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Chapter 4

Notes for Chapter 4 of Business, Vol. 1, 2e

Management (MGT)
Course Code
Chris Bovaird

of 3
MGTA03 – Business, Volume 1
R. Griffin, R. Ebert, F. Starke
Chapter 4 – Understanding Legal Forms of Business Organization
Organizing Options; Forms of Business Ownership
Sole Proprietorship
-Sole proprietorship: a business owned and operated by one person; the business is
considered an extension of the sole proprietor, not a separate legal entity
-Sole proprietorships account for a small portion of total business revenues
oAdvantages of a Sole Proprietorship
freedom; sole proprietor is the only boss in his/her business and does not
have to answer to anyone
no need to register
easy to form; very simple legal setup procedures and low start-up costs
tax benefits
oDisadvantages of a Sole Proprietorship
unlimited liability: sole proprietor is responsible for all debts, owner may
be obliged to pay out of own pocket
lack of continuity: business will legally dissolve when owner dies
business relies on resources of only one person
-Partnership: formed when two or more people operate a business for profit;
owners pool their resources for its success; not regarded as legal entities; partners are
taxed as individuals
-General partnership: all partners are jointly liable for the obligations of the
business; share in the profits, have a say in managing the business, responsible for debt
-Limited partnership: consists of at least one general partner (who runs the
business and has unlimited liability) and one or more limited partners (who do not run the
business and have limited liability; they can only lose the amount of their original
oAdvantages of a Partnership
ability to grow by adding talent and money with addition of new
more likely to get loans from banks
simple to organize, few legal requirements, but require legal agreement
(solely between partners)
oDisadvantages of a Partnership
unlimited liability (for general partners); all partners may be liable for
debts incurred in the partnership’s name, even if they are unaware of it
lack of continuity; partnership is dissolved if one partner dies or pulls
difficulty of transferring ownership; no partner(s) may leave the
partnership without consent from other partner(s); life of partnership
may depend on retiring partners finding suitable replacement
partnerships provide little-no guidance in resolving conflict between
-Corporation: β€œartificial being”; separate legal entity that is liable for own debts,
owners’ liability is limited to their investment
-Characteristics: legal status as separate entity, property rights and obligations,
indefinite lifespan; ensure business runs in best interest of shareholders
-Shareholders: investors who buy shares of a corporation; real owners of a
-Board of directors: governing body of a corporation; oversees and takes legal
responsibility for corporation’s actions
-Inside directors: employees of a company who are also a part of its board of
-Outside directors: members of a board of directors who are not employees of the
company (i.e. accountants, attorneys)
-Chief executive officer: person responsible for firm’s overall performance
oTypes of Corporations
Public corporation: business whose shares of stocks are widely held
and available for sale to the public
Private corporation: business whose shares are held by a small group
of individuals and not available for public sale
most new corporations start as private corporations because few
investors will buy unknown stocks
Initial public offering: sales of a company’s shares to the public for the
first time
public corp. can also β€œgo private”
oFormation of the Corporation
federal incorporation under the Canada Business Corporations Act (if
the business will be operating in more than one province)
provincial incorporation under any provincial corporations acts (for
operation in only one province)
corporations have to attach β€˜Ltd.’, β€˜Inc.’, or β€˜Corp.’ to the company
name to tell customers and suppliers that the owners have limited
liability for corporate debts
oAdvantages of Incorporation
limited liability; liability is limited to investors’ personal investments
continuity; able to continue forever because it is a separate legal entity
raising money; by selling shares, they gain investors and available
oDisadvantages of Incorporation
much more government regulated than other two forms
Redrawing Corporate Boundaries
Acquisitions and Mergers
-Acquisition: one firm buys another firm and it is absorbed into its operations
-Merger: the union of two companies to form a single new business
-Horizontal merger: merger of two companies from the same industry
-Vertical merger: merger of two companies that had a buyer-seller relationship
-Conglomerate merger: merger of two completely unrelated businesses
-Friendly takeover: acquired company welcomes the acquisition probably because
it sees benefit in the action
-Hostile takeover: acquiring company buys enough stock to take control of the
other even though the takeover is not welcome
Divestitures and Spinoffs
-Divestiture: occurs when a company sells part of its existing business operations to
-Spinoff: strategy of setting up one or more corporate units as new, independent
corporations because a unit might be more valuable when separated