Chapter 5 Business Organization and Finance

Economics 11

Types of organizations

Businesses are established and financed in five ways:

-sole proprietorship (aka single proprietorship)

-partnership

-corporation

-public (government) enterprise

-cooperative

Sole Proprietorship the sole proprietorship is a form of

business organization in which one person owns and operates the business

sole proprietorships are very common in Canada, they are easy to establish

there are no general laws governing the establishment of a proprietorship; each province has its own regulations In Nova Scotia, a sole proprietorship is

actually registered as a “partnership” – but with only one partner listed, in other words it is a partnership of one

Sole Proprietorship The owner (sole proprietor) makes all

decisions about what, where, when, and how much to produce

The owner establishes the prices, hires the employees, supplies the capital necessary

The owner does what they like and collects all the profits (or incurs all losses)

The sole proprietor can say “I am the company”

Sole Proprietorship Challenges for the sole proprietor:

The size of the operation (number of employees, amount of capital invested, the output produced) is severely limited by proprietors’ financial resources and their ability to borrow money.

Proprietors are obliged to oversee the entire operation and frequently perform all the various tasks themselves For some of the tasks, the sole proprietor

may not be particularly well suited.

Sole Proprietorship Challenges for the sole proprietor:

A sole proprietorship usually requires the owner’s continuous presence Any prolonged absence on the owner’s part could

lead to serious losses for the firm

Sole proprietors face serious financial risk Legally, proprietors are entirely liable for the

losses of their business This liability is unlimited, they could lose the

capital they invested but they could also lose their homes, and any other assets with value.

often sole proprietors find it difficult to sell their business because it is hard to find someone with the necessary knowledge, skills and capital

Sole Proprietorship if the proprietor dies, goes to prison, or

becomes insane, the proprietorship is ended.

sole proprietorships are particularly appropriate when the total market is small, where large scale production is out of the question, and where operations are not routine.

sole proprietorships are common in professional services like accounting, dentistry and engineering and also in farming, restaurants, house construction and appliance repair

Partnerships

a partnership is a business organization in which two or more individuals enter a business as owners, and share the profits and losses

sometimes with a sole proprietorship, lack of capital is a problem, which is why a partnership works well because more capital can be raised

Partnerships

a partnership always has an agreement (usually written) that specifies the money, skills, and participation to be provided by each partner, as well as the type of authority each partner will have

the profits and losses can be shared equally, a 50/50 relationship, but it could also be 60/40, 80/20, etc.

Partnerships advantages a PARTNERSHIP has over the SOLE

PROPRIETORSHIP: can raise more capital so it is better able to undertake

operations on a larger scale

responsibilities can be divided and therefore handled more efficiently

shared expertise allows each partner to specialize in different types of the business

If one partner gets ill or for some other reason has to be away from the business for an extended period of time, the business continues to run under the control of another partner

Partnerships disadvantages of a PARTNERSHIP:

Partners may find it difficult to reach agreement on certain issues

Each partner is legally liable for the debts of the entire firm this liability is unlimited in that it goes beyond the

amount a partner has invested in the firm and can include the partners’ personal property

a partner cannot simply withdraw from the business whenever they like, they must be bought out

each time a partner resigns or dies, a new agreement must be drawn up

Corporations

a corporation is a form of business organization that has an existence of its own separate from those who created or own it

there are two main types of corporations: Crown and business

Crown corporations are owned and controlled by some level of government (for example the CBC)

Corporations a business corporation is owned and

controlled by private individuals

the weaknesses of the sole proprietorship and the partnership led to the formation of the corporation

the corporation is considered an entity under the law it has all the legal rights and responsibilities of an adult

person a corporation can hold property in its name, enter into

contracts, and sue or be sued in a court of law

officials act on a corporation’s behalf

Corporations advantages a CORPORATION has over the

SOLE PROPRIETORSHIP and PARTNERSHIP:

the legal right to limited liability, people who have invested in a corporation are not personally liable for all its debts the investment is all they lose

companies attach the word Limited (Ltd.) or Incorporated (Inc.) to their company name to indicate to suppliers and customers that the owners have limited liability for corporate debts

when a corporation wants to grow it must raise funds (capital) one way of raising capital is to retain earnings of a corporation rather

than distributing them in the form of dividends to owners

another way to raise capital is to issue securities ; there are three main types of securities that corporations offer to the public:

the common share, the preferred share and the bond

CorporationsCommon Shares

if you purchase one or more common shares in a corporation than you become part owner of that corporation

this means you get a right to vote in the affairs of the company and a right to share in the profits

voting power and share of the profits depends on the number of shares held (owned) compared to the total number of shares that have been issued

one share = one vote if the corporation goes under, the shareholders are

paid last (all other financial obligations of the firm are met first)

CorporationsPreferred Shares stock issued by a corporation that shows ownership of a

company

preferred shareholders don’t get a vote in the affairs of the corporation

preferred shares are more secure than common shares

promised a fixed return on investment

if the company goes under, you get paid before common shareholder

CorporationsBonds a written promise to pay a stated sum of money at some time in the future

until that time interest is paid on stated dates bonds are the most secure of the securities bondholders are not part owners, they are more like creditors if the corporation folds, debt to bond holders is repaid before the preferred and

common shareholders generally bonds give a lower return than common and preferred stock

all corporations must issue common stock, but they don’t have to issue preferred shares or bonds

ultimately control of the corporation is with the common shareholders however, for large corporations with thousands of shareholders there are too many

people to actually make any decisions so a board of directors is elected by vote of the shareholders (one vote for each

share owned) the board of directors then elects the officers of the board (VP, treasurer,

President, etc.) the board of directors performs a “watchdog” role they are responsible to

shareholders for the officers they elected to run the company

Corporationsadvantages of the CORPORATION:

the shareholders’ liability is limited to the amount invested in the firm

usually not difficult to sell shares on the stock market

they do not need to consult other owners before selling their stock

corporations can raise a lot of capital

can take advantage of mass production, marketing, and automation

Corporationsdisadvantages of the CORPORATION

in theory the corporation is under democratic control of the shareholders, but in practice a small group may control it effective control may rest in the hands of the minority

corporations are more expensive to establish, have to pay a fee to be incorporated federally or provincially

costs of auditors, accountants, and lawyers are also high

double taxation as a firm it pays federal and provincial taxes on its profits after-tax profits paid to shareholders are also subject to federal

and provincial taxes

The Stock Exchange an organized market where listed stocks can be bought or sold

a stock exchange is an actual building that provides a marketplace for the buying and selling of stocks

traders work on the floor of the exchange, executing their clients’ orders to buy or sell listed shares

the stock exchange does not set the price of stock, prices reflect the public opinion and worth and potential of a company

there are four stock exchanges in Canada: since

(21%) Montreal 1832(75%) Toronto 1852(3%) Calgary 1913(1%) Venture (Vancouver)

http://www.tmx.com/en/about_tsx/

The Stock Exchange (1%) Vancouver 1907 the TSE (Toronto Stock Exchange) is the fifth largest in the world Canadian stock exchanges involve trading shares that have already been sold

to the public by stockbrokers acting on behalf of corporations that wish to raise money

Canadian laws and stock exchange rules control the activities of corporations and stockbrokers to ensure fair and honest dealings as well as full disclosure of information

the Canadian Securities Commission and provincial securities commission The Dow Jones industrial average is the best known and most widely quoted

indicator of the general trend of stock market prices in the US Since 1928 the Dow has been based on the closing prices of the thirty major

US corporations from sectors considered most representative of the US economy GM, IBM, Exxon, McDonalds, Texaco, Boeing, Coca-Cola, Amex

The Dow is widely used to track the movement of stock prices on the NYSE Canadian stock exchanges also publish indicators of the general trend in

stock prices The 300 composite index (known as TSE 300) is the widely known and

commonly used in Canada The TSE 300 measures changes in the prices of 300 leading and

representative Canadian stocks

Cooperatives

A cooperative (also co-operative or co-op) is an autonomous association of persons who voluntarily cooperate for their mutual social, economic, and cultural benefit. Cooperatives include non-profit community

organizations and businesses that are owned and managed by the people who use its services (a consumer cooperative) and/or by the people who work there (a worker cooperative).

Cooperatives

The primary purpose of co-operatives and credit unions is to meet the common needs of their members, whereas the primary purpose of most investor-owned businesses is to maximize profit for shareholders.

Cooperatives

Co-operatives and credit unions use the one-member/one-vote system, not the one-vote-per-share system used by most businesses.

Cooperatives

members vote on how a cooperative should be run and what should be done with its savings or profits

in recent days, places like Just-Us Coffee Roasters Co-Op in Wolfville, making money doing socially responsible coffee trade

not only do they provide employment and generate sales opportunities, its buying practices ensure a better life and better environment for people in Central and South America

strength: democratic control and loyal members

weakness: difficulty remaining competitive with private firms

http://www.justuscoffee.com/our-co-op/beginnings

Cooperatives

http://www.mec.ca/AST/ContentPrimary/AboutMEC/AboutOurCoOp/PricingPolicy.jsp

Public Enterprise

public enterprise -  a business organization wholly or partly owned by the government and controlled through a public authority.

Some public enterprises are placed under public ownership because it is thought the service or product should be provided by a government monopoly. Utilities (gas, electricity, etc.), broadcasting, telecommunications,

and certain forms of transport are examples of this kind of public enterprise.

Public Enterprise

some public enterprises, though owned by government, are given a certain degree of autonomy to operate without government interference and to operate in a manner similar to a corporation

such semi-independent public enterprises are called Crown Corporations

Public Enterprise

Examples of crown corporations include the Canadian Broadcasting Corporation, Canada Post, and ViaRail.

Former crown corporations before their privatization include Air Canada and Petro-Canada.