Chapter TWO:
Options for Organizing a
Business
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Options for Organizing Business
Learning Objectives:
L01: Define and examine the advantages and
disadvantages of the sole proprietorship form of
organization.
L02: Identify three types of partnership, and evaluate
the advantages and disadvantages of the partnership
form of organization
L03: Describe the corporate form of organization, and
cite the advantages and disadvantages of corporations.
L04: Define and debate the advantages and
disadvantages of mergers, acquisitions and leveraged
buyouts.
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Forms of Business Ownership
Sole proprietorship
Partnership
Corporate
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Comparing Forms of Business Ownership
Sole Proprietorship
Businesses owned and operated by one individual
Often employ less than 50 people
Common examples include:
Restaurants
Hair salons
Flower shops
Independent grocery stores
Large businesses can grow from small sole
proprietorships
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Sole Proprietorship
Advantages Disadvantages
Ease and cost of formation Unlimited liability
Secrecy Limited sources of
Distribution and use of funds
profits Limited skills
Flexibility and control of
Lack of continuity
the business
Government regulation
Taxation
Taxation
Closing the business
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Partnership
A form of business organization defined as an
association of two or more persons who carry on
as co-owners of a business for profit”
General partnership
Limited partnership
Limited liability partnership (LLP)
Partnership Agreement
Legal documents that set forth the basic
agreement between partners
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Two Types of Partnerships
General Partnership
A partnership that involves a complete sharing in both
the management and the liability of the business
Limited Partnership
A business organization that has at least one general
partner, who assumes unlimited liability, and at least
one limited partner whose liability is limited to his or
her investment in the business
Limited Liability Partnership
A partnership agreement where partners are not
responsible for losses created by other partners.
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Articles of Partnership
1. Name, purpose, location
2. Duration of the agreement
3. Authority and responsibility of each partner
4. Character of partners (i.e., general or limited,
active, or silent)
5. Amount of contribution from each partner
6. Division of profits or losses
7. Salaries of each partner
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Partnership Disadvantages
Unlimited liability
Advantages
Ease of organization Disagreement among
Capital & credit partners
Business responsibility
Knowledge & skills
Life of the partnership
Decision making
Distribution of profits
Regulatory controls
Limited sources of
funds
Taxation of
partnerships
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Keys to Success in Partnership
Partners should have different & complementary skill
sets
Honest is critical
Maintain face-to-face communications
Transparency sharing information
Awareness of funding constraints and limited resources
Do not become too infatuated with the idea think
implementation
Couple optimism with realism in sales and growth
expectations
Know that partners will disagree. Have a formal
mechanism in place to help solve disputes.
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Corporations
Legal entities under provincial or federal law
whose liabilities and assets are separate from its
owners
Typically owned by shareholders/stockholders
The individuals creating the corporation are called
incorporators
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Federal versus Provincial Corporations
A business that is incorporated provincially does so under
their provincial corporations legislation and can only
conduct business in the province in which they are
incorporated.
Businesses that are incorporated federally do so under
the Canada Business Corporations Act and can conduct
business in all provinces and territories provided that they
register their corporation in all the provinces where they
carry on business.
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Federal versus Provincial Corporations
Advantages of incorporating federally are the
ability to operate anywhere in Canada.
Federal corporations cost more to start and have
extra paperwork.
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Articles of Incorporation
Legal documents filed with basic information about the
business with the appropriate government office.
Common elements: Name & address of corporation
Objectives of the corporation
Classes of shares (common, preferred, voting, nonvoting)
Number of shares of each class of stock
Financial capital required at time of incorporation
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Articles of Incorporation (continued
Provisions for transferring shares of stock
Regulation of internal corporate affairs
Address of business office
Names and addresses of the initial board of
directors
Names and addresses of the incorporators
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Types of Corporations
1. Private corporation
A corporation owned by just one or a few people who
are closely involved in managing the business (e.g.,
Irving Group)
2. Public corporation
A corporation whose stock anyone may buy, sell, or
trade (e.g., Royal Bank)
3. Initial Public Offering
A private corporation who wishes to go public to raise
additional capital and expand. The IPO is selling a
corporation s stock on public markets for the first time
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Elements of a Corporation
Board of directors: A group of individuals elected
by the shareholders to oversee the general
operation of the corporation who set the
corporation s long-range objectives.
Inside Directors
Individuals who serve on a board and are employed
by the corporation (usually executives of the
corporation)
Outside Directors
Individuals who serve on a board who are not
directly affiliated with the corporation (usually
executives of other corporations)
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Share Ownership
Preferred share
A special type of shares whose owners, though
not generally having a say in running the
company, have a claim to profits before other
shareholders do.
Common Share.
Shares whose owners have voting rights in the
corporation, yet do not receive preferential
treatment regarding dividends.
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Corporations Disadvantages
Advantages
Limited liability Double taxation
Transfer of ownership Forming a
Perpetual life corporation
External sources of Disclosure of
funds information
Expansion potential Impact on
Tax management decisions
Employee-owner
separation
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Other Types of Business Ownership
Cooperative (Co-Op)
An organization composed of
Joint Venture individuals or small
A partnership established businesses that have banded
for a specific project or for together to reap the benefits
a limited time of belonging to a larger
Examples: organization
Husky Energy and BP plc There are 8,800 co-ops in
Ballard Power and Ford Canada that provide service to
17 million members.
Example: Farmer s Dairy, SSQ
Groupe Financier
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Trends in Business Ownership
Merger
The combination of two companies (usually
corporations) to form a new company
Acquisition:
The purchase of one company by another,
usually by buying its shares and/or assuming
its debt.
Example:
In 2009, the Molson family bought the
Montreal Canadians and the Bell Centre.
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Trends in Business Ownership (cont...)
Leveraged buyout (LBO)
A purchase in which a group of investors borrows
money from banks and other institutions to
acquire a company (or a division of one) using the
assets of the purchased company to guarantee
repayment of the loan.
Example
Gerry Schwartz, CEO of Onex Corporation has
made millions using LBO to buy struggling
businesses, turn them around and sell them at a
profit. Trends in Business Ownership (cont...) 5-31
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