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Commerce 1B03 Midterm 2 Review

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McMaster University
Rita Cossa

Commerce 1B03 Midterm #2 Review ch. 6-11 Forms of Business Ownership Three major forms of business ownerships – sole proprietorships, partnerships, corporations Sole Proprietorship – a business owned and operated by one person without forming a corporation. Business owner is a single entity, 24 percent of registered business in Canada are sole proprietorships Partnership – a legal form of business with two or more parties This form is very popular when you do not have the money, time, or desire to run a business alone. Corporation – a legal entity with authority to act and have liability separate from its owners. More than 1.5 million corporations in Canada, have largest share of business revenue. Liability – includes the responsibility to pay all normal debts and to pay because of a court order or law, for performance under a contract, or payment of damages to a person or property in an accident. Advantages of a sole proprietorship 1. Ease of starting and ending the business. 2. Being your own boss 3. Pride of ownership 4. Retention of profit 5. No special taxes 6. Less regulation Disadvantages of Sole Proprietorship 1. Unlimited liability – the risk of personal losses. The responsibility of business owners for all of the debts of the business. 2. Limited financial resources. Funds available are limited to the funds that one owner can gather 3. Management difficulties. 4. Overwhelming time commitment 5. Few fringe benefits. 6. Limited growth. 7. Limited lifespan 8. Possibly pay higher taxes Partnerships Is a legal form of business with two or more parties. There are two types of partnerships, limited partnership, and general partnerships. General Partnership – a partnership in which all owners share in operating the business and in assuming liability for the business’s debts. Limited Partnership – a partnership with one or more general partners and one or more limited partners. General Partner – an owner who has unlimited liability and is active in managing the firm. Every partnership must have at least one general partner. Limited Partner – an owner who invests money in the business but does not have any management responsibility or liability for losses beyond the investment. Limited Liability – limited partners are not responsible for the debts of the business beyond the amount of their investment. Advantages of Partnerships 1. More financial resources. When two or more people pool money together you have more capital 2. Shared management and pooled complementary skills and/or knowledge 3. Longer survival 4. Shared risk 5. No special taxes 6. Less regulation Disadvantages of Partnerships 1. Unlimited liability 2. Division of profits 3. Disagreements among partners 4. Difficult to terminate 5. Possibly pay higher taxes Corporation Public Corporation – Corporation that has the right to issue shares to the public, so its shares may be listed on a stock exchange. This could allow for raising large amounts of capitals. Private Corporation – a corporation not allowed to issue stock to the public, so its shares are not listed on stock exchanges, it is limited to 50 or fewer shareholders. Advantages of Corporations 1. Limited liability 2. More money for investment 3. Size 4. Perpetual life 5. Ease of ownership change 6. Ease of drawing talented employees 7. Separation of ownership from management Disadvantages of Corporations 1. Extensive paperwork 2. Double taxation 3. Two tax returns 4. Size 5. Difficulty of termination 6. Possible conflict with stockholders and board of directors. 7. Initial cost Professional Corporations - Individuals can also incorporate. A professional corporation is a Canadian controlled private corp that provides professional services - Major benefit of professional corporation is tax benefits. Also includes limited liability Non-Resident Corporations - Conducts business in Canada but has its head office outside of Canada. Non-Profit Corporations - Formed for charitable or social benefits - Has same features as business corporations but it pays no income taxes and does not issue shares. Crown Corporations - Companies that only the federal and provincial government can set up. Corporate Governance – refers to the process and policies that determine how an organization interacts with its stakeholders, both internally and externally. It is necessary because of evolution of public ownership. Individuals who serve on boards can be held personally responsible for misconduct of an organization. Business Regulations - Companies that wish to operate in Canada must follow federal and provincial regulations Articles of Incorporation – a legal authorization from the federal or provincial government for a company to use the corporate format. Corporate Expansion: Merger and Acquisition Merger – the result of two firms forming one company Acquisition – one company’s purchase of the property and obligations of another company Vertical Merger – the joining of two companies involved in different stages of related businesses Horizontal Merger – the joining of two firms in the same industry. Conglomerate Merger – The joining of firms in completely unrelated industries. Leveraged Buyout – an attempt by employees, managed or a group of investors to purchase an organization primarily through borrowing. Franchising Franchise agreement – an arrangement whereby someone with a good idea for a business sells the rights to use the business name and sell its goods and services in a given territory. Franchisor – a company that develops a product concept and sells others the rights to make and sell the products Franchise – the right to use a specific business’s name and sell its goods or services in a given territory. Franchisee – A person who buys a franchise Advantages of Franchises 1. Management and marketing assistance 2. Personal ownership 3. Nationally recognized name 4. Financial advice and assistance 5. Lower failure rate Disadvantages of a franchise 1. Large start-up costs 2. Shared profit 3. Management regulations 4. Coattail effects 5. Restrictions on selling 6. Fraudulent franchisors Co-operatives An organization that is owned by members and customers, who pay an annual membership fee and share in any profits. Co-ops are different because they: 1. Have a different purpose – meet common needs of their members 2. A different control structure – co-ops use one member one vote system. 3. A different allocation of profit – share profits among their member owners on the basis of how much they use the co-op. Entrepreneurship and Small Business Entrepreneurship – accepting the challenge of starting and running a business Entrepreneurial ventures differ from small business in the following ways: 1. Amount of wealth creation 2. Speed of wealth creation 3. Risk 4. innovation Why people take the entrepreneurial challenge 1. new idea, process, or product 2. independence 3. challenge 4. family pattern 5. profit 6. immigrants What does it take to be an Entrepreneur 1. self-directed 2. determined 3. action-oriented 4. highly energetic 5. tolerant of uncertainty 6. able to learn quickly Small and medium sized enterprises (SME) – refers to all businesses with fewer than 500 employees Entrepreneurial Teams – a group of experienced people from different areas of business who join together to form a managerial team with the skills needed to develop, make, and market a new product. Micro-enterprise – a small business defined as having fewer than five employees. Micropreneurs – small-business owners with fewer than five employees who are willing to accept the risk of starting and managing the type of business that remains small, lets them do the kind of work they want and offers them a balanced lifestyle Intrapreneurs – creative people who work as entrepreneurs within corporations Incubators – centres that provide hands on management assistance, education, information, technical and vital business support services, networking resources, financial advice, as well as advice on where to go to seek financial assistance. Business establishment – has at least one paid employee, annual sales revenue of $30,000, or is incorporated and has filed a federal tax return at least once in the previous three years. Employer business – meets one of the business establishment criteria and usually maintains a payroll of at least one person, possibly the owner. Small Business – a business that is independently owned and operated, is not dominant in its field, and meets certain standards of size in terms of employees or annual revenues. Business plan – a detailed written statement that describes the nature of the business, the target market, the advantages the business will have in relation to competition, and the resources and qualifications of the owners. Venture Capitalists (VCS) – Individuals or companies that invest in new businesses in exchange for partial ownership of those businesses. Angel investors – private individuals who invest their
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