Forms of Business Organization

Chapter 10


Within Canada
• Three basic forms:
– Sole proprietorship – Partnership – Corporation

• Characterized by differing degrees of control and risk

Sole proprietorship
• a business that is owned by one person. It may be managed by that person, or others but all chance of profit and risk of loss is borne by one who owns it. • Key Issues
– Extension of the individual – Unlimited liability for actions, any or all of owner’s assets may be seized to cover debts, judgments of any kind

• a business owned by two or more persons with a view to making profit. Like a sole proprietorship, a partnership may be managed by the partners or others but all chance of profit and risk of loss is borne by the partners who own the business. • Key Issues
– Extensions of individuals but rules (legislation, common law) exist – each partner of a business is fully responsible for each debt and obligation of the business (joint liability) – any or all of any owners’ assets may be seized to cover debts, judgments of any kind, including those due to actions of other partners

Other forms of Partnership
• Limited Partnerships
– Full liability on general partner, others to extent of investment

• Limited Liability Partnerships
– Personal assets of innocent partners are protected in event of malpractice by one


• A separate legal entity owned by two or more persons (shareholders). The corporation is similar to a partnership but because it is a separate legal entity, which status is obtained by meeting certain legal requirements, it provides the owners with protection from liability for most legal issues that arise. • A shareholders liability is limited to his/her investment in the company

Alternative Market Entry Strategies
• • • • • • • • Exporting Licensing Franchising Joint Ventures Strategic Alliances Consortia Turnkey/ Management Contracts Foreign Direct Investment It depends!

Which is best? -

A Closer Look At Exporting
A key to international success is developing and maintaining the right, aggressive and reliable distribution channel. Distribution Options: - direct through own sales force - use independent intermediaries in local foreign market e.g. agent or distributor - use home country agent or distributor Which is best? - It depends!

Agents and Distributors
• Agents are independent, commissionbased sales representative of principal • Distributors purchase goods on own account (takes title) for resale at a profit


- independent, commission-based sales representative of principal - does not take title to goods - normally does not inventory, arrange transportation, nor take risk for delivery - normally takes orders on behalf of principal (supplier) but requires approval - does not represent competitors - normally takes no risk for payment although some (del credere ) agents guarantee payment


Agents - Key Legal Principles
1/ two types of authority in agency relationships: - Real or Actual Authority – authority given to agent by principal in the agency agreement (contract) - Apparent Authority – part of legal relationship between principal and third party (buyer) caused by understanding of third party that agent legally represents the principal and appears to have authority 2/ agent unable to bind principal unless he/she has actual or apparent authority 3/ principal legally bound by any acts done by agent which are within their apparent authority 4/ under common law, agency agreements are a contract of “utmost good faith” which requires extra high standard of performance 5/ agent may NOT act for both principle and third party unless given permission by both parties What Can Principal Do to control agent? 1/ principal must inform all potential customers of any limitations of agent’s authority 2/ on termination of agent’s agreement principal must advise third parties or can legally continue to be bound by agent’s activities

- purchases goods on own account (takes title) - profit based on mark-ups - takes on all credit risks - does not act on behalf of principal - operates independently re customers, competitors - inventories, often arranges transportation - Can provide installation, maintenance, other related services

Appointing the wrong agent or distributor can be your biggest market entry mistake - it is difficult and costly to change and the damage to your ability to conduct business can last for years.


How to Make the Right Choice of Agent, Distributor
• • • • Choose the appropriate channel Locate and select the right intermediary Screen the candidate Draft a strong contract (in full compliance with international and local laws) Control and motivate

Choose the appropriate channel
• The appropriate distribution channel is a function of risk and return, an integral piece of your market entry strategy.


Locate and select the right intermediary
Develop selection criteria: - study the market and develop an intermediary profile and rating system - get leads from: - unsolicited inquiries - Canadian government sources - foreign government sources - trade sources - service providers - your own sales force - target customers - trade shows and missions - other reps and distributors - active solicitation - direct mail, ads

Screen the candidate
1/ letters to prospects outlining your firm, product lines and intermediary requirement 2/ follow-up with best responses for detailed information for your rating system 3/ check references carefully e.g. customers, banks, suppliers, employees, C of C’s, trade associations 4/ visit each on short list, make joint sales calls, check facilities, talk to target market 5/ make sure fit is right, doesn’t have to be biggest, small and hungry may be better 6/ Follow your company governance procedures exactly

Draft a Strong Contract
Agency Agreements: 1/ exclusive, non-exclusive 2/ authority - introducer - concludes contracts - $ limits 3/ define - products - price points - territory - market segment 4/ payment - rate, basis, when due 5/ duties of agent: - obey lawful instructions of principal - use reasonable diligence/maintain agreed standards - full disclosure to principal - can’t accept bribes, make secret profits - can’t divulge confidential information 6/ duties of principal: - to pay commission ( once payment received from third party) - if deal direct - must pay commission - agent’s expenses - per contract - commission on orders from territory but not by agent - per contract - commission on repeat orders – per contract - discretion to accept orders – no if ‘introducer’, yes if ‘contract maker’ - commission due per agreement – what happens if order not filled? – make agreement 7/ duration, renewal provisions 8/ dispute settlement 9/ termination clauses: - specify - fraud, deceit, - damage to business interests - failure to comply with contract


1/ establish marketing objectives: - sales volume, market share - inventory turnover ratios - number of accounts per area - number of calls on key clients per year - growth targets - quality and extent of promotion - price points 2/ don’t lose control and create “grey” markets (where legal) 3/ control their activities (where legal) - volume of sales - market coverage - services offered - prices - advertising - payment of bills - profits


• provide strong promotion support • offer attractive incentives, commissions, margins • provide credit, sales technical and product service support • continuing communications and visits “don’t orphan your rep or distributor”