Options for Organizing Business

Copyright © 2011 McGraw-Hill Ryerson, Inc.

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.

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Learning Objectives

• 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
• Corporation

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Comparing Forms of Business Ownership

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Sole Proprietorship
Businesses owned and operated by one individual; the most
common form of business organization in Canada
• Often employ less than 50 people
• Common examples include:
 Restaurants
 Hair salons
 Flower shops
 Dog kennels
 Independent grocery stores

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• Large businesses can grow from small sole
proprietorships.

• Vancouver-based Robeez, which sold for

$27.5 million, started as a home-based
business.

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Sole Proprietorship
Advantages Disadvantages

• Ease and cost of formation • Unlimited liability

• Secrecy • Limited sources of funds
• Distribution and use of profits • Limited skills
• Flexibility and control of the • Lack of continuity
business • Taxation
• Government regulation
• 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)
PartnershipAgreement
• Legal documents that set forth the basic agreement between partners

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Mississauga-based Dekalam Hire Learning, a provider of
online training to help people with pre-employment exams
for policing, the public service and so forth, was founded
by three partners who brought complementary skills to the
business: Adam Cooper had testing experience, Kalpesh
Rathod brought IT experience, and Deland Jessop worked
in law enforcement.

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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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Articles of Partnership (continued)
8. How much each partner is allowed to withdraw
9. Death of partner
10.Sale of partnership interest
11.Arbitration of disputes
12.Required and prohibited actions
13.Absence and disability
14.Restrictive covenants
15.Buying and selling agreements

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Partnership

Advantages Disadvantages

• Ease of organization • Unlimited liability

• Capital & credit • Disagreement among
• Knowledge & skills partners
• Decision making • Business responsibility
• Regulatory controls • Life of the partnership
• Distribution of profits
• 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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Large Partnership Disputes

• Such as those at:

• McCain
• Flightexe

Often lead to the ending of the partnership and relationship

of the partners.

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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
(cont...)

• 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

Private corporation
• A corporation owned by just one or a few people who are closely
involved in managing the business (e.g., Irving Group)
Public corporation
• A corporation whose stock anyone may buy, sell, or trade (e.g.,
Royal Bank)
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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Did you know?

Canada’s biggest company, RBC, has a

revenue of $37.6 billion, making it
equivalent to Latvia.
With a GDP of $36.9 billion, Latvia was
the 80 biggest economy in the world
th

by GDP, out of 179 countries ranked by

the IMF.

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Corporations
Advantages
• Limited liability
• Transfer of ownership
• Perpetual life
• External sources of funds
• Expansion potential
• Tax
Disadvantages
• Double taxation
• Forming a corporation
• Disclosure of information
• Impact on management
decisions
• Employee-owner separation
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Other Types of Business Ownership

Joint Venture
• A partnership established for a specific project or for a
limited time

• Examples:
• Husky Energy and BP plc
• Ballard Power and Ford

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Other Types of Business Ownership (cont...)

Cooperative (Co-Op)
• An organization composed of individuals or small
businesses that have banded together to reap the benefits of
belonging to a larger organization
• There are 8,800 co-ops in 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.

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Discussion Questions

1. Do you think every partnership is ultimately doomed

to fail? Why or why not?
2. Would you rather work in a partnership or be a sole
proprietor? Why?
3. What are some of the major differences between a
private and public corporation?
4. What do you think are some of the advantages and
disadvantages of co-operatives?

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