Forms of Business Ownership BBI2O Introduction to Business Unit 1: Business Fundamentals 1.B Types of Businesses

Business Organizations The 3 Most Common Form of Business Ownership Sole proprietorships Partnerships Corporations

Comparisons of Forms of Business Organizations Sole proprietorships Partnerships Corporations

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 Disadvantages 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.

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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

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CORPORATION CONTD. Owners/shareholders Board of directors Officers (elect board of directors) Board of directors (hire officers) The structure of a large public corporation Officers (set corporate objectives, select managers) Managers (supervise employees) Employees

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

3 TYPES OF CORPORATIONS (+1) 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 cause Ex. Canadian Cancer Society, The United Way

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 Disadvantages 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 Disadvantages 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