Unit 1 – Chapter 2Types of Business Ownership

Introduction

• Deciding which type of business ownership you want to establish needs serious thought.

• Each has it advantages, but each also has some disadvantages.

• Over time, the form of business ownership you use can change! That’s a G☺☺D thing!!

We will explore:

• The different types

• Features of each type

• Advantages

• Disadvantages / risks

Types of Business Ownership

• Sole Proprietorship• Partnership• Corporation• Cooperative• Franchise

Sole ProprietorshipSole Proprietorship

• a business owned and operated by one person.

• The owner is responsible for all operations of the business AND

• assumes all the risks.

Sole ProprietorshipSole Proprietorship

• this is the most common form of business in Canada!!

Common Businesses that are Sole Proprietors

• architects• artists• authors• baby-sitters• carpenters• computer specialists• construction consultants• digital designers• Web designers

• ecotourism guides• engineers• environmental consultants• farmers• gardeners• industrial designers• inventors• photographers• researchers• song-writers

Sole ProprietorshipSole Proprietorship

• WHY would a person want to “Go it Alone” when opening a business?

• What problems or issues might arise because a person owns a business ALONE?

• Why might it NOT be a good idea to own it alone?

Sole Proprietor-Sole Proprietor- AdvantagesAdvantages

• Owner in direct control of decision making - you are your OWN BOSS!!

• All profits to owner. Cha-Ching !!$$

• Tax advantages to owner (Ie. Write-offs).

• Secrecy (Shhhh!!) of financial information.

• Relatively low start-up costs; (Ex. home-based businesses)

• Greatest freedom from regulation.

• Minimal working capital required.

Sole Proprietor -Sole Proprietor - DisadvantagesDisadvantages

• Unlimited liability …DEBT…AWWWWW!!!!!!!!!

• Lack of continuity in absence of owner;

• Difficulty raising capital.

• Costs & time commitment can be high.

Unlimited liability….a closer look!!Unlimited liability….a closer look!!

• Owner is fully responsible for all debts and obligations related to his or her business.

• A creditor (those whom you owe money to) with a claim has a right against all of his or her assets.

• Business OR personal.

• Ex. Personal Savings, vehicles, properties, home, equipment etc..

1. Define the term Collateral.

2. When would a person need collateral?

3. What kinds of things would be used as collateral?

4. What collateral would a teenager possibly have?

Expanding Your Knowledge p. 33

PartnershipPartnership

• two or more people own and operate the business together.

• Created by a written legal document called a partnership agreement.

• 2 types of partnership:General partnershipLimited partnership

Partnership - Partnership - General partnershipGeneral partnership

EACH PARTNER:• shares the management of the

business.

• is personally liable for all the debts of the business. (Unlimited liability)

• is responsible for and must assume the consequences of the actions of the other partner(s).

Partnership – Partnership – Limited partnershipLimited partnership

A LIMITED PARTNER:

• contributes only capital.

• takes no part in control or management.

• is liable for debts to a specified extent only or original investment. (limited liability)

Limited liability….a closer look!!Limited liability….a closer look!!

• all debts and obligations related to the business are “limited” to business assets only.

• A partner’s risk is “limited” to monies invested into the business.

PartnershipPartnership

• WHY would a person want to “have a partner” when opening a business?

• What problems or issues might arise because more than one person owns the business?

• Why might it NOT be a good idea to have a partner ?

Partnership - AdvantagesPartnership - Advantages

• Partners co-own the business.

• They share responsibilities.

• They share time commitment.

• They may have greater financial resources.

• They share business losses.

• Variety of skills and experience may help the business to make more profit.

• Ease of formation.

• Relatively low start-up costs; (Ex. home-based businesses)

Partnership - Partnership - DisadvantagesDisadvantages

• Partners have unlimited liability for all the other partners.

• They may have conflicts.

• Profits are shared.

• Partnerships are more difficult to close down than sole proprietorships.

• Lack of continuity;

• Difficulty raising additional capital

• Hard to find suitable partners

• Partners can legally bind each other without prior approval

CorporationsCorporations

• A corporation is a legal entity that exists independently of its owners,

• its owners are called shareholders.

• Shareholders, the people who buy shares in a company,are all part owners of the company.

• A corporation is identified by the terms "Limited", "Ltd.", "Incorporated", "Inc.", "Corporation", or "Corp.".

CorporationsCorporations - Advantages - Advantages

• Separate legal entity.

• The owners are shareholders. They have limited liability for the debts.

• ownership is transferable, therefore continuous existence is possible

• Ex. A corporation can continue to exist after the death of its owners.

• Corporations usually have a lower tax rate than private owners (possible tax advantage).

• easier to raise capital. (sell more shares!)

• Usually shareholders do not operate the company. They hire employees to do so.

• specialized management hired.

CorporationsCorporations - - DisadvantagesDisadvantages

• most expensive form to organize;

• double taxation of dividends

• share the profits, usually small.

• Possible development of conflict between shareholders and executives.

• Employees who are not owners may not be committed to the business.

• Corporations have more complicated structures (Ex. Board of Directors)

• Corporations must publish annual reports, which could give away important secrets to competitors.

• closely regulated and extensive record keeping necessary;

• The value of company shares can change depending on changes in the stock market.

Expanding Your Knowledge p. 36-40

1. Identify and briefly describe the 4 types of corporations.

2. Name 2 examples of each type of corporation.

3. Describe or define: Articles of Incorporation, Merger, Acquisition

Co-operativesCo-operatives

• Co-operatives, also called co-ops, are businesses owned and operated by a group of people with a strong common interest.

• the members have a close association with the enterprise as producers or consumers of its products or services, or as its employees.

• The start-up costs are shared among the members of the co-operative.

• Members own and control the business and make all business decisions.

• There are different types of co-ops (farmers, financial services, consumers…etc..)

Co-operatives – F.Y.I.Co-operatives – F.Y.I.

• Cooperatives are based on the values of self-help, self-responsibility, democracy and equality.

• Membership is open, meaning that anyone who satisfies certain conditions may join.

• Economic benefits are distributed proportionally.

• Cooperatives may be generally classified as either consumer cooperatives or producer cooperatives.

• Read p. 40 TEXT

Co-operatives – F.Y.I.Co-operatives – F.Y.I.

• Building cooperative - pool resources to build housing, normally using a high proportion of their own labour. When the building is finished, each member is the sole owner of a homestead, and the cooperative may be dissolved.

• Retailers' cooperative - employs economies of scale on behalf of its members to get discounts from manufacturers and to pool marketing. It is common for locally-owned grocery stores, hardware stores and pharmacies.

• Worker cooperative - owned and democratically

controlled by its "worker-owners".

Co-operatives – F.Y.I.Co-operatives – F.Y.I.

• Consumers' cooperative - is a business owned by its customers. “The CO-OP grocery store!!

• Agricultural cooperative - are both marketing and supply cooperatives. They promote and may actually distribute specific commodities as well as provide inputs into the agricultural process.

• Cooperative banking (credit union) provides a broader range of loan and savings products at a much cheaper cost to their members.

Co-operatives - Advantages - Advantages

• Members help run the business and share in financial decisions.

• Variety of different skills to run the business.

• Shared ownership = less risk than it would be for a sole proprietor or a partner.

• Limited Liability to the amount of your share in the capital of the co-op. (Ie. Membership fee or cost of share).

Co-operatives - Advantages - Advantages

• One person = one vote, no one person or group of people can dominate business.

• High volume of business = more of the profits.

• Members receive favorable prices because they buy goods in large quantities (bulk).

• Co-ops also control the sale and price of goods produced by members. This helps members get the best price.

CooperativesCooperatives - - DisadvantagesDisadvantages

• Difficulty raising additional funds to expand their business.

• Having only one vote can be a disadvantage. Members may not want to invest more money

• Decision-making can be difficult because of the number of people involved.

• Commitment of the members may vary. Ex. Some may have more money at stake or take the business more seriously than others.

Franchise System

Franchise Agreement

Franchisor

Franchisee

FranchiseFranchise

• A franchise agreement is the written contract between the franchise seller (franchisor) and buyer (franchisee).

• A franchisor sells the rights to use the business name and to sell a product or service in a given territory.

• The franchisee purchases the right to distribute the products, use techniques (supplies & packaging), and trademarks (name and logos etc.) of the franchise.

FranchiseFranchise

• Advertising, training, and other support services are commonly made available by the franchisor.

• Franchisee runs business by franchisor’s rules/procedures.

• Franchisee buys materials from franchisor / approved supplier.

• In return, the franchisor, receives a royalty fee based on a percentage of gross monthly sales…

(even if the franchisee does NOT earn a profit!)

Franchise Contract

Franchisor, IncFranchisor, Inc..

FranchiseeFranchisee

Branded Branded Product/ServicProduct/Servic

eePerformancPerformanc

ee

MonitoringMonitoring$$$$$$$$$$

FranchiseFranchise - Advantages - Advantages

• Franchisees buy a business with a good reputation, well known name and products.

• Franchisors supply training and financial knowledge.

• Franchisors usually provide packaging, advertising, and equipment to the franchisee.

FranchiseFranchise - - DisadvantagesDisadvantages

• Franchises can be expensive to buy.

• Franchisees may have to follow a lot of rules laid down by the franchisors. No or limited control.

• If a franchisor’s business fails, so will the franchisee’s business.

http://archives.cbc.ca/on_this_day/01/31/12844/

http://ms.radio-canada.ca/archives_new/2006/en/wmv/td_mcdonalds19900131et1.wmv

Growth in Canadian BusinessGrowth in Canadian Business

• The business environment constantly changes. • To survive, people in business must be prepared to take

advantage of the opportunities that change offers.

Some of these changes include: advances in technologies, especially in information

technologies an increase in global business connections the growth of the small business and service sectors a greater emphasis on the natural environment a focus on business ethics and social responsibility

Technological Change – The Technological Revolution!!!!!

New technologies change the way businesses :

Produce goods,

Buy goods,

Sell goods and services,

The way they communicate with each other,

The way they obtain financial and other resources,

Even the ways that people work and types of jobs.

Not to mention creating a new forms of business existence.

The Information Age

• Competition among businesses is very fierce.

• One of the things that gives companies a competitive edge is information.

• Information technologies, such as laptop and palm-held computers and cellular phones, give employees fast access to information.

The Information Age

• This information can help a business operate efficiently and quickly. Examples:

– Track the movement of their shipments.

– Search the world to find the best quality and price for production materials and other resources.

– Internet based security.

– Financing and loans from any place.

Increased Globalization

• The information age and communication technology have reduced the impact of the geographic barriers.

• Doing business internationally is called globalization.

• Globalization gives Canadian businesses the chance to increase:their customer markets.(+)their profits.(+)competition for markets. (-)

Growth of Small Business

A small business is one that is:

• independently operated

• not dominant in its field

• limits in terms of employees (< 50 employees, < 100 employees in the manufacturing sector)

• has limits in annual sales.

Growth of Small Business

A small business usually:

started by entrepreneurs who saw a need or market trend

most often in the service sector

owners tend to develop a close relationship with their customers.

Read top page 50.

Growth of Small Business – Home-based businesses

• small businesses are being operated from homes.

• are considered the fastest growing form of small business.

• have only one employee, the owner.

• to reduce their operating expenses.

Growth of the Service Sector

• The most significant growth of small businesses in Canada has been in the service sector.

• One reason for this growth is that Canadians have more money and less time. (need others to do things for us).

• Example: The success of the Molly Maid franchise happened largely because people are willing to pay others to clean their homes.

Growth of the Service Sector

• Another reason for the service sector’s growth is that fewer manufacturing jobs are available.

• Canada has an aging population, services that are critical to the elderly, such as health care, are likely to be more in demand.

Growing Concern for the Environment

• Worldwide concern for the environment has had a significant impact on the way businesses are run.

• Among the concerns are:– the depletion of the

ozone layer = global warming.

– toxic waste in our water systems.

– huge amounts of waste and garbage.

Growing Concern for the Environment

• In 1999, the federal government passed the new Canadian Environmental Protection Act,

focuses on:– pollution prevention– protection of the environment– human health

in order to contribute to sustainable development.”

• Canadian businesses are required to incorporate environmentally responsible policies in their normal operations.

EXAMPLES

• No CFC’s• CFL (Compact Florescent Lights)• Scrubbers for stacks• Minimum recyclable content

(paper)• Recycle cardboard, plastics,

aluminum and bottles.• Water meters• Phosphate-free detergents• Use of organics over chemical

fertilizers, herbicides and pesticides.

• Catalytic converters on vehicles.• Environmental risk assessments-

woods operations etc.

http://216.128.16.108/streamingmedia/NWNA-External.wmv

Business Ethics and Social Responsibility

• Ethics are standards of conduct that society believes people should follow.

• socially responsible towards their employees, their immediate community, and the wider global community.

• Social responsibility is the duty to care for others whose actions can be affected in a damaging way.

• A major force for change during the last 100 years has been the labour movement (unions).

• serious issues such as: dangerous working conditions, lack of pensions or compensation for injured workers, child labour, low pay, and long hours.

Some goals of socially responsible businesses and citizens are:

to end discrimination of women and minorities in terms of hiring, promotion, salaries, and firing

to halt the production and sale of weapons and land mines.

to practice sustainable development and not to allow short-term economic considerations to replace longer-term,

to end white-collar crime (usually thefts by employees), which has become more complicated in the age of Internet finance

to ensure that the Canadian marketplace remains fair and competitive by outlawing price fixing and bid rigging (secret agreements among competitors to control prices)

to eliminate from the global market place dangerous drugs produced by pharmaceutical companies.

social responsibility – McDonald’s

http://www.youtube.com/watch?v=S_bgP3ASUM4