Understanding
Canadian Business
Chapter 6
Forms of Business Ownership
Learning Goals
1.
Compare the advantages and disadvantages of sole
proprietorship.
2.
Describe the differences between general and limited partners,
and compare the advantages and disadvantages of
partnerships.
3.
Compare the advantages and disadvantages of corporations.
4.
Define and give examples of three types of corporate mergers,
and explain the role and leveraged buyouts and taking a firm
private.
5.
Outline the advantages and disadvantages of franchises, and
discuss the challenges of global franchising.
6.
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
1.
Unlimited liability – the risk of personal losses
2.
Limited financial resources
3.
Management difficulties
4.
Overwhelming time commitment
5.
–
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.
6.
Limited growth
7.
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.
General partnership
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
1. More financial resources
2. Shared management &
pooled/complementary skills
and knowledge
3. Longer survival
4. Shared risk
5. No special taxes
Disadvantages of Partnerships
1. Unlimited liability
–
Each general partner is liable for the debts of the
firm, no matter who was responsible for causing the
debts.
2. Division of profits
–
Sharing risk means sharing profits, and that can
cause conflicts.
3. Disagreements among partners
–
All terms of partnership should be spelled out in
writing to protect all parties and minimize
misunderstandings
4. 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
1. Limited liability
2. More money for investment
3. Size
4. Perpetual life
–
Because corporations are separate from those who
own them, the death of one or more owners does
not terminate the corporation.
5. Ease of ownership change
–
Sell stock to someone else
6. Ease of drawing talented employees
7. Separation of ownership from management
Disadvantages of Corporations
1. Extensive paperwork
2. Double taxation
3. Two tax rates
4. Size
5. Difficulty of termination
6. Possible conflict with stockholders and
board of directors
7. Initial cost