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Chapter 7 Political Legal Factors

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Wilfrid Laurier University
Sofy Carayannopoulos

Keith Diaz Chaper 7: Political and Legal factors 1. Laws, regulations 2. Taxes 3. Trade agreements or conditions 4. Political system: determines how involved the government is  laissez faire vs. communism 5. Political stability: how predictable are government decisions? How government influences business  Government can create incentives, constraints, or support/bail out when needed  Affects uncertainty, risk and constraints/costs faced by firm  How does this create a threat/opportunity for a business?  Ex: in Australia, there’s a law that makes cigarette companies package their products in brown boxes with plain writing. No logos or images or fancy things allowed  less attractive to people Customer: by buying products and services, governments help firms be successful.  In some cases, government can be the most important consumer Competitor: Canada Post, CBC  Crown Corporations, government owned  Government can directly compete with firms by regulating the prices you can charge Regulator  Regulates business activity: CRTC, Wheat Board  What business can or cannot do  Wheat board: regulates the price farmers receive for their wheat  CRTC: regulates all aspects of Canadian broadcasting system  Purpose 1. Promotes competition: Competition Act ensure healthy level of competition, that there are enough different organizations in the environment for a healthy competitive environment, and that everyone is playing fairly with respect to price prohibits acts that reduce competition 2. Protects consumers: Hazardous Products Act requires certain products to be labelled, and the Tobacco Act prohibits cigarette advertising on billboards and in stores, etc. 3. Achieve social goals: promotes well-being of society; universal health care, education… 4. Protect the environment: Canada Water Act (controls water quality in fresh and marine waters), Fisheries Act: Nobody owns the environment so government must act in behalf of the environment. Designed to ensure protection. Taxation agent  Collected by all 3 levels of government  clear laws on which level can tax what  Revenue taxes: levied to provide revenue to fund various services and programs 1. Progressive: %tax paid increases with income 2. Regressive: consistent, sales tax, based on value of underlying activity 3. Restrictive: restrict/influence consumption  ex: gas tax Provider of incentives and financial assistance Keith Diaz  Subsidies: government of Canada offers significant subsidies to film management companies. You use subsidies instead of tax breaks because they’re companies outside Canadian jurisdiction so they are not influenced by tax anyway  reduce their cost  Tax breaks: beneficial to companies in local jurisdiction who are affected by taxes  to encourage companies to locate in a certain area  Support services: when a government wants to assist companies in making certain choices, they offer support services.  Ex: help with foreign trade; give advice to small businesses/start-ups.  Bail outs: helping companies come back to life  Ex: GM supporting American car manufacturers. It’s better to let them continue to operate than to let them collapse and then deal with the unemployment later. Provider of essential services:  highways, armed forces, police and fire department, hospitals, education  don’t want your army to be for a profit group run be some company  same with police/fire department because you need them to make the right choices - they know you’re covered by insurance, so they’re unmotivated without the government  The only reason the 407 exists is because it is parallel to the 401 and so if there is traffic on 401, people use 407 instead  Health services exist by keeping cost down  non-profit organizations. For profit-increased costs, cannot afford to fund it  Education: non-profit, any revenues get put away Lobbyist  hired to represent the company’s interest with government decision makers  Lobbying Act: lobbyists must register so it’s clear who are being paid for lobbying. They must also follow rules for how they can and must behave, what kind of gifts they can/cannot give  When you approach a government person, they know you are a lobbyist, so there’s biased argument against you  Know you are not representing voters, but 1 particular interest group  Also, there must be transparency ; agency that lists the different groups that are lobbying the government and what their communications are, what they are lobbying for,  Canadian federations of students lobbies the government for funding and financial assistance  Trade associations - Employees and owners of small businesses do not have the resources to lobby the government  but they want representation. So they join trade associations. - Can be individual lobbyists, industry lobby group - Get together and lobby for the whole industry to influence legislation  more resources  Advertising - Corporations influence legislation by influencing voters - Politicians understand language of votes - If corporation is able to advertise directly to individuals, saying do this, don’t do that, the consumers are more likely to contact the government/politicians  Why hire lobbyists instead of going to talk to politicians yourself? - Lobbyists will talk to multiple politicians - Will work politicians to create legislation - Takes a lot of time, money, and contacts Forms of ownership Keith Diaz  What are they, why do they exist, advantages and disadvantages Traditional forms of ownership 1. Sole proprietorship 2. Partnership 3. Corporation 4. Public vs. private corporations  Other forms - Franchising: form of distribution. If you decide to open a McDonalds, you go to the parent company and pick a location, and they will build it. Disadvantage: little control, cannot change it, must pay royalties. Advantage: Benefit from another company’s experience, brand and training. - Co-operatives - Page 105 chart Sole Proprietorship  Owned and run by one person; business and owner are one and the same  Legally, your business is considered to be an extension of yourself  can be small or large Advantages Disadvantages o Complete control over profits and decisions:o Taxed as personal income: business= owner, so don’t have to consult anybody on your personal income tax (higher than corporate tax ) choices or share your profits with anyone o Unlimited liability: if you do not pay your debts, o Ease of formation: don’t even need to the bank can come after the owner’s personal register business name. assets. o Fewer regulations; takes time, money, o Lack of continuity: If the owner retires, the new energy to form regulations business owner means the old business ceases - Costs comply with regulations for small to exist customers may not see the businesses; Small business cannot do much difference, but from a legal perspective, the damage due to small size  don’t need business changed many regulations o Limited managerial& financial resources: few o Government support: wants small source of finance = whatever money you can businesses to set up obtain is what’s used o Tax benefits: most businesses suffer losses o Difficult to obtain outside financing: banks do at first. But since business=owner, losses can not want to lend money to sole proprietorship, be deducted from personal income unless you pledge personal assets Partnership  Owned and run by 2 or more partners; business & owners = one legal entity  Sometimes comes from sole proprietorships that grew too large for one person to handle Advantages Disadvantages o Ease of formation o Taxed as personal income (advantage if business has losses): o Few regulations higher tax rate than corporate income o Government support: wants o Unlimited liability: by law, each partner can be liable for all entrepreneurship debts incurred by any other partner o More managerial & financial o Lack of continuity: if partner leaves or if new partner joins, the resources: 2 heads > 1 old partnership no longer exists o Easier to borrow money: o Difficult to transfer ownership: both parties have to approve banks prefer to loan to non- of terms and conditions sole proprietorships o Difficult to obtain outside financing: although easier than sole Keith Diaz proprietorship, still difficult o Shared profits and decisions: conflicts with no guidance to resolving them  The main difference between partnership and sole proprietorship is that you should make a partnership agreement: the (private) rules that you will follow Types of partnerships General partnership  Actively involved in managing the firm, and have unlimited liability  Most common type and is similar to sole proprietorship as all (general) partners are jointly liable for the obligations of the business  All partners have joint and several liability - Joint: together share liability  if other partners do not come up with their fair share, whoever owns you means they can come after you, even if you’re not the cause of the problem - Several liability: 1 partner may be liable for all Limited partnership  Don’t participate actively, and liability is limited to amount they invested in the partnership - the most that you can lose is your investment.  At least one general partner with unlimited liability + 1 or more limited partners  Limited partners cannot participate in management or they risk loss of their limited liability status Corporation  Separate entity from owners (shareholders)  Interests represented by board of directors (BOD): governing body of corporation - Inside directors: also employees of the corporation, expertise - Outside directors: those who are not employees who sit on board  Dividends on common stock are paid on a per share basis  10 shares = 10 x 1 share  Proxy: investors cannot attend shareholders’ meeting, so they grant authority to someone else  Chief executive officer (CEO): top managers hired by BOD to run corporation Types of corporations  Public: corporations whose shares are publicly traded.  Private: stock is held by only a few people, and the controlling group = management group.  Most new corporations start out as private, because few investors will buy an unknown stock. Then as the corporation grows, it becomes a public corporation with an Initial Public offering: first time a company sells shares to the public. You go to an investment dealer, talk about how much and how many, and create a perspective (detailed document about company as a whole).  Public can go private using Private equity firms: buy publicly traded companies and then make them private. They often make major changes to company operations in order to increase its value. - want to become private again because of hassle and cost of being publicly traded  publicly traded means regulations and listening to opinions of outside shareholders. If public company chooses to become private, they have to buy their shares from the stock market.  Crown: CBC is an example that competes.  Can be small business, owned by one person  not always a big company 2 methods of incorporation 1. Federal: under the Canadian Business Corporations Act  if operating across the country Keith Diaz 2. Provincial: under provincial corporation acts  within province business only Advantages Disadvantages o Lower taxes than individuals: corporate tax rates o Double taxation: Corporation must pay are lower than personal tax rates. Governments do income taxes on its profits, and then this because the economic benefit of businesses in shareholders must also pay personal country is good. income taxes on dividends they receive  o Limited liability: limited to investment dividends are paid with after-tax dollars o Ease of raising money: lots of finance resources o Cost and complexity of formation: a large sell stock to expand number of investors corporation means conflicting ideas o Continuity: business and shareholders are separateo Regulations: heavy; BOD does not entities if owners change it does not matter necessarily represent the interest of the o Ease of transferring ownership company, so the government intervenes Small private corporations (Canadian controlled)  Shares not sold to public, Canadian and privately controlled, less than 50 shareholders Advantages Disadvantages o Lower taxes than large corporations since you are entitleo Double taxation?: to a small business deduction which means lower tax rate - Revenue – expenses = net o Limited liability?: since your personal assets are income before tax unprotected, you’re still liable as banks can come after y-u NIBT – tax = earnings after tax o Ease of raising money? - EAT = dividend to owners o Continuity: change in ownership does not change business o Complexity of formation?: More o Ease of transferring ownership complex than sole proprietorship, o Secrecy : you do not need to
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