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Forms of business ownershipEASE OF STARTING YOUR OWN BUSINESS
Basic forms of business ownership 1. Sole proprietorship
You are the sole owner of the businessSubject to all liability
– the responsibility to pay all normal debts and also to pay
A. because of a court orderB. because of lawC. due to contractsD. for damages to a person or property in an
accident
Sole Proprietor Unlimited liability – Whereby all of the debts of the
business must be shouldered by you
Advantages:Relatively easy to start a businessBeing your own bossRetain all company profitsNo special taxes; business losses can be claimed against
income
Sole Proprietor Disadvantages:
Limited financial resourcesManagement difficulties – you can’t be good at
everythingOverwhelming time commitmentFew to no benefitsSlow growth/expansion
2. Partnerships Two or more people legally agreeing to be co-owners of a
business
A. General partnership – all owners share in operating the business and in assuming liability for the business
B. Limited partnership – has one or more general partner and one or more limited partner
General partner – has unlimited liability and is active in managing the firm
Limited partner – invests money but does not have any management responsibilities or liability
2. Partnerships Advantages:
More financial resourcesShared management and complementary skillsShared riskNo special taxes
Disadvantages:Unlimited liabilityDivision of profitsDifficult to end the businessDisagreement amongst partners
3. Corporations Incorporating is the act of creating a corporation
These are federally or provincially chartered legal entities with authority to act and have liability separate from its owners
Investors/shareholders are not liable to any debts beyond what they invested
Allows many people/parties to share in ownership
3. Corporations A. Public Corporations
- Have the right to issue stocks to the public thus raising a lot of capital
- Can be small or large companies
3. Corporations B. Private corporation
- Not allowed to issue stocks to the public- Regulations permit 50 or less shareholders- Good for when substantial capital is no required
3. CorporationsGeneral advantages:
- limited liability
- ability to raise large sums of money for investment
- perpetual life: if a shareholder dies, the corporation stays
- ease of ownership change
3. CorporationsGeneral disadvantages:
- Initial cost: incorporating requires many lawyers, accountants, and other services
- extensive paperwork: detailed financial records, meeting minutes and more are required
- Double taxation: income the corporation makes is taxed. Then dividends given to shareholders is taxed again
- Internal conflicts: disagreements between shareholders or board members
Progress assessment - Questions 1. Would you be a sole proprietor? Or have a partnership? Give 3
reasons to support your decision
2. Why would unlimited liability be considered a major drawback of sole proprietorship?
3. What is the difference between a limited partner and a general partner?
4. What are the advantages and disadvantages of incorporating?
5. If you are a shareholder of a corporation, can you be sued for someone who was severely injured by their product? Why or why not?
3. Corporations Corporate Governance – policies that stipulate how an
organization interacts with stakeholders
Board of directors – in general, govern management decisions and operations
Business Regulations Registration – required by the government so that they can
keep track of businesses that are in operation
Articles of incorporation – legal authorization from the federal or provincial governments for a company to become a corporation
Reporting and Information – Filing annual reports to the government, and receiving information from the government
Corporate Expansion 1. Mergers – two separate entities forming a single
companyA. Vertical merger – Joining of 2 forms that are involved in
different stages of a related businessEx: Coca cola merging with a artificial sweetening
company. Or a bottling company
B. Horizontal merger – joining of 2 firms in the same industry and allows them to diversify or expand their productsEx: Coca cola merging with a mineral water company
Corporate Expansion C. Conglomerate merger – multiple firms of unrelated
industries to diversify business operations and investments. Ex: Coca cola and Lays
Corporate Expansion 2. Acquisition – when one company purchases another.
Taking up their property and obligations
Leveraged buyout (“Taking the company private”) – When employees of a company buy all the shares and own the company
3. Franchising – Selling someone else the right to sell/provide your product/serviceEx: La Poire
3. Franchising Advantages:
Management and marketing assistancePersonal ownershipNationally recognized nameLower failure rate
3. Franchising Disadvantages:
Large start-up costShared profitManagement regulationCoattail effects
4. Co-Operatives An organization owned by members and customers who
pay an annual fee (usually).
Interest lie in the common needs of members
One vote/member vs one vote/shareholder
Profits (“dividends”) are distributed among members on the basis of how much they use the co-op; not how many shares they hold Not subject to income tax!
Question/Assignment sheet Complete, and hand in
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