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Ch 8 Notes.docx

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Valerie Irie

Chapter 8: Political Factors Learning Objectives • Understand the impact that political-legal factors have on companies/industries • Describe how government influences business • Describe how business influences government • Compare and contrast traditional forms of business ownership • Describe co-operatives as an alternative form of business ownership • Discuss the forces of globalization • Recognize major marketplaces • Distinguish various forms of competitive advantage • Understand barriers to international trade and how to overcome them • Connect critical success factors to international business Political-Legal Factors Elements: • Laws, regulations • Taxes • Trade agreements or conditions • Political system • Political stability • Government can create incentives, constraints, or support/bail out when needed • Affects uncertainty, risk, and constraints/costs faced by firm How Government Influences Business • Always try to monitor what type of stakeholder the government is • Customer – buys products & services o Government can represent a good customer (office supplies, etc) o For many business, can be one of the priority customers o Can be frustrating process dealing with the government, as it is timely and government can change o Can provide significant contracts due to sheer size of government • Competitor – Canada Post, CBC o Government can be a competitor (i.e. TV channels versus CBC) • Regulator o Every industry affected by some level of some regulation o Trying to regulate business activity, create economy where business activity is safe and fair for consumers o Regulates business activity – CRTC o Purpose:  Promotes competition – Competition Act  Promotes competition  Customers get variety of choices, keeps prices reasonable  Protects consumers – i.e. Hazardous Products Act  If dangerous or harmful substances, need to be clearly labeled  Restricts advertising on harmful substances  Textile labeling act, food and drug act  Achieve social goals – i.e. universal health care, education  Whether government changes or not, we have foundational goals always present  Protect the environment – Canada Water Act, Fisheries Act  Much legislation present to reduce harm on and protect the environment • Taxation agent o Collected by all three levels of government o Government earn revenue largely through tax systems o Revenue - progressive, regressive, restrictive  Regressive:  Absolutely nothing to do with the amount of income, flat rate for all products and price range  Sales tax is a regressive tax  Called regressive because it takes a higher percentage of income from lower income earners  Restrictive:  Put in place to discourage us from using certain products  Alcohol tax, tobacco tax, etc  Progressive:  Linked to or dependent on your income level  Income tax system is progressive tax rate  Pay different rates on different parts of income • Provider of incentives & financial assistance o Subsidies, tax breaks, support services  Provide monetary incentives to do things, in the end they will benefit the government  Arrangements put in place to increase business and in turn increase revenue  Help business flourish and do well, akin to investing and hoping for future return o Bail outs  Keep citizens employed, and suppliers employed and running  Ripple effect can occur if they close down, can extensively hurt economy • Provider of essential services o Highways, armed forces, police & fire dept., hospitals, education o Government in Canada will not allow these services to be privatized, so that they will carry certain standards How Businesses Influences Government? • Lobbyists o Hired to represent company’s/group’s interest o Will hire a lobbyist, whose job is to network with government officials and create awareness for factors that influence business o Lobbying Act – must register and follow rules  If a person is lobbying, must make it clear who they are working for and what exactly they are doing • Trade associations o Industry lobby group o Employees and owners of small businesses o Only some larger business can afford to hire lobbyist, many smaller ones cannot o If this is the case, firms in an industry will join together and create trade association o Trade association has a larger voice to talk to the government, create expansions, work on behalf of all involved in the industry • Advertising o Corporations influence voters o Will take out advertisements to broadcast their concerns with various legislation o Get public to support their cause, use public to help sway the government in their favor Forms Of Ownership • Traditional forms of ownership • Sole Proprietorship • Partnership • Corporation • Public vs. Private Corporations • Other forms… • Co-operatives • Form of ownership will likely change over life of business Sole Proprietorship  Owned & operated by one person, business and owner = one legal entity  Owner is the operator  Can have any number of employees  Business and owner is one legal entity Advantages of Sole Proprietorship Ease of Formation  If just testing a business out, it will not harm you drastically  Fairly easy to take it down and inexpensive Fewer Regulations  Still has to conform to laws, taxes, etc  Does not have the extra administration, expectations that apply to public corporations Complete Control Over Profits and Decisions  As owner, complete control of profits and decisions  Do not have to organize a team or council to make changes Government Support (Advice)  Much government support in place for sole proprietorship Disadvantages of Sole Proprietorship Tax  Considered as personal income, so full time income and business income all come together on tax form  Incremental profits will continuously increase tax rate  -if very successful, will face very high taxes  -however, if business is losing money (i.e. first few years) then the net income is lowered and pay less incremental taxes and taxes are deducted from the owners personal income sources (POSITIVE) Unlimited Liability  Business and person are one  Personal assets are tied to business assets  If business occurs losses and in debt, creditors can take personal assets to pay back debt/loans Lack Of Continuity  If sole proprietorship owner changes, then the company in that form can no longer exist Limited Managerial and Financial Resources  If not good at certain areas of business, then help to run those areas limited  Can have negative effect on business as lack of skill and knowledge  As own business, only have own cash and loans to draw on Difficult to Obtain Outside Financing  Very hard to get financing for new, untested business  Based on personal assets, not business assets  Bankers feel they won't be able to recover loans if the owner becomes disabled Partnership  Two or more owners, business & owners = one legal entity  Unincorporated  Owners still directly own and run business Advantages of Partnerships Ease of Formation  Opening business relatively easy  Signing a partnership agreement is highly recommended to ensure fairness and common goals and terms, will take a bit of time to set up but important  Not required by law however, takes money and time up front, but can save a lot of time and issues in the long term Few Regulations  Same as sole proprietorship More Managerial and Financial Resources  In sole proprietorship, limited to one persons skill sets and financial resources  In partnership, pick a partner that has complimentary managerial skills and adequate financial resources Government Support (Advice)  Self-help centres geared mainly towards partnerships as well Easier To Borrow Money  Two people can combine and put forward personal assets  Greater amount ideally Disadvantages of Partnerships Taxed as Personal Income (Advantage if Business Has Losses)  Still put on personal tax return as personal income, if making profit can increase incremental taxes  Gives purpose to possibly changing type on business Lack of Continuity  If one partner leaves, then the partnership can no longer exist  Can still operate business, but must draw up a new partnership agreement, or goes to sole proprietor  Must change form of ownership Difficult to Obtain Outside Financing  Not easy to raise outside financing as public corporation (can’t issue shares or bonds) Shared profits and Decisions - Conflicts  Will not always see eye to eye on decisions Types of Partnerships • General partnership – All partners have joint and several liability – All partners have unlimited liability in a different way as more than one person – Before entering into a partnership with other people, ensure they have assets and can be held accountable – Personal assets are combined with business asset • Joint liability – together share liability  All partners hold an equal share of liability • Several liability – 1 may be liable for all  If one partner not able to cover their share of liability, then the other partner(s) are responsible for covering that persons share of the liability • Limited partnership – Limited partners liability = investment – Limited partners cannot be active in management – At least one general partner – Only putting in capital, not active in management of business – As not responsible for decision making, can't be active in any decision making in business – If they abide by this limitation, if company enters debt, then the limited partner only responsible for the initial amount they invested in the business – Need at least one general partner to run business however Corporation • Separate entity from owners (shareholders) o Issue shares/bonds • Types: – Public – starts with IPO  How they go public  Start offering shares and bonds  Go public when they start needing mass amounts of capital and track record to use it wisely and grow  Does not happen initially, only occurs when the firm grows to a size where becoming a corporation makes sense – Private  Can be huge or small  Choose to stay private for various reasons – Crown  Completely owned by the federal government (i.e. CBC, LCBO) • Interests represented by board of directors – Makes sense to have lots of owners, and a governing body to oversee managers and ensure shareholders rights represented – Inside directors  President, CFO, that sit on the board  In private, if small company can have only inside BOD, as very small and interests are for few people don't need outside/large BOD – Outside directors  People that are not a present member of the company  Make fair and objective decisions for stakeholders Public Corporation  Several owners, shares publicly available, business & owners = separate entities  Several too many owners  No limit to number of shareholders  Publicly traded, available to anyone Advantages of a Public Corporation Flat Tax Rates (Possibly Lower Than Individual Rates)  Not a progressive tax rate that individuals face  Corporate tax system generally a flat tax  Whether corporation earns small or large amount, the tax rate is the same  Could save money, if the tax system is compared to the individual tax system, if taxes are less for profit range than individual tax rate for that profit Limited Liability  Shareholders/owners can only lose initial investment  Not personally liable for anything beyond their initial investment  Cannot draw on personal assets of owners Continuity (Ease of Transferring Ownership)  Many owners trade daily  No risk of disconinuity Ease of Raising Money/ Unlimited Shareholders  Many more owners to draw upon  Much easier to get bank loans due to size and history of firm  Can continuously acquire owners/investors Can Attract/ Afford Experts  As a large corporation, attract a lot of outside experts  Much easier to diversify talent pool, as due to the size many people will willingly apply here Disadvantages of a Public Corporation Double Taxation  Takes profit and subtracts tax (NIAT)  After, BOD decides whether to issue dividends after taxes deducted  Dividends paid to individual, it is considered income for the individual, then that is taxed for the individual on their personal income tax  Dividends are taxed differently than bonds, normal income, receive preferential (lower) tax treatment  As BOD decides whether to issue dividends, then double taxation technically happens at discretion of BOD Cost and Complexity of Formation  Most complex and costly to put together  Can take 6 months - 2 years to set everything up, paying for lawyers, investors even before operating Regulation  Have to disclose a lot of information as many investors  Scrutinized to a much higher degree as many more people involved  Many more requests for disclosure and information Lack of Secrecy  No secrets  Pressure is on them to hold many updates and forecasts  Lot of pressure to grow quickly, and keep the public up to date regarding their decisions  While good for investors, puts all the firms information on display for their competitors BIG DISADVANTAGE Private Corporation  Shares not sold to public, < 50 shareholders,  Owners & business = separate entities in theory  In theory, share many similar characteristics with public corporations  In reality, many differences  Shares are not sold publicly  Need to be invited by owners to buy shares Advantages of Private Corporations Relatively Flat Taxes, Lower Than Public Corpo
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