Understanding Canadian Business Chapter 6 Forms of Business Ownership

Learning Goals Compare the advantages and disadvantages of sole proprietorship. Describe the differences between general and limited partners, and compare the advantages and disadvantages of partnerships. Compare the advantages and disadvantages of corporations. Define and give examples of three types of corporate mergers, and explain the role and leveraged buyouts and taking a firm private. Outline the advantages and disadvantages of franchises, and discuss the challenges of global franchising. 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 Definition Sole 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 Proprietorship Sole proprietorships are the easiest kind of business for you to explore in your quest for an interesting career. Other advantages include: Ease of starting and ending the business Being your own boss Pride of ownership Leaving a legacy Retention of company profit No special taxes

Disadvantages of Sole Proprietorship Unlimited liability – the risk of personal losses Limited financial resources Management difficulties Overwhelming time commitment Sole proprietors set their own hours but it is difficult to manage the business, train employees and have time for anything else Tim DeMello founder of Wall Street Games Inc says, “It’s not a job, it’s not a career, it’s a way of life.” Few fringe benefits No paid health insurance, no paid disability insurance, no sick leave, and no vacation pay. Limited growth Limited lifespan

Partnerships Term 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. An owner (partner) who has unlimited liability and is active in managing the firm. 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 More financial resources Shared management & pooled/complementary skills and knowledge Longer survival Shared risk No special taxes

Disadvantages of Partnerships Unlimited liability Each general partner is liable for the debts of the firm, no matter who was responsible for causing the debts. Division of profits Sharing risk means sharing profits, and that can cause conflicts. Disagreements among partners All terms of partnership should be spelled out in writing to protect all parties and minimize misunderstandings 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.

Private Corporation Private corporations benefit from the small business deduction, which applies to the first $300,000 of active business income (all income other than investment income). Federal income tax rate is 13.12% Corporate rate is 29.12%

Advantages of Corporations Limited liability More money for investment Size Perpetual life Because corporations are separate from those who own them, the death of one or more owners does not terminate the corporation. Ease of ownership change Sell stock to someone else Ease of drawing talented employees Separation of ownership from management

Disadvantages of Corporations Extensive paperwork Double taxation Two tax rates Size Difficulty of termination Possible conflict with stockholders and board of directors Initial cost