Forms of Business Ownership

BBI2O Introduction to Business

Unit 1: Business Fundamentals

1.B Types of Businesses

Business Organizations

1. Sole proprietorships

2. Partnerships

3. Corporations

The 3 Most Common Form of Business Ownership

Comparisons of Forms of Business Organizations

Number Sales

Sole proprietorshipsPartnershipsCorporations

Other Forms of Business Ownership

• Co-operatives

• Franchise

Factors in Choosing a Business Organization

• Owner’s liability for firm’s debts

• Ease and cost of forming the business

• Ability to raise funds

• Taxes

• Degree of control the operator has

• Ability to attract employees

SOME KEY DEFINITIONS

• LIABILITY – the amount that owner’s are responsible for the company’s debts.

• (ie. if bankrupted, who can creditors legally get money from…)

• Capital – money available for investment purposes, such as starting a

business and keeping it running

SOLE PROPRIETORSHIP

• Is a business owned and operated by one person

• The owner is responsible for all operations/decision making in the business and assumes all of the risk– Responsible for all for production, sales, marketing,

accounting etc.

• More than 1,000,000 of these exist in Canada

• Takes no formal documents to start up

Sole Proprietorships

• Advantages– Easy and

inexpensive to form– Owner keeps all

profits– Direct control, “own

boss”

• Disadvantages– Unlimited liability– Difficulty in raising

capital – May have limited

expertise

- Personal time commitment

– Owner absorbs all losses

EXAMPLE OF A SOLE PROPIETORSHIP

• Carpenters

• Hair salons

• Convenience stores

• Plumbers

PARTNERSHIPS

• Form of business organization in which two or more people own and operate the business together

• Are more complex to set up then sole proprietorships

• Must be set up with a formal partnership agreement

• This includes things like how profits will be divided, who will invest what, who will be responsible for what, how the partnership will be ended

• If you violate this agreement your partner could take you to court

Partnerships

• Advantages– Relatively easy to

start up – Availability of capital– Diversity of skills and

expertise– Flexibility– No special taxes

• Disadvantages– Unlimited liability…no

matter how much you personally have invested in the business

– Potential for conflict between partners

– Sharing of profits– Difficulty in leaving or

ending a partnership

EXAMPLES OF PARTNERSHIPS

• Lots of professionals form partnerships– ie. Dentists, Vets, Accountants, CFPs

(certified financial planners), Insurance Agents, Engineers, Architects

Business Trivia Story:Roots started out as partnership in 1973, between two friends. The friends where from Detroit, Michigan and had attended summer camp together in Algonquin park. Today they have over 2,000 employees in Canada and $300 million in sales.

JOKE BREAK

• What to vegan zombies eat?

GRAAAAAAAAAAAAAAAAAAAINS!!!!!!!!!

CORPORATION

• A legal entity that exists independently from it’s owners. A corporation has the same rights and obligations as a citizen under Canadian law – Ex. A corporation can own assets, can sue

and be sued, can be criminally and civilly liable.

• The owners of a corporation are called shareholders

Video Clip ….

CORPORATION CONTD.

Owners/shareholders(elect board of directors)

Board of directors(hire officers)

Employees

Managers(supervise employees)

Officers(set corporate objectives, select managers)

The structure of a large publiccorporation

3 TYPES OF CORPORATIONS (+1)

• Private corporation – can only have up to 50 shareholders– Shares are not sold on the public stock

exchange• Ex. McCain foods

• Public corporation – no restrictions on the number of shareholders– Share are sold on the public stock

exchange (I.e. TSX, NYSE)• Ex. Ford, McDonald’s

• Crown corporation –owned by government (federal, provincial, and/or municipal) – the goal is usually to provide a special service to

the public– Ex. Canada Post, CBC

• Non-profit corporation – goal not to make profit, but to undertake fundraising, carry out research or promote a causeEx. Canadian Cancer Society, The United Way

3 TYPES OF CORPORATIONS (+1)

A LITTLE MORE ON CORPORATIONS

• A corporation is brought into existence by drawing up a set of documents called “The articles of incorporation” and filling paperwork with the government

• Corporations also have to pay a corporate tax rate

Corporations

• Advantages– limited liability… no one

person is responsible for the debt of the company.

– easy transfer of ownership

– unlimited life-span– ability to attract

financing

• Disadvantages– double taxation of

profits– cost and complexity

of formation– more government

regulations and restrictions

Other special forms of ownership

• Cooperatives– a legal entity collectively owned by

individuals or businesses with a strong common interest

– profits distributed to the members in proportion to their contributions

– Members share the start up cost– Many different types of co-ops: farm co-

ops, consumer co-ops: i.e. MEC, credit unions

Cooperatives

• Advantages

– Members own and control the business

– Shared startup costs and financial risk

– Members may pay less for goods and services offered by the co-op

• Disadvantages

– Each member only has one vote, so some may not want to invest money for expansion, etc

– Members can have conflicts

Specialized Forms of Business Organizations

- Franchises: a business organization in which a franchisor supplies the product concept to the franchisee, who sells the goods or services in a certain geographical area

- The franchisor states how the business must be operated ie. how advertising is to be done and what products are offered

- One of the fastest forms of business ownership

- Ex: Tim Hortons, McDonald’s

Franchises

• Advantages

• Franchisees can buy a business with a good reputation

• Franchisors supply training and financial knowledge

• Franchisors usually provide packaging, advertising & equipment

• Disadvantages• Can be expensive to

buy • Many strict rules to

follow• If a franchisor’s

business fails, so will the franchisee’s business

Top 10 Franchises for 2010 Source:www.entreprenuer.com’s Franchise 500