1.

2b: Forms of ownership

● Profit-based organizations
Learning goal: Respond to the following

What are the different types of ownership for

profit-based organizations?

Success criteria: Distinguish between

Sole proprietorships
Partnerships
Corporations/companies

2
Before we start:
Compare/contrast these ice cream flavours.
What’s similar? What’s different?
Three flavours of private businesses

Sole proprietorship = Vanilla → the most common flavour

- One owner who takes on all financial risk

- All decisions (ideas, spending) made by one person
- Profit is kept by one person

Partnership = Chocolate vanilla swirl → two flavours mixed together

- Two or more owners who take on all financial risk

- Decisions (ideas, spending) made by all owners
- Profit is split evenly (e.g. 50/50) or by agreed terms (e.g. 60/40, 80/20)

Corporation = Ice cream sundae → a bunch of stuff mixed together

- At this point, a business becomes a separate legal entity (i.e. a person!)

- Owned by shareholders
- Controlled by a board of directors
- Special ingredient: Limited liability → A corporation’s members cannot be
held responsible unless they’ve done something criminal
Similar: All three business types are profit-based
● Aim is to make a profit
● Success is mostly defined by profitability

Differences: A few!

● Ownership type
● How the business is financed (how it raises money)
● How profit is distributed
● How the business is controlled

What’s similar/different about the three types of for-profit businesses?

Examples of for-profit organizations: These are multinational for-profit organizations - we’re probably most familiar with these
A deeper look:
Profit-based organizations

1. Sole Trader

2. Partnerships

3. Limited Liability
Sole Trader

● Individual who runs

and owns a personal
business
● Responsible for all
risks + success/failure
● Most common form of
business ownership
Sole Trader
Legal responsibility

Unlimited liability
● Personally responsible
for all debts of business
Sole Trader (dis)advantages
Advantages Disadvantages
● Easy to start ● Unlimited liability
● All profit = yours ● Limited financial
● All decisions = yours resources
● Being your own boss ● High risks
● Privacy ● High stress
 Pg 17 of Text.
Group task:
Read the case and
Flowers By discuss the Costs
and Benefits of
Cam running a small
flower shop.
 Partnerships
● Profit-seeking business run by 2+
people
● An Ordinary Partnership can have up
to 20 partners
● Financing for the business comes
from personal funds or combined
funds

Partnerships can also have Silent Partners:

investors that do not run the business, but
have contributed to financing.
Legally speaking?

There’s no strict legal requirement to have papers written up describing

a partnership.

Descriptions could include:

- What the business does
- What business partners are responsible for
- How profit is divided
Example:
Partner A does Task X, and receives 40% of profit
Partner B does Task Y, and receives 60% of profit

But is coming up with a description a good idea or not? Why?

 Deed of Partnership
A written legal contract that can include:

1. A description of how much finance (money) is

contributed by each partner
2. Roles responsibilities for each partner
3. How profits and losses will be shared
4. How new partners are added to the business (why?)
5. Clauses for withdrawal of partners (why?)
6. Procedures for ending partnerships (why?)

Quick discussion: Is it a good idea to have an explicit agreement?

Why or why not?
Partnership (dis)advantages

● More sources of finance ● Unlimited Liability

● Specialization ● Lack of continuity
● Division of labour ● Decision making
● Financial privacy ● Conflicts between
partners

Considering disadvantages: What does each one mean?

 Read the case of EXP (pg 18)
and discuss:

1.Define: Ordinary
Group task: Partnership?
EXP - The Chinese 2.Advantage/disadvantage
Experience as a partnership?
3.Potential problems?
4.Benefits of EXP
remaining as small
business?
Companies (Corporations)

●Businesses owned by
shareholders

●Shareholders = individuals
or other businesses that
have invested money in a
company.
Special features of companies
(Corporations)

Most complex form of ownership

- Legal difference between the owners of the company
and the business itself
- Corporations have legal rights like people

A corporation is treated like a human being.

Special features of companies
(Corporations)

Limited Liability:
- Shareholders do not lose beyond what they’ve invested if
company goes into debt
- Board of Directors are protected from lawsuits*

Quick discussion: Limited liability = good idea? Yes or no? Why?

*unless the charges are criminal in nature

Special features of companies
(Corporations)

Board of Directors
- Elected to run company on shareholders behalf
- Usually have special skills and/or expertise
- Responsible for success of company
Types of companies (corporations)

1.Private Limited Company

a.Can’t raise money from (sell shares to) the general public
b.Shares are sold to individual investors
c.Shares cannot be traded to someone else without
agreement from BOD
d.Name usually has Ltd. attached (changes by country —
e.g. GmbH in Germany)

●See page 19 for abbreviations for different counties

Types of companies (corporations)

2. Public Limited Company (see slide 31)

- Can sell shares to general public via stock exchange

- Depending on the country, you’ll see “PLC” attached to name
Exam Tip: Business vs Company

Companies are corporations, owned by shareholders

(They can be private or public)

Businesses include companies and all other scenarios

●sole traders
●partnerships

All companies are businesses.

Not all businesses are companies.
Required documents for
corporations

Remember: Corporations are the most complex business type!

1. Memorandum of Association
○ Short document with name of business, address,
purpose, money invested

2. Articles of Association (Articles of incorporation

○ Highlights company rules and how it runs (rights, roles,
and power of the BOD and shareholders)
○ Administrative details: how profit is distributed,
communicating with shareholders, how BOD members
are selected
Flotation
Company first sells its shares to external investors (people
like you and me) through an Initial Public Offering (IPO)

A company will receive capital from investors to further its

grown and expand its business.

Quick discussion: Why is an IPO a good idea?

Who buys shares (and why)?

1.Institutions, banks, mutual funds

2.Individual investors → you and me

Why buy shares?

- Long term investment: could be
worth more later on
- Dividends: small payments
periodically to shareholders
- Potential to get rich quickly (not
likely, but it happens)
Corporations - (dis)advantages
- Raising finances - they’re
unlimited! (why?)
- Limited liability
- Continuity
- Economics of scale
- Productivity
- Tax benefits
- Communication
problems
- Added complexities
- Compliance costs
- Disclosure of information
- Bureaucracy
- Loss of control (how?)
- Many people to please
(divergent interests)
For tonight...

Before you go:

- What’s something new you learned today? (completely new, or
extended your knowledge)
- What’s something that you want to know more about?

Read/respond Other work

- 1.2.4 - Mars Inc, pg 21 - Watch videos on slides 30 and 32

- Optional: Video on slide 33
- For discussion tomorrow: Is it ethical to
consider corporations as people?

28
What’s a sole proprietorship?
A corporation
Corporations is treated like a human
are people?
being!
What happens during an Initial Public Offering (IPO)?
The Corporation: Documentary