CHAPTER 5

Forms of Business Ownership and Organization

Chapter Summary: Key Concepts

Most Businesses are Small Businesses

What is a small business? A vital component of our economy, small businesses

account for approximately 97% of Canadian firms. A small
business is generally defined as an independent business
with fewer than 100 employees, and revenues less than $2
million. However, the size can vary according to the
industry.

Typical small-business ventures Small businesses in Canada operate in nearly all industries,
but account for more than two-thirds of employment in five
Canadian industry categories: non-institutional health care,
construction, accommodation and food, forestry, and other
services.

Home-based businesses Many small businesses are home based due to access to the
Internet and the availability of communication devices.

Contributions of Small Business to the Economy

Creating new jobs Small businesses create more than half of all new jobs in
Canada. The majority of new job growth is among firms
that provide services instead of goods. They also hire those
who traditionally have had a difficult time finding work,
such as people returning to the workforce.

Creating new industries Small businesses give business people the opportunity to
develop new ideas, some of which become entirely new
industries. Many of today’s largest and most successful
firms began as a small business. Small businesses also
provide needed services to a larger corporate community.

Innovation In a typical year, small firms will develop twice as many

product innovations per employee, and produce 13 times
more patents per employee than larger firms.

Why Small Businesses Fail

Management shortcomings These include lack of people skills, inadequate knowledge

of finance, inability to track inventory or sales, poor

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 Forms of Business Ownership and Organization 5–2

assessment of competition, and a lack of time to do

everything required.

Inadequate Financing First-time business owners assume that their firm will
generate enough funds from their initial sales to finance
continuing operations. However, most don’t turn a profit
for months or even years due to start-up costs.

Government Regulation Unlike large business that hire specialists to help the firm
comply with government regulation, small businesses have
a limited staff.

The Business Plan: A Foundation for Success

Business plan Every business needs a plan in order to succeed. A business

plan is a formal document that details a company’s goals,
the methods by which it will achieve these goals, and the
standards by which it will measure its achievements.

Business plan sections - An executive summary

- An introduction
- Financial section
- Marketing section
- Résumés of principals

Business plan elements - The company’s mission and visions

- An outline of what makes the company unique
- The customers
- The competition
- Financial evaluation of the industry and market conditions
- An assessment of the risks

Assistance for Small Businesses

Business Development Bank The Business Development Bank of Canada (BDC)

of Canada offers a variety of services. It operates across Canada
through offices and resource centres that provide long-term
financial assistance and management counselling. The
BDC also provides training, technical assistance, and
education to help small businesses prepare for doing
business in foreign markets.

Financial assistance

Business incubators Low-cost shared business facilities available to small

start-up companies developed by community agencies.

Private investors Money invested in a small business by another business or a

group of individuals in exchange for an ownership share.

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 Forms of Business Ownership and Organization 5–3

Small-business opportunities Approx. 50% of Canadian small and medium-sized

for women enterprises (SMEs) have at least one female owner.
Many women leave large corporations when they feel
blocked from opportunities for advancement or seek
self-employment as a method to spend more time with
family.

Franchising

The franchising sector A contract-based business arrangement between a

manufacturer or other supplier, and a dealer, to produce and
market the supplier’s good or service. Canada has the
second largest franchise industry in the world, after the
United States.

Franchising agreements Two principles in a franchising agreement are the

franchisee, the individual or firm purchasing the
franchise, and the franchisor, the firm whose products
are sold by the franchisee.

Benefits to franchising Franchising allows the franchisor to expand the business

more rapidly, while the franchisee can take advantage of
name recognition, an established management system, and
a prior performance record.

Problems in franchising Franchise fees and future payments are costly to

franchisees. They may give up some independence under
the franchise contract, and the entire franchise can be
adversely affected by bad performance at one franchise
unit.

Forms of Private Business Ownership

Sole proprietorships Ownership of an organization by a single individual,

considered the simplest and most common form of
business. Common in industries such as repair shops,
small retail stores, and service providers. Advantages
include ease to dissolve and management flexibility.
Disadvantages include personal liability, limited
financial resources, and a lack of long-term continuity.

Partnerships An association of two or more persons who operate a

business as co-owners by voluntary agreement. Advantages
include ease of formation and greater financial capability.
Disadvantages include unlimited liability, difficulty
dissolving, and personal conflicts.

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 Forms of Business Ownership and Organization 5–4

Corporations A legal organization with assets and liabilities separate

from those of its owner(s). Advantages include limited
liability and expanded financial capabilities. A major
disadvantage is double taxation.

Not-for-profit corporations Organizations whose goals do not include pursuing a profit.

Approx. 160,000 not-for-profits operate in Canada.

Public and Collective Ownership of Business

Public (government) ownership The ownership and operation of an organization by a

government unit or agency.

Collective (cooperative) ownership A form of ownership where owners join forces to

operate all or part of the activities in their firm or
industry. Often referred to as a co-op.

Organizing a Corporation

Where and how businesses Incorporation can be done at the federal or

incorporate provincial level. Canadian firms can incorporate in any
province they choose. Most small and medium-sized firms
incorporate in the province where they operate. Larger
firms often compare the benefits, such as tax incentives,
offered in different provinces when deciding where to
incorporate. Information in the articles of incorporation
forms the basis on which a government grants a corporate
charter.

Corporate management Corporations generally have up to five levels of

management: shareholders, board of directors, top
managers, middle managers, and supervisory managers.

When Businesses Join Forces

Mergers Two or more firms that combine to form one company. A

vertical merger combines firms operating at different levels
of production. A horizontal merger joins firms in the same
industry, while a conglomerate merger combines unrelated
firms.

Acquisitions One firm purchases another, or when one firm buys a

division or subsidiary from another firm.

Joint ventures: specialized A partnership between companies formed for a specific

partnerships activity.

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 Forms of Business Ownership and Organization 5–5

Business Vocabulary
acquisition horizontal merger
board of directors joint venture
Business Development Bank of Canada (BDC) merger
business incubator not-for-profit corporations
business plan partnership
common shares preferred shares
conglomerate merger shareholders
corporation small business
franchisee sole proprietorship
franchising vertical merger
franchisor venture capital
home-based businesses

Application of Vocabulary
Select the term from the list above that best completes the statements below. Write that term in
the space provided.

1. A(n) ______ occurs when one company buys the assets and assumes the liabilities of another
firm.

2. The purchaser of a franchise is known as the ______.

3. ______ are companies that sell franchises to independent business people.

4. A(n) ______ is a merger between firms whose businesses are unrelated.

5. The ______, operated from the residence of the business owner, is a widely used and low cost
option for new firms.

6. The ______ is a government agency that assists, counsels, and protects the interests of small
businesses in Canada.

7. ______ are shares that give the owners voting rights but only residual claims on the firm’s assets
and income distribution.

8. In a(n) ______, one firm combines with another firm in the same industry.

9. ______ is generally defined as an independent business, with fewer than 100 employees and
revenues less than $2 million, not dominant in its market.

10. A(n) ______ is a legal organization whose assets and liabilities are separate from those of its
owner(s).

11. A business that is owned by one person is a(n) ______.

12. A(n) ______ is an organization in which the owners operate collectively.

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 Forms of Business Ownership and Organization 5–6

13. ______ are shares that give the owners limited voting rights and the right to receive dividends
or assets before the owners of common shares.

14. ______ means an organization is owned and operated by a government unit.

15. Two or more persons who operate a business as co-owners form a(n) ______.

16. ______ is a contractual business agreement between a manufacturer or supplier and a dealer.

17. The governing authority of a corporation, elected by the common shareholders, is called the
______.

18. An organization whose goals do NOT include pursuing a profit is known as a(n) ______.

19. When firms at different levels in the production and/or marketing process decide to combine
into one company, a ______ has occurred.

20. ______ is money invested in a business by another business firm or group of individuals in
exchange for an ownership share.

21. When two or more firms combine to make one company, a ______ has occurred.

22. Owners of a corporation due to their purchase of shares in the corporation are known as
______.

23. A(n) ______ is an organization that provides low-cost shared facilities to small start-up
companies.

24. A(n) ______ is a formal document that details a company’s goals, the methods by which it
intends to achieve those goals, and the standards by which it will measure achievements.

25. A partnership between companies formed for a specific undertaking is called a(n) ______.

Analysis of Learning Objectives

Learning Objective 5.1: Distinguish between small and large businesses.

Multiple Choice

1. A small business is defined as

a) independently owned and managed.
b) a firm that is not dominant in its industry.
c) a firm that meets industry-specific size standards for income or number of employees.
d) all of the above

2. The federal government agency that is set up to work with small businesses is the

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 Forms of Business Ownership and Organization 5–7

a) BBC.
b) SBC.
c) FTC.
d) BDC.

3. Which of the following industries tends to attract small business?

a) retailing
b) agriculture
c) services
d) construction
e) all of the above

4. Home-based businesses
a) are illegal in most provinces.
b) don’t have to pay income taxes.
c) take advantage of the Internet and the availability of communication devices.
d) account for fewer than 50% of firms with revenues of $25,000 or less.

Learning Objective 5.2: Discuss the contributions of small businesses to the economy.

True or False

1. ______ It is fair to say that a strong small business sector is very important to the Canadian
economy.

2. ______ Many of today’s large businesses were started by entrepreneurs.

3. ______ In Canada, the number of small businesses is declining.

4. ______ More than half of all new jobs are created by small businesses.

5. ______ New job opportunities for small businesses include green energy and media.

6. ______ Small businesses account for barely one-tenth of the nation’s GDP.

7. ______ Small businesses are more likely to hire people returning to the workforce and former
recipients of social assistance than are larger businesses.

Learning Objective 5.3: Discuss why small businesses fail.

Fill in the Blank

Complete the sentence with the correct answer.

1. After the first year, ______ percent of new businesses survive.

2. After three years, ______ percent of new businesses survive.

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 Forms of Business Ownership and Organization 5–8

3. By the fifth year, ______ percent of new businesses have closed.

Learning Objective 5.4: Describe the features of an effective business plan.

Multiple Choice

1. A description of the firm’s target market and marketing plan, as well as detailed financial
forecasts is known as
a) the company’s financial mission.
b) the marketing executive summary.
c) the financial and marketing section.
d) assessment of risks section.

2. A description of why the company was founded and what it intends to do accomplish its goals is
known as
a) plan and intent.
b) mission and vision.
c) goals and values.
d) objectives and ideas.

3. The section of the business plan that acknowledges and outlines a strategy for dealing with
uncertainty is known as
a) assessment of risks.
b) mission and vision.
c) business assessment.
d) danger signs.

4. The who, what, where, when, why, and how are answered in
a) the company’s mission.
b) the executive summary.
c) the financial and marketing section.
d) the assessment of risks section.

Learning Objective 5.5: Identify the assistance available to small businesses.

Short Answer

1. List and discuss the major areas in which the Business Development Bank of Canada (BDC)
offers programs and services.

2. Discuss the difference between business incubators and venture capital.

Learning Objective 5.6: Explain franchising.

True or False

1.______ Franchising is a contractual business arrangement between a manufacturer or

supplier and a dealer.

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 Forms of Business Ownership and Organization 5–9

2. ______ A well-established franchise is cheaper to open than an independent small business.

3. ______ Many franchisors offer training services for franchisees and their employees.

4. ______ Major advantages of franchises include a tested management system, name

recognition, and a proven business model.

5. ______ The buyer of a franchise is known as the franchisor.

6. ______ One franchise unit can suffer from the actions or poor performance of other units of the
same franchise.

7. ______ Franchising offers entrepreneurs greater independence and flexibility than other types
of small businesses.

Learning Objective 5.7: Outline the forms of private business ownership.

Multiple Choice

1. The most widely used form of business ownership is

a) general partnership.
b) sole proprietorship.
c) corporation.
d) limited partnership.

2. Additional capital is most easily obtained if the form of ownership is a

a) general partnership.
b) sole proprietorship.
c) corporation.
d) limited partnership.

3. Limited financial liability is the most important advantage of which form of

ownership?
a) general partnership.
b) sole proprietorship.
c) corporation.
d) all of the above.

4. These types of organizations are commonly found in sectors such as museums, libraries,
and hospitals:
a) general partnership
b) sole proprietorship
c) not-for-profits
d) corporations

True or False

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 Forms of Business Ownership and Organization 5 – 10

5. ______ Sole proprietorships give owners ease of formation and dissolution, maximum
flexibility, and the owner retains all the after tax profits.

6. ______ Sole proprietorships suffer from financial limitations and unlimited financial liability.

7. ______ Like sole proprietorships, partnerships are easy to form and dissolve.

8. ______ Major advantages that can be achieved through the partnership form of ownership
include complimentary management skills and expanded financial capability.

9. ______ Corporations face fewer tax disadvantages and legal restrictions than other forms of
business ownership.

Learning Objective 5.8: Describe public and collective business ownership.

Multiple Choice

1. When a group of wheat farmers collectively purchases a grain elevator, this is an example
of
a) private ownership.
b) public ownership.
c) cooperative ownership.
d) employee ownership.

2. If the city of Winnipeg owns a parking garage on Main Street, the garage is said to be
a) privately owned.
b) publicly owned.
c) co-operatively owned.
d) collectively owned.

3. These types of firms result when private investors are unwilling to invest in a high-risk project
a) public ownership.
b) employee ownership.
c) cooperative ownership.
d) a firm going private.

4. These types of firms are commonly found among agricultural businesses

a) employee-owned firms.
b) not-for-profit corporations.
c) co-operatives.
d) all of the above.

Learning Objective 5.9: Describe the ownership structure of corporations.

True or False

1. ______ Top managers include job titles like CEO, CFO, COO, and CIO.

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2. ______ Top managers are responsible for the day-to-day operational functions of the firm.

3. ______ Managers who directly supervise employees and coordinate day-to-day operations of
the firm are known as supervisory managers.

4. ______ The board of directors is elected by the corporation’s common shareholders and
appoints top management.

5. ______ If you incorporate provincially, you can carry on business everywhere in Canada.

6. ______ Incorporation of a business can be done at the federal or provincial level.

Learning Objective 5.10: Describe mergers, acquisitions, and joint ventures.

Multiple Choice

1. When two or more firms combine to form one company, we say that the firms have
a) practiced divestiture.
b) been taken private.
c) become a cooperative.
d) merged.

2. When one firm purchases the property and assumes the liabilities of another firm, there has been
a(n)
a) vertical merger.
b) horizontal merger.
c) acquisition.
d) divestiture.

3. If a sporting goods manufacturer combines with a firm that operates sporting goods retailers,
this would be an example of
a) a vertical merger.
b) a horizontal merger.
c) a conglomerate merger.
d) an employee ownership arrangement.

4. If this sporting goods manufacturer combined with a food company, this would be an example
of
a) a vertical merger.
b) a horizontal merger.
c) a conglomerate merger.
d) public ownership.

5. If this sporting goods manufacturer combines with a manufacturer of tennis nets, this would
be an example of
a) a vertical merger.
b) a horizontal merger.
c) a conglomerate merger.

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 Forms of Business Ownership and Organization 5 – 12

d) a divestiture.

Self-Review

True or False

1. ______ Most businesses in Canada are organized as corporations.

2. ______ The quickest and simplest form of business ownership to start is the sole
proprietorship.

3. ______ The government usually offers small businesses the option of foregoing the paperwork
required of larger businesses.

4. ______ A partnership is defined as an association of two or more persons who are co-owners
of a business.

5. ______ In a partnership, the death of one partner does not affect the business in any way.

6. ______ Many small-business owners get added help in lowering costs by involving family
members who often contribute without being paid.

7. ______ Nearly half of all small and medium-sized enterprises (SMEs) in Canada have at least
one female owner.

8. ______ A franchise owner typically can generate profits faster than an independent business
owner can.

9. ______ On average, about 30 percent of small businesses dissolve within five years of being
formed.

10. ______ The BDC will lend money to anyone with a really good idea.

11. ______ A corporation is a legal entity separate from the owners.

12. ______ A conglomerate merger is a merger of unrelated firms.

13. ______ Poor management is a frequently cited reason for small-business failure.

14. ______ An organization that is operated collectively by its owners is a cooperative.

15. ______ The type of shares that entitles owners to voting rights and represent the true
ownership of the corporation are referred to as common shares.

16. ______ Fewer than 20 percent of businesses in Canada qualify as small businesses.

17. ______ The number of women-owned businesses is increasing.

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18. ______ An important disadvantage of sole proprietorships is lack of continuity.

19. ______ Because of their many disadvantages, sole proprietorships have largely become a thing
of the past.

20. ______ Small business plays a key role in international trade, accounting for 20 percent of
Canadian exports.

Multiple Choice

21. One advantage of purchasing a franchise is

a) the purchaser is guaranteed success.
b) the franchisee gets a tested business model.
c) there is a great deal of operational independence for the franchisee.
d) it is usually a cheaper way to open a new business than starting from scratch.

22. When managers or a group of shareholders buy up all of a firm’s stock, the firm then
becomes
a) a privately owned corporation.
b) a cooperative.
c) an LLC.
d) a joint venture.

23. When two firms in the same industry merge, it is called a(n)
a) conglomerate merger.
b) vertical merger.
c) horizontal merger.
d) acquisition.

24. On the CBC show Dragons’ Den, entrepreneurs present their ideas for a new business to a
panel of
a) business incubators.
b) bank managers.
c) venture capitalists.
d) shareholders.

25. Shareholders who have a prior claim to dividends and assets are known as
a) creditors.
b) preferred stockholders.
c) common stockholders.
d) partners.

26. The tier of management responsible for coordinating the day-to-day operations of a firm is
a) top management.
b) middle management.
c) supervisory management.
d) the board of directors.

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 Forms of Business Ownership and Organization 5 – 14

27. The purpose of a business plan should be to

a) clarify the entrepreneur’s ideas for a business.
b) create a document that can be shown to potential investors, lenders, or suppliers.
c) decide upon the business’s organization and structure.
d) spell out marketing and financial plans.
e) all of the above.

28. If one firm acquires the property and assumes the obligations of another, it is called a(n)
a) cooperative.
b) merger.
c) acquisition.
d) joint venture.

29. When a government agency or unit owns and operates an organization, it is known as
a) private ownership.
b) public ownership.
c) conglomerate ownership.
d) employee ownership.

30. The legal document that formally establishes a corporation is known as

a) a business plan.
b) a corporate merger.
c) a corporate charter.
d) corporate management.

31. The group who is elected by shareholders and who hires top management is called
a) the Board of Directors.
b) middle management.
c) supervisory management.
d) not-for-profit management.

32. The owners of a corporation are known as the

a) board of directors.
b) shareholders.
c) partners.
d) management.

33. Business incubators

a) are generally sponsored by local community agencies.
b) provide shared space and services for new small businesses.
c) often offer management counselling and in-house mentors.
d) all of the above.

Application Exercises

1. Daryl Fox is a self-employed real estate agent. For the past ten years, he has been advising

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 Forms of Business Ownership and Organization 5 – 15

shopping centre developers on such things as type and size of centres for given locations. During
the course of his business, he has become friendly with the Keller Development Company, which
is presently organized as a sole proprietorship. Daryl Fox and Chuck Keller, president of the Keller
Development Company, are discussing the possibility of going into business together. Daryl’s
sister, Delores Reyes, is an accountant and has been employed by a large accounting firm for
several years. She, too, would like to have her own business rather than work for someone else.
The three of them have decided that they collectively have the necessary skills and funds to start a
large-scale operation.
a) What legal form of business ownership should you recommend? Why have you selected that
form?
b) To protect Daryl Fox, Chuck Keller, and Delores Reyes, which form would you not
recommend? Why did you make this decision?
c) Do you anticipate any problem areas in this arrangement? If yes, what problems?
d) How would this endeavour benefit Mr. Fox? Mr. Keller? Ms. Reyes?

2. Winning the lottery netted Albert DeLuca slightly over $100,000. His good friend Carla Hall is
a talented jewellery designer but does not have any money. Carla suggested that the two of them
form a partnership, with Albert investing half his winnings and Carla contributing her talents.
They decided on a general partnership. About two weeks later, Albert left for an around-the-world
vacation while Carla stayed on to run the business. When Albert returned home eight months later,
he found that both Carla and the $50,000 were gone. The next day, the creditors of the business
came to Albert with bills in excess of $80,000.
a) What is Albert’s liability?
b) What is Carla’s liability?
c) If you met Albert when he won the lottery, what advice would you have given him?

Short Essay Questions

3. What advantages do small businesses bring to the Canadian economy? What disadvantages
must successful small businesses overcome?

4. What is franchising? How important is franchising as a form of small business? What are the
advantages and disadvantages franchisees can expect?

5. Name and define the three legal structures of business ownership, citing their respective
advantages and disadvantages.

6. Define and distinguish a merger and an acquisition. What are the major types of mergers?

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