BUS106 Forms of Business Ownership

1. Week 5, Chapter 5
Forms of Business Ownership

3. Figure 4.3 Ethical Orientation Questionnaire (see page 88)

4. What your score means (see page 89)

5. Ethical Dilemma?
A disgruntled employee of your major competitor mails top-secret
information or new product samples to you. Do you begin to do a
dance on your desktop or do you immediately mail
the information back to your competitor?
What would you do?
Throw the plans or secrets away.
Send them to your research
department for analysis.
Notify your competitor about
what is going on.
Call the RCMP.

6. What actually happened.
It seems a 3M employee named Philip Stegora mailed
samples he stole of a new casting tape to J&J and three
other competitors. He offered to meet and explain the
technology for a fee of $20,000.
None of the contacted companies reported his scheme to
3M. Instead, an outside source contacted 3M who then
turned the case over to the FBI. The case could have
ended there but in patent-infringement proceedings, 3M
found that J&J had done chemical tests on the sample
Stegora had sent. 3M sued and was awarded $116.3
million from J&J for infringing on its patent and
misappropriating trade secrets. Sounds like someone
should have sent the tape back to 3M in the first place.
Image sources: http://solutions.3m.com ; http://www.jnjcanada.com/

7. Ethical Dilemma?
You are the vice president of a beer company in a
province which sets the legal drinking age at
twenty-one. Your boss asks you to organize a lobbying
effort to have the drinking age reduced to eighteen.

8. Nineteen (it is eighteen in Alberta, Manitoba, and
Quebec) to twenty-one year olds represent a huge
market for liquor. But, again, the public reaction should
be considered.
Source: http://www.flickr.com/photos/criminalintent/

9. Learning Objectives
List the advantages and
disadvantages of:
• Sole Proprietorships
• Partnerships
• Corporations
Define and give
examples of three types
of corporate mergers,
and explain the role of
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.

10. Figure 5.1 Basic Forms of Ownership

11. Sole Proprietorship
One person owning and
operating a business, without
forming a corporation.
In a sole proprietorship, the
business and the owner are a
single entity.
As noted in Figure 5.1, almost
24% of all registered
businesses in Canada fall under
this form of ownership.

12. Sole Proprietorship
Advantages
• Ease of
start/end
• Be your own
boss
• Pride of
ownership
• Leave legacy
• Retain profit
• No special taxes
• Fewer
regulations
Disadvantages
• Unlimited
liability
• Limited financial
resources
• Difficulty in
mgmt.
• Time
commitment
• Few fringe
benefits
• Limited growth
• Limited life span

13. Liability - for a business, it includes the responsibility to pay all normal debts.

14. Unlimited Liability
When you work for others, it
is their problem if the
business is not profitable.
When you own your own
business, you and the
business are considered one.
You have unlimited liability;
that is, any debts or damages
incurred by the business are
your debts, and you must pay
them.

15. Main types of partnerships
General
Partnership
Limited
Partnership
General
Partner
Limited
Partner

16. 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.
Partnership

17. Advantages
• More financial resources
• Shared mgmt.
• Longer survival
• No special taxes
Disadvantages
• Unlimited liability
• Division of profits
• Disagreements among partners
• Difficult to terminate
Partnership

18. How to Form a Partnership
Choose your
partner
carefully
Get a
partnership
agreement
in writing

19. Types of Partnerships
General Limited
Passive Investor
Passive InvestorPassive Investor

20. New Forms of Partnerships
Master Limited Partnership
• traded publicly
• taxed as a partnership
Limited Liability Partnership

21. Corporations
Although the word
corporation makes people
think of big businesses
such as the Bank of
Montreal or Irving Oil, it
is not necessary to be big
to incorporate (i.e., start
a corporation).
Obviously, many
corporations are big;
however, incorporating
may also be beneficial for
small businesses.

22. Advantages
• More money for
investment
• Limited liability
• Separation of
ownership/mgmt.
• Ease of ownership
change
• Perpetual life
• Size
Disadvantages
• Initial cost
• Paperwork
• Two tax returns
• Termination
difficult
• Stockholder and
board conflict
• Double taxation
Corporation

23. To raise money, a corporation can sell ownership (stock) to
anyone who is interested. This means that thousands of people
can own a part of major companies.
Corporation – advantage: more money for investment

24. Types of Corporations
•not traded on any
stock exchange -
limited to 50 or
fewer stockholders.
Private
•shares are traded
on one or more
stock
exchanges
Public
•performs public
service, has special
tax considerations
to encourage
formation
Non-
Profit

25. Other Types of Corporations
Professional Corporations
Non-resident: has its head office
outside of Canada
Personal Services: for an athlete
or entertainer to take advantage
of corporate tax rates

26. Figure 5.4 How Owners Affect Management

27. Canada’s Largest Corporations
Corporation 2008 Revenue ($Billions)
Royal Bank 37.6
Power Corp. of Canada 37.1
Manulife Financial 37.0
George Weston (Loblaws) 32.1
EnCana Corp. 1.2

28. Figure 5.5 Comparison of Forms of Ownership

29. Corporate Governance - the process and policies that determine how an
organization interacts with its stakeholders, both internal and external.
As a result of corporate
scandals, board members
are under increasing
scrutiny to ensure that
they are effectively
fulfilling their roles and
responsibilities to their
stakeholders.
Be aware that those who serve on boards (both for-profit
and non-profit) may be held personally liable for the
misconduct of the organization.

30. Business Regulations and Articles of Incorporation
Companies that wish to operate in
Canada must follow federal and
provincial business laws and
regulations.
Among other things, this applies to
registration and to reporting and
information.
Articles of incorporation: A legal
authorization from the federal or
provincial/territorial government for
a company to use the corporate
format.
Image source: http://www.flickr.com/photos/34517490@N00/

31. Corporate Expansion: Mergers and Acquisitions
A merger is the result of two firms forming one company.
An acquisition is one company’s purchase of the property and
obligations of another company.

32. Corporate Expansion: Mergers and Acquisitions
A vertical merger is the joining of
two firms involved in different stages
of related businesses.
A horizontal merger joins two
firms in the same industry and allows
them to or e x p a n d their
products.
A conglomerate merger unites firms
in completely unrelated industries.

33. Mergers
Magna auto parts
Ford auto mfg
Scarborough
Ford/ Lincoln
Auto dealership
Delta auto parts
GM auto mfg
Markham
Cadillac
Auto dealership
Magna + Delta?
H o r i z o n t a l

34. Mergers
Magna auto parts
Ford auto mfg
Scarborough
Ford/ Lincoln
Auto dealership
Delta auto parts
GM auto mfg
Markham
Cadillac
Auto dealership
Magna + the
Scarborough
dealership?
V
e
r
t
i
c
a
l

35. Magna auto parts
Ford auto mfg
Scarborough
Ford/ Lincoln
Auto dealership
Delta auto parts
GM auto mfg
Markham
Cadillac
Auto dealership
Scarborough +
Ford?
V
e
r
t
i
c
a
l
Mergers

36. Delta +
Henderson?
Conglomerate
Henderson’s
Appliances
Magna auto parts
Ford auto mfg
Scarborough
Ford/ Lincoln
Auto dealership
Delta auto parts
GM auto mfg
Markham
Cadillac
Auto dealership
Mergers – unrelated industries

37. Why Mergers Don’t Work
Companies overpay to
acquire another firm
Acquiring company
overestimates cost
savings and synergies
After merger,
managers disagree
about integrating
operations
After merger, cost
cutting obsession
hurts business,
costing top employees
and customers

38. Leveraged Buyout - an attempt by employees, management, or a group
of investors to purchase an organization primarily through borrowing. The
funds borrowed are used to buy out the stockholders in the company.

39. Leveraged Buyout
Individual + Loan = Purchase of Company
Purchase Loan
Company = Collateral

40. Franchises
Some people are not comfortable
starting their own business from
scratch. They would rather join a
business with a proven track
record through a franchise
agreement.
A franchise agreement is an
arrangement whereby someone
with a good idea for a business
(the franchisor) sells the rights to
use the business name and to sell
a good or service (the franchise)
to others (the franchisee) in a
given territory.
Ource: http://www.flickr.com/photos/nicktakespics/

41. Franchises
Advantages
• Management
and marketing
assistance
• Personal
ownership
• Recognized
name
• Financial
advice &
assistance
• Lower failure
rate
Disadvantages
• High start-up
costs
• Shared profit
• Management
regulation
• Coattail effects
• Restrictions on
selling
• Fraudulent
franchisors

42. Franchise System
Image sources: http://popseoul.files.wordpress.com/2009/03/hanyeseul-090309-20-281-29.jpg; http://www.seeklogo.com; http://www.fnp.in; http://timhortons.com

43. Figure 5.7 Canadian Franchisors

44. Franchise Contract
Branded Product/Service
Performance
Monitoring
$$$$$
Franchisor

45. Franchisor
Assigns territory
May provide financial
aid/advice
Offers merchandise/ supplies
at competitive prices
Provides training/support
Business expansion using
OPM

46. Franchisee
Pays upfront costs
Makes monthly payment to franchisor
Runs business by franchisor’s
rules/procedures
Buys materials from
franchisor/approved supplier

47. How to Avoid a Franchise Lemon
Research officers & their business experience
Get summary of any bankruptcy &
litigation
Estimate all costs to set up franchise
Review franchise contract and three
most recent financial statements
Image source: http://www.flickr.com/photos/ahinsajain/

48. Flexible work hours | Quality lifestyle
Doing the work of your choice | Self-motivation
Opportunity to expand using technology
Benefits of a Home-Based Franchise
.
Image source: http://www.flickr.com/photos/yukonblizzard/

49. Franchising & E-Commerce
Technology: faster customer service
Access to international markets

50. Co-operatives

51. Chapter Summary
The advantages of sole proprietorships include ease of starting
and ending the business, being your own boss, pride of
ownership, retention of profits, no special taxes, and less
regulation than for corporations.
General partners are owners (partners) who have unlimited
liability and are active in managing the company. Limited
partners are owners (partners) who have limited liability and
are not active in the company.
Advantages of corporations: more money for investment,
limited liability, size, perpetual life, ease of ownership change.

52. Chapter Summary
A merger is the result of two firms forming one company.
Franchises: benefits include a nationally recognized name
and reputation, a proven management system, promotional
assistance, and pride of ownership.
Co-operatives are organizations owned by
members/customers. Some people form co-operatives to
give members more economic power than they would have
as individuals.

54. 54
Homework