Ch. 5Ch. 5

Forms of Business OwnershipForms of Business Ownership

Forms of Business OwnershipForms of Business Ownership1.1. Sole ProprietorshipSole Proprietorship

owned by one personowned by one person

2. 2. PartnershipPartnershipUsually owned by two or more partnersUsually owned by two or more partners

3. 3. CooperativeCooperativeOwned by its workers or by members who buy from the businessOwned by its workers or by members who buy from the business

4. 4. FranchiseFranchiseOne business licenses (allows) another to use its name, operating One business licenses (allows) another to use its name, operating procedure, etc.procedure, etc.Can have any form of ownershipCan have any form of ownership

5. 5. CorporationCorporation

Business is an artificial “person” created by law and owned by Business is an artificial “person” created by law and owned by shareholdersshareholders

Sole ProprietorshipSole Proprietorship

Simplest form of business ownershipSimplest form of business ownership

One owner of a businessOne owner of a business

Sole ProprietorshipSole ProprietorshipA business owned by one personA business owned by one person– Small firms - Less than 50 people Small firms - Less than 50 people

employedemployed– Can easily be managed by ownerCan easily be managed by owner– Few legal requirementsFew legal requirements– Sole controlSole control– Owner receives all profits & debts!Owner receives all profits & debts!

More than More than 2/3 (66%)2/3 (66%) of U.S. businesses of U.S. businesses are operated as sole proprietorshipsare operated as sole proprietorships– Most common formMost common form

Requirements for StartingRequirements for Starting

Knowledge of industry areaKnowledge of industry area– What type of small business is going to be What type of small business is going to be

successful and profitable?successful and profitable?– What goods/services do consumers need?What goods/services do consumers need?

EquipmentEquipment– For physical facilityFor physical facility– For creating goodsFor creating goods

Business name? Permit or license? Business name? Permit or license?

Little capital neededLittle capital needed

Sole ProprietorshipSole Proprietorship

Must account for income and expensesMust account for income and expenses

Pay taxes on profitsPay taxes on profits– Tax advantageTax advantage

All income is taxed as a part of your personal All income is taxed as a part of your personal incomeincome

Business expenses can be used to reduce the Business expenses can be used to reduce the income (tax write-offs)income (tax write-offs)

Sole ProprietorshipSole Proprietorship

Advantages Advantages Keep all the profitsKeep all the profits Make all the decisionsMake all the decisions You are your own You are your own

bossboss (i.e Financial (i.e Financial

information can be information can be kept secret. from kept secret. from competitors), but not competitors), but not the governmentthe government

DisadvantagesDisadvantages Unlimited LiabilityUnlimited Liability Facing personal and Facing personal and

financial risks and financial risks and challenges on your challenges on your ownown

Borrowing money Borrowing money may be more difficultmay be more difficult

Huge time Huge time commitmentcommitment

Sole ProprietorsSole Proprietors

Examples may include individuals who are:Examples may include individuals who are:

ArtistsArtistsAuthorsAuthorsCarpentersCarpentersComputer specialistsComputer specialistsDigital designersDigital designersEcotourism guidesEcotourism guidesFarmersFarmersIndustrial designersIndustrial designersPhotographersPhotographersWeb designersWeb designersChefs or BakersChefs or BakersHair stylistsHair stylists

PartnershipPartnership

More complex and needs a written agreementMore complex and needs a written agreement

Owned by 2 or more peopleOwned by 2 or more people

Partners must discuss and agree on issues such Partners must discuss and agree on issues such as:as: how much time and money each partner will puthow much time and money each partner will put

into the business into the business How the profits will be sharedHow the profits will be shared Who will make decisions about different aspects ofWho will make decisions about different aspects of

the business the business Who will manage the employeesWho will manage the employees How the partnership might be endedHow the partnership might be ended

Partnership AgreementPartnership Agreement

All partners must sign the partnership agreement which All partners must sign the partnership agreement which includes:includes:

the name and location of the businessthe name and location of the business Its purposeIts purpose The amount of partner’s investmentThe amount of partner’s investment The way that the profits and losses are to beThe way that the profits and losses are to be

divided divided The duties and responsibilities of each partnerThe duties and responsibilities of each partner The procedures for ending the partnershipThe procedures for ending the partnership

PartnershipsPartnerships

AdvantagesAdvantages Inexpensive to set up Inexpensive to set up

and organize ($1000)and organize ($1000) Two people to invest and Two people to invest and

it is easier to borrow from it is easier to borrow from a banka bank

More brains filled with More brains filled with different knowledge, different knowledge, experience, skillsexperience, skills

Shared responsibility Shared responsibility eases stress and eases stress and workloadworkload

Share debt and can more Share debt and can more easily take a vacationeasily take a vacation

DisadvantagesDisadvantages Unlimited liabilityUnlimited liability

Your personal assets Your personal assets (home, care etc may (home, care etc may need to be used to pay need to be used to pay off business debts)off business debts)

Conflicts between Conflicts between partners that can not be partners that can not be worked outworked out

Typical PartnershipsTypical Partnerships

Small independent service or retail businesses. Small independent service or retail businesses.

bakeries, hair salons, flower shop, convenience bakeries, hair salons, flower shop, convenience store, landscaping or décor store, consignment store, landscaping or décor store, consignment shop, restaurants, retail stores,plumbers, shop, restaurants, retail stores,plumbers, electricians, mechanics, carpenterselectricians, mechanics, carpenters

Professional Designations or ApprenticeshipsProfessional Designations or Apprenticeships

accountants, lawyers, doctors, veterinarians, accountants, lawyers, doctors, veterinarians, mechanics, plumbers, electricians, carpentersmechanics, plumbers, electricians, carpenters

Co-operativesCo-operatives

Also called Co-opsAlso called Co-ops

Business owned and operated by a group of Business owned and operated by a group of people with a strong common interestpeople with a strong common interest

Start-up costs are shared among membersStart-up costs are shared among members

Members own and control and make all the Members own and control and make all the business decisionsbusiness decisions

Examples of CoopsExamples of Coops

FarmersFarmersBelong to producer co-opsBelong to producer co-opsMembers bring crops to a central location to sell themMembers bring crops to a central location to sell themCoop monitors the supply of the crop and controls its Coop monitors the supply of the crop and controls its sale and pricesale and priceFarmers do not compete against each other or undercut Farmers do not compete against each other or undercut other’s pricesother’s pricesFarmers can combine to buy equipment and reduce Farmers can combine to buy equipment and reduce costs and share expertisecosts and share expertiseExample: Saskatchewan Wheat Pool sells products all Example: Saskatchewan Wheat Pool sells products all over the world.over the world.

Consumer Co-opsConsumer Co-ops

Join together to operate a business that Join together to operate a business that provides them with goods and servicesprovides them with goods and services

Profits are divided among the members in Profits are divided among the members in proportion to the amount of business that proportion to the amount of business that each member doeseach member does

Examples: Omish Community Furniture Examples: Omish Community Furniture Co-ops Co-ops

Credit Unions/ Caisses Populaires Credit Unions/ Caisses Populaires

Financial co-opsFinancial co-ops

Like banks but profits are distributed annually to Like banks but profits are distributed annually to their memberstheir members

Co-operativesCo-operativesAdvantagesAdvantages Shared skills and Shared skills and

experiencesexperiences Less risk than for sole Less risk than for sole

proprietor and partnershipproprietor and partnership Liability is limited to the Liability is limited to the

amount of your share in the amount of your share in the capital of the coopcapital of the coop

Each member gets one vote Each member gets one vote – equal decision making and – equal decision making and influenceinfluence

If you have more shares, you If you have more shares, you still get one vote, but more still get one vote, but more share of the profitsshare of the profits

Coops get discounts due to Coops get discounts due to volume purchasing by many volume purchasing by many peoplepeople

Control sale and price of Control sale and price of goodsgoods

DisadvantagesDisadvantages Individual members hesitant Individual members hesitant

to invest more – only one to invest more – only one votevote

Decision-making can be Decision-making can be difficult because of multiple difficult because of multiple members members

Commitment of members Commitment of members may vary because some may vary because some have more money at stake have more money at stake and some may take things and some may take things more seriously than othersmore seriously than others

CorporationsCorporationsA business owned by a number of people and A business owned by a number of people and operated under written permission from the operated under written permission from the sate in which it is locatedsate in which it is located– Articles/Certificate of IncorporationArticles/Certificate of Incorporation

Corporation’s NameCorporation’s Name

Corporation’s PurposeCorporation’s Purpose

LocationLocation

Amount of stock to be issuedAmount of stock to be issued

Names of the Board of DirectorsNames of the Board of Directors

Invisible, intangible and existing only in the eyes of the Invisible, intangible and existing only in the eyes of the law (an individual)law (an individual)

– Few compared to sole proprietorshipsFew compared to sole proprietorshipsOnly 15%-20% of businesses are corporationsOnly 15%-20% of businesses are corporations

Over 80% of all business is done by corporationsOver 80% of all business is done by corporations

CorporationCorporation

Legal entity that exists independently of its owners who Legal entity that exists independently of its owners who are the shareholders.are the shareholders.

Has the same rights and obligations under U.S. Has the same rights and obligations under U.S. law as a natural personlaw as a natural person

It can be found guilty of committing a crimeIt can be found guilty of committing a crime

CorporationsCorporationsAbility to:Ability to:– Borrow or loan moneyBorrow or loan money– Buy and sell goodsBuy and sell goods– Make contractsMake contracts– Sue or be suedSue or be sued

Ownership in a corporation:Ownership in a corporation:– Individuals (stockholders) can share in Individuals (stockholders) can share in

profits by buying shares of stockprofits by buying shares of stockRepresent ownership in the corporationRepresent ownership in the corporation

Stockholders risk only the amount they investStockholders risk only the amount they invest

Shareholders receive Shareholders receive dividendsdividends (part of the (part of the profit earned by the corporation)profit earned by the corporation)

Advantages of CorporationsAdvantages of CorporationsLimited liabilityLimited liability– Only responsible for your personal Only responsible for your personal

investment in the company (your personal investment in the company (your personal assets are not at stake)assets are not at stake)

Unlimited lifeUnlimited life– The corporation will still survive with The corporation will still survive with

changing personnel (owners)changing personnel (owners)

Easy to transfer ownershipEasy to transfer ownership– Through selling stock - ownershipThrough selling stock - ownership

Skilled personnelSkilled personnel– Highly trained and preparedHighly trained and prepared

Financial powerFinancial power

Employees

Managers

(Supervise Employees)

Officersi.e. CEO

(Chief Executive Officer)

(set corporate

objectives and hire managers)

Board of Directors

(hire officers)

Owners/Shareholders

(Elect Board of Directors)

STRUCTURE OF A

CORPORATION

Disadvantages of CorporationsDisadvantages of Corporations

Difficult to form and operateDifficult to form and operate

Separate owners and managersSeparate owners and managers– Varied opinions and strategies = +, -Varied opinions and strategies = +, -

More complex requirements (govt.)More complex requirements (govt.)

TaxationTaxation– The corporation is taxed twiceThe corporation is taxed twice

At the individual’s level with owning sharesAt the individual’s level with owning shares

At the corporate level for the business entityAt the corporate level for the business entity

The FranchiseThe FranchiseOne of the fastest growing forms of business One of the fastest growing forms of business ownershipownershipThe franchisor sells to another person (the The franchisor sells to another person (the franchisee) the rights to use the business name franchisee) the rights to use the business name and to sell a product or service in a given and to sell a product or service in a given territory.territory.Available in many different sectors (fast food, Available in many different sectors (fast food, wine, funeral homes)wine, funeral homes)Franchise can be any form of business Franchise can be any form of business ownership (i.e. sole proprietorship, partnership, ownership (i.e. sole proprietorship, partnership, corporation)corporation)

Franchise AgreementFranchise Agreement

Written contract between the franchise seller Written contract between the franchise seller and buyerand buyerPermit the franchisee to use the franchisor’s Permit the franchisee to use the franchisor’s name, products, packagingname, products, packagingFranchisor will specify how the franchise is to be Franchisor will specify how the franchise is to be operated, what products can be sold, the operated, what products can be sold, the advertising, etc.advertising, etc.Provide more than 1 million jobs directly, many Provide more than 1 million jobs directly, many more indirectlymore indirectlyAnnual sales of $100 billionAnnual sales of $100 billion

FranchisesFranchises

AdvantagesAdvantages Proven track record and Proven track record and

nationally or nationally or internationally recognized internationally recognized namename

Personal ownership like a Personal ownership like a sole proprietorshipsole proprietorship

Less stress in initial set Less stress in initial set up as most issues like up as most issues like process, products and process, products and location, equipment, location, equipment, décor are spelled out by décor are spelled out by the franchisorthe franchisor

DisadvantagesDisadvantages Expensive to buyExpensive to buy Must pay royalties for Must pay royalties for

your sales your sales Little say in many of the Little say in many of the

business decisionsbusiness decisions If the franchisor fails, so If the franchisor fails, so

does the franchiseedoes the franchisee