Chapter 2: Types of Businesses Forms of Business Ownership

1. 1 Chapter 2: Types of BusinessesForms of Business Ownership Forms of business ownership and types of businesses describe how they are organized and run. The four main forms of business ownership are listed below. Sole Proprietorships A sole proprietorship is a business owned by one person who is known as the proprietor. The proprietor has a wide range of responsibilities including arranging displays and selling to customers to name a few. Funds to run the business usually come from the owner�s savings, friends, family, or from a bank loan. If the business prospers, the owner receives all of the profits. If the business does poorly, the owner is responsible for its losses. This is called unlimited liability. SOLE PROPRIETORSHIP Unlimited liability: The responsibility for all of the business�s debts and liabilities could mean that the owner loses his/her home or other personal assets. Unlimited liability is the greatest disadvantage of a sole proprietorship. This form of business ownership is easier and less expensive than the other forms of business ownership. Business income is declared on the owner�s personal income tax rather than filing a separate business tax form.SOLE PROPRIETORSHIP Unlimited liability: The responsibility for all of the business�s debts and liabilities could mean that the owner loses his/her home or other personal assets. Unlimited liability is the greatest disadvantage of a sole proprietorship. This form of business ownership is easier and less expensive than the other forms of business ownership. Business income is declared on the owner�s personal income tax rather than filing a separate business tax form.

2. 2 Chapter 2: Types of BusinessesForms of Business Ownership Partnerships A partnership refers to a type of business in which two or more individuals share the costs and responsibilities of owning and operating it. The terms of the partnership are recorded in the partnership agreement. The most common form of partnership is a general partnership. When two individuals form a limited partnership, the partners are only responsible for the funds they both invested in the initial business. This is called limited liability. PARTNERSHIP Examples include A&W, Baskin-Robbins, Black & Decker, and Proctor & Gamble. A general partnership means that all partners have unlimited liability for the firm�s debts. With this form of unlimited liability each partner could be held responsible for the other partner(s)� business-related arrears. With a limited partnership there is limited liability, this means that each partner is only responsible for paying back the amount they invested in the partnership. If the business fails, their personal savings and other assets cannot be used to pay the partnership�s debts. The working relationship between partners can be an advantage of a partnership. Successful partners usually have complementary talents and share in decision making.PARTNERSHIP Examples include A&W, Baskin-Robbins, Black & Decker, and Proctor & Gamble. A general partnership means that all partners have unlimited liability for the firm�s debts. With this form of unlimited liability each partner could be held responsible for the other partner(s)� business-related arrears. With a limited partnership there is limited liability, this means that each partner is only responsible for paying back the amount they invested in the partnership. If the business fails, their personal savings and other assets cannot be used to pay the partnership�s debts. The working relationship between partners can be an advantage of a partnership. Successful partners usually have complementary talents and share in decision making.

3. 3 Chapter 2: Types of BusinessesForms of Business Ownership Corporations A corporation is a business granted legal status with rights, privileges, and liabilities that are distinct from those of the people who work for the business. Corporations can be small such as a one-person business or large such as A multinational that conducts business in several different countries. Small portions of corporate ownership that are owned publicly are called stocks or shares. Individuals who own shares of a corporation are called shareholders and become owners of the business. Shareholders have limited liability. A board of directors runs a corporation that is owned by shareholders. A publicly traded corporation that makes a profit may pay out dividends to shareholders. CORPORATIONS Multinational corporations are also know as transnational. Most corporations are owned entirely by individuals, families, and small groups. Large corporations require funds, therefore the original owners divide the corporation�s ownership into small parts called shares or stocks and sell them through a stock exchange. Examples of stock exchanges are the TSX, the Toronto Stock Exchange, and the New York Stock Exchange. Once shares are sold the corporation becomes a publicly traded (or publicly owned) corporation. The more shares that a shareholder has the more control he or she has. One share usually equals one vote. With so many owners, a board of directors is designated to run the corporation beyond the amount originally invested. Shareholders have limited liability, they cannot be held legally responsible for the debts of the corporation. If the corporation loses money, investors only lose the amount invested, if the business makes a profit it can be reinvested and/or paid out to shareholders in the form of dividends. Shareholder Dividend = Total Profit Paid Out � Total Number of Shares x Number of Shares Owned by ShareholderCORPORATIONS Multinational corporations are also know as transnational. Most corporations are owned entirely by individuals, families, and small groups. Large corporations require funds, therefore the original owners divide the corporation�s ownership into small parts called shares or stocks and sell them through a stock exchange. Examples of stock exchanges are the TSX, the Toronto Stock Exchange, and the New York Stock Exchange. Once shares are sold the corporation becomes a publicly traded (or publicly owned) corporation. The more shares that a shareholder has the more control he or she has. One share usually equals one vote. With so many owners, a board of directors is designated to run the corporation beyond the amount originally invested. Shareholders have limited liability, they cannot be held legally responsible for the debts of the corporation. If the corporation loses money, investors only lose the amount invested, if the business makes a profit it can be reinvested and/or paid out to shareholders in the form of dividends. Shareholder Dividend = Total Profit Paid Out � Total Number of Shares x Number of Shares Owned by Shareholder

4. 4 Chapter 2: Types of BusinessesForms of Business Ownership Types of Corporations Co-operatives A co-operative is owned by the workers or members who buy the products or use the services that the business offers. This type of business is motivated by service and not profit. Adaptations of this business model include consumer, retail, and worker co-operatives. TYPES OF CORPORATIONS Private corporations: Only a few people control all the shares or stock, therefore the business. Shares are not listed for sale on a stock exchange. Public corporations: Available to anyone, shares in these corporations are bought and sold on the stock exchange. Selling shares raises money for the corporation. Shareholders are the owners of the business. The more shares an individual owns, the more impact they have on the business. One share means one vote. Crown corporations: A business owned by the provincial or federal government. Examples include the Business Development Bank of Canada, Canada Post, and the Canadian Broadcasting Corporation (CBC). Municipal corporations: In an effort to provide local citizens with services towns and cities can be incorporated. CO-OPERATIVES The motivation is not profit. Members make up the board of directors that run the co-operative. Regardless of the number of shares owned, each member has only one vote. Profits of a co-operative are distributed according to how much each member spends. A local credit union is an example of consumer co-operative. IGA (Independent Grocers Alliance) is an example of a retail co-operative. A worker co-operative is created to provide work for its members. Some co-operatives are not-for-profit such as health care, child-care, and housing. TYPES OF CORPORATIONS Private corporations: Only a few people control all the shares or stock, therefore the business. Shares are not listed for sale on a stock exchange. Public corporations: Available to anyone, shares in these corporations are bought and sold on the stock exchange. Selling shares raises money for the corporation. Shareholders are the owners of the business. The more shares an individual owns, the more impact they have on the business. One share means one vote. Crown corporations: A business owned by the provincial or federal government. Examples include the Business Development Bank of Canada, Canada Post, and the Canadian Broadcasting Corporation (CBC). Municipal corporations: In an effort to provide local citizens with services towns and cities can be incorporated. CO-OPERATIVES The motivation is not profit. Members make up the board of directors that run the co-operative. Regardless of the number of shares owned, each member has only one vote. Profits of a co-operative are distributed according to how much each member spends. A local credit union is an example of consumer co-operative. IGA (Independent Grocers Alliance) is an example of a retail co-operative. A worker co-operative is created to provide work for its members. Some co-operatives are not-for-profit such as health care, child-care, and housing.

5. 5 Chapter 2: Types of BusinessesForms of Business Ownership Franchises The franchiser licenses the rights to its name, operating procedure, designs, and business expertise to another business called the franchisee. A franchise agreement can provide the franchisee with a ready made, fully operational business brand recognition that is appealing to consumers Requirements before a franchise is awarded may include paying the franchise fee agreeing to pay a monthly percentage fee as well as any national or local advertising costs purchasing all supplies centrally from the franchiser participating in franchiser standards training FRANCHISES Examples of franchise operations include; hotels, motels, fast-food restaurants, and automobile dealerships. Paid to the franchiser, the franchise fee can range from thousands to millions of dollars. A monthly franchise fee might be 5% of total monthly sales. Local and/or national advertising costs are roughly 1% of monthly sales.FRANCHISES Examples of franchise operations include; hotels, motels, fast-food restaurants, and automobile dealerships. Paid to the franchiser, the franchise fee can range from thousands to millions of dollars. A monthly franchise fee might be 5% of total monthly sales. Local and/or national advertising costs are roughly 1% of monthly sales.

6. 6 Chapter 2: Types of BusinessesGoing into Business Eight Questions to Ask Before Going into Business Why Start Your Own Business? People who desire to be the boss and take responsibility for making decisions often decide to run their own business. They believe it is the best way for them to achieve financial independence, to allow them to use their skills and knowledge, and to be creative. What Different Types of Businesses Are There? service business retail business not-for-profit organization manufacturing business What Are Your Skills and Interests? Different ideas, skills, and knowledge can be used to start a new business. Two popular ones are home-based or Web-based businesses. 2. WHAT DIFFERENT TYPES OF BUSINESSES ARE THERE? See Figure 2.1 �Types of Businesses� on page 52.2. WHAT DIFFERENT TYPES OF BUSINESSES ARE THERE? See Figure 2.1 �Types of Businesses� on page 52.

7. 7 Chapter 2: Types of BusinessesGoing into Business Should Your Business Be Home-based? Technology has changed how SOHO (�small office, home-based�) businesses operate. Computers, scanners, and Internet access are a few of the tools that home office businesses use today to be successful. ii. Should Your Business be Web-based? E-commerce (�electronic commerce�) is a marketplace where consumers and sellers meet without face-to-face contact. In the �real world,� products are tangible. Products and services are sold to us by personal contact with the sellers. In cyberspace or online, we do not interact with products or come face-to-face with the sellers. Our experience with services is limited or non-existent. Consumers are often reluctant to purchase online due to unreliable or dishonest businesses and privacy issues. Should Your Business be Home-based? Computers, scanners, video equipment, camcorders, and access to the internet have transformed the home office into a �virtual� office. Advantage might be: fewer meetings, no office politics, less time on the telephone or running from office to office, and casual clothing. Disadvantage might be: less personal contact, lack of discipline imposed by the traditional work environment, and distractions that are not business related. Should Your Business be Web-based? E-businesses are generally open �24/7�, they are open 24 hours a day, seven days a week. An e-commerce business needs a physical space to operate. They need a website to conduct e-commerce transactions and a domain name; a catchy and simple Internet address such as www.Ebay.com. An Internet address lets potential customers connect with the business online. Businesses can hire a professional to create their website and the contained web pages, or they can create it themselves. E-businesses need to be able to process online payments. Profit and website hits, a measurement of a site�s popularity by the number of people who visit the site, can help a business gauge success. Some products and services have a reputation of selling well on the Internet, such as CDs, health products, banking services, travel, etc. Privacy issues include information being stolen or misused. Should Your Business be Home-based? Computers, scanners, video equipment, camcorders, and access to the internet have transformed the home office into a �virtual� office. Advantage might be: fewer meetings, no office politics, less time on the telephone or running from office to office, and casual clothing. Disadvantage might be: less personal contact, lack of discipline imposed by the traditional work environment, and distractions that are not business related. Should Your Business be Web-based? E-businesses are generally open �24/7�, they are open 24 hours a day, seven days a week. An e-commerce business needs a physical space to operate. They need a website to conduct e-commerce transactions and a domain name; a catchy and simple Internet address such as www.Ebay.com. An Internet address lets potential customers connect with the business online. Businesses can hire a professional to create their website and the contained web pages, or they can create it themselves. E-businesses need to be able to process online payments. Profit and website hits, a measurement of a site�s popularity by the number of people who visit the site, can help a business gauge success. Some products and services have a reputation of selling well on the Internet, such as CDs, health products, banking services, travel, etc. Privacy issues include information being stolen or misused.

8. 8 Chapter 2: Types of BusinessesGoing into Business Where Can You Find Information About a Business? Businesses require accurate and current information to make good decisions. Important resources to find information include What Are the Start-up Costs? Capital resources to run a business are available through debt financing referred to as borrowing money to run the business. Using your savings or investor savings called equity financing is an alternative way to fund a business. WHERE CAN YOU FIND INFORMATION ABOUT A BUSINESS? Strategis gives Canadians direct access to valuable business and consumer information sources, timesaving interactive tools, and a large number of online and e-commerce services. Statistics Canada, collects statistical information about Canada, Canadians, and business, and makes it available to Canadians via the web site. Information such as the gross domestic produce (GDP), the total dollar value of all goods and services produced in a country during one year. The GDP measures how a country�s economy is performing. WHAT ARE YOUR START-UP COSTS? Debt financing: Disadvantage - large sum may be difficult to pay back on time and interest costs are based on risk of loan. Banks, trust companies, and credit unions may lend money after factors such as the applicant�s past credit history and review of the business plan are completed. The lending institution also considers if the owner has the skills to operate the business as to whether the applicant will be able to repay the loan. Equity financing: Disadvantages are risking your own savings and/or that of others and you give up part ownership in the business. WHERE CAN YOU FIND INFORMATION ABOUT A BUSINESS? Strategis gives Canadians direct access to valuable business and consumer information sources, timesaving interactive tools, and a large number of online and e-commerce services. Statistics Canada, collects statistical information about Canada, Canadians, and business, and makes it available to Canadians via the web site. Information such as the gross domestic produce (GDP), the total dollar value of all goods and services produced in a country during one year. The GDP measures how a country�s economy is performing. WHAT ARE YOUR START-UP COSTS? Debt financing: Disadvantage - large sum may be difficult to pay back on time and interest costs are based on risk of loan. Banks, trust companies, and credit unions may lend money after factors such as the applicant�s past credit history and review of the business plan are completed. The lending institution also considers if the owner has the skills to operate the business as to whether the applicant will be able to repay the loan. Equity financing: Disadvantages are risking your own savings and/or that of others and you give up part ownership in the business.

9. 9 Chapter 2: Types of BusinessesGoing into Business What Level of Risk Can You Expect? Even with research and planning, business can be risky. Risks or threats beyond and within the owner�s control can put the business in financial difficulty. What Steps Are Involved in Running This Business? Some types of businesses, such as manufacturing, are complex. A complex business requires many people with different skills to successfully start and operate it. WHAT LEVEL OF RISK CAN YOU EXPECT? You could lose the capital that you, or others, have invested. Depending on type of ownership, personal liability. WHAT STEPS ARE INVOLVED IN RUNNING THIS BUSINESS? Remember the four types of businesses include; service business, retail business, not-for-profit organization, and manufacturing business. WHAT LEVEL OF RISK CAN YOU EXPECT? You could lose the capital that you, or others, have invested. Depending on type of ownership, personal liability. WHAT STEPS ARE INVOLVED IN RUNNING THIS BUSINESS? Remember the four types of businesses include; service business, retail business, not-for-profit organization, and manufacturing business.

10. 10 Chapter 2: Types of BusinessesGoing into Business What Resources Will You Need? Forecasting is determining the resources the business requires and how much financing it needs to obtain them. Revenue is the amount of money gained from the sale of products or services. WHAT RESOURCES WILL YOU NEED? Resources might include cash, inventory, supplies, furniture and fixtures, computer hardware and software, equipment, tools, vehicles, and buildings. Approximately every three months projected revenue should be determined. Projected revenue is the amount of money that you think the business will generate over a period of time. Revenue � Costs + Expenses = Profit If projected revenue, or costs and expenses, are inaccurate it is important to find out why and make another forecast. WHAT RESOURCES WILL YOU NEED? Resources might include cash, inventory, supplies, furniture and fixtures, computer hardware and software, equipment, tools, vehicles, and buildings. Approximately every three months projected revenue should be determined. Projected revenue is the amount of money that you think the business will generate over a period of time. Revenue � Costs + Expenses = Profit If projected revenue, or costs and expenses, are inaccurate it is important to find out why and make another forecast.

11. 11 Chapter 2: Types of BusinessesInternational Business Structures A number of different business structures allow businesses to expand into international markets. Joint Ventures A joint venture can match the skills and expertise of two different individuals or businesses to generate more benefits for both parties. International Franchises An international franchise is a way to achieve an international presence by buying the rights to a chain operation from the franchiser. JOINT VENTURES A joint venture can be adopted for a trial period (weeks/months) and should be continued only if they work to the advantage of the parties. A joint venture can help businesses establish more contacts, get more leads, and increase their customer base. INTERANTIONAL FRANCHISES A hybrid type of business ownership where the franchisee buys the rights, from the franchiser, to operate one or more of a chain of similar businesses that offer the same products or services. Boston Pizza is an example of a Canadian franchise that has expanded into the United States. It supplies the franchisees with real estate, construction, start-up procedures, fixtures, operating systems, signage, equipment, marketing programs, training, and menus. JOINT VENTURES A joint venture can be adopted for a trial period (weeks/months) and should be continued only if they work to the advantage of the parties. A joint venture can help businesses establish more contacts, get more leads, and increase their customer base. INTERANTIONAL FRANCHISES A hybrid type of business ownership where the franchisee buys the rights, from the franchiser, to operate one or more of a chain of similar businesses that offer the same products or services. Boston Pizza is an example of a Canadian franchise that has expanded into the United States. It supplies the franchisees with real estate, construction, start-up procedures, fixtures, operating systems, signage, equipment, marketing programs, training, and menus.

12. 12 Chapter 2: Types of BusinessesForms of Business Ownership Strategic Alliances Strategic alliances occur when two or more businesses agree to commit particular resources to achieve a common set of objectives. Alliance partners remain separate and entirely independent of each other. Mergers Mergers happen when two or more companies join together: one of the businesses usually wants to purchase a controlling interest in the other company, or both business have combined interests. STRATEGIC ALLIANCES Used to help co-develop, co-produce, and co-market products or service of the two businesses. Strategic alliance players include customers, suppliers, competitors, universities, and/or divisions of government. The purposes of the alliance can include improving competitive positioning, gaining entry to new markets, the supplementation of critical skills, and to share the risk or cost of major projects. Amnesty International and the Citizens Bank of Canada have formed an alliance in which the bank donates 10 cents to Amnesty when people use a designated Visa card. MERGERS The benefits can include stronger operations, ability to enter new markets, the acquisition of new technologies, resources, and skills. The smaller company may increase market share, become more efficient, or gain a competitive advantage. The federal government of Canada has the power to stop mergers that are to the detriment of the public�s interest.STRATEGIC ALLIANCES Used to help co-develop, co-produce, and co-market products or service of the two businesses. Strategic alliance players include customers, suppliers, competitors, universities, and/or divisions of government. The purposes of the alliance can include improving competitive positioning, gaining entry to new markets, the supplementation of critical skills, and to share the risk or cost of major projects. Amnesty International and the Citizens Bank of Canada have formed an alliance in which the bank donates 10 cents to Amnesty when people use a designated Visa card. MERGERS The benefits can include stronger operations, ability to enter new markets, the acquisition of new technologies, resources, and skills. The smaller company may increase market share, become more efficient, or gain a competitive advantage. The federal government of Canada has the power to stop mergers that are to the detriment of the public�s interest.

13. 13 Chapter 2: Types of BusinessesForms of Business Ownership Offshoring Offshoring relocates some of a company�s operations to another country. Usually this happens to take advantage of lower labour costs, to be closer to large and emerging buyer markets, and to have access to skilled workforces. Multinational Corporations A business enterprise that conducts business in another country or several different countries is a multinational corporation. A multinational corporation offers different benefits to the country it invests in. Some positive benefits include new jobs and training for people. Negative consequences could be less pay and more financial instability for citizens of that country. OFFSHORING Canadian companies have offshored manufacturing to China and Mexico. Challenges to offshoring include public perception in the home country, political climate and currency stability of offshore country, and trade barriers. MULTINATIONAL CORPORATION These corporations observe the regulations, rules, and polices of the countries in which they operate. Some multinationals wield enough power to pressure (sometimes the threat to close operations and cause mass lay-offs) the governments into meet their demands. Benefits to the offshore country may include jobs, new technology, and training. Disadvantages to the offshore country can include poor wages and conditions not considered acceptable in the home country.OFFSHORING Canadian companies have offshored manufacturing to China and Mexico. Challenges to offshoring include public perception in the home country, political climate and currency stability of offshore country, and trade barriers. MULTINATIONAL CORPORATION These corporations observe the regulations, rules, and polices of the countries in which they operate. Some multinationals wield enough power to pressure (sometimes the threat to close operations and cause mass lay-offs) the governments into meet their demands. Benefits to the offshore country may include jobs, new technology, and training. Disadvantages to the offshore country can include poor wages and conditions not considered acceptable in the home country.