 stores.

Beavertail’s Pastry

Introduced in Ottawa in 1978, there are now more than 130 locations in seven countries.

What makes franchising successful in international markets is what makes it successful domestically; convenience and predictable level of service.

+Co-operativeAn organization that is owned by members and customers, who pay an annual membership fee and share in any profits.

+Co-operatives

4/10 Canadians are members of at least one co-op.

There are more than 9,000 co-operatives in Canada that employ 155,000 people.

Some co-ops are listed in Canada’s top 500 companies and several financial co-operatives have been rated the best places to work in Canada.

Fishermen and farmers catch and produce their own products, but part of the marketing is done through jointly owned co-ops.

+Co-operatives Differ fromOther BusinessesPurpose – meet the

common needs of the members

Control structure 1 Member = 1 Vote

Allocation of profit – share profits among their member-owners on the basis of how much they use the co-op, not how many shares they hold