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Exam 2 Study Notes.docx

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Brock University
Herb F Mac Kenzie

Chapter 5 – Business Formation LO1 3 Basic Forms of Business Ownership: 1. Sole Proprietorships a. Businesses owned and usually managed by an individual 2. Partnerships a. Voluntary agreements where two or more people act as co-owners; there are several types 3. Corporations a. Legal entities, separate from their owners LO2 Sole Proprietorship: Pros  Retention of control  Pride of ownership  Retention of profits  Possible tax advantage Cons  Limited financial resources  Unlimited liability  Limited ability to attract and retain talented employees  Heavy workload and responsibilities LO3 General Partnership: Pros  Pooled financial resources  Shared responsibilities  Ease of formation  Tax advantages Cons  Unlimited liability  Disagreements  Difficulty in withdrawing from partnership  Lack of continuity (if partners die, company dies) Types of Partnership: 1. General Partnership a. All partners have right to participate in management b. All share unlimited liability 2. Limited Partnership a. At least one general partner and at least one partner with limited liability 3. Limited Liability Partnership a. All partners actively involved b. They have some form of limited liability (varies by jurisdiction) LO4 Corporations:  Artificial reality  Legal entity, separate/distinct from owners  Owned by shareholders  Board of directors establishes mission and objectives  Board is elected by shareholders to represent their interests  Rarely gets involved in day-to-day management Pros  Limited liability  Permanence  Ease of transfer of ownership  Ability to raise capital  Specialized management Cons  Complexity/expense of formation and operation  Complications if operating across jurisdictions  Double taxation  Paperwork/regulation  Conflicts of interest Corporate Restructuring:  Acquisitions – when one firm buys another  Mergers – two companies agree to become one o Horizontal – 2 firms in same industry o Vertical – buyer/seller relationship o Conglomerate – 2 firms in unrelated industries  Divestures – allow the firm to streamline operations and focus o Spin-off  Setting up a division as a separate entity  Sell shares to existing shareholders o Carve-out  Setting up a separate business from an operation  Sell shares to outside investors LO5 Other types of corporations: 1. Cooperatives a. Owned by members b. Formed to meet common needs of members c. Each member has equal ownership and an equal voice on managing the co-op d. May be for-profit or not-for-profit e. Profits distributed through patronage dividends 2. Not-for-Profits a. Operate in both public and private sectors b. Approx. 161,000 not-for-profits in Canada 3. Crown Corporations a. Government owned, but most operate at arm’s length from government b. Provide services to Canadians where private industry cannot c. Many former Crown Corporations have been sold: Air Canada, Canadian National Railway, and Canada Post LO6 Franchising: Pros  Less risk  Training and support  Brand recognition  Access to funding Cons  Costs  Lack of control  Negative halo effect  Growth challenges  Restriction on sale  Poor executio
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