Introduction

It’s early morning and the streets are busy with people, many of them rushing to get to work or school on time. Where are they going? What will they do when they get there?

In the previous learning activity, you learned about the purpose of business, the law of supply and demand, price factors, industries, sectors, and competitors.

This learning activity describes the many types of businesses that exist in Canada. You will study the advantages and disadvantages of each and then consider which best suits your personality, goals, and aspirations.

As you work through this learning activity, you will have a better understanding of what businesses do and whether you are better suited to running a home-based business or a corporation.

Types of businesses

What do McDonald’s, The United Way, the CBC, and Loblaws have in common? They are all businesses. However, they each represent a different type of business. One of the best ways to understand the world of business is to first grasp the different categories of business. We can categorize a business using the following criteria:

• the business’s goal: to make a profit or to meet other needs
• forms of business ownership: one person, two or more people, shareholders, members, or a combination of these
• ownership category: government, private, or public
• what the business does: provide a service, make products, or distribute products to consumers

Each type of business and different forms of ownership are described in this learning activity. We will explore the pros and cons of each and then you can decide which type of business best suits your purpose, goals, and personality type. Here we go!

Is profit necessary?

There are two types of businesses, including the following:

• for-profit businesses
• not-for-profit businesses

If a business makes a profit, it is a for-profit business. If a business does not make a profit, it is a not-for-profit business. As we discovered in the previous learning activity about the profit motive, businesses exist to make a profit. While this is true for most businesses, not all have the sole goal of earning a profit. Although all businesses try to reduce expenses and increase revenue, not all businesses intend to make a profit.

Profit-focused businesses

Access the following audio clip to explore this content.

The goal of most businesses is to make a profit. Profit is the money that is left over after all expenses are paid. Essentially, profits are a business owner’s take home pay and their way of making a living. If it weren’t for profit, most businesses wouldn’t exist.

Profit also improves businesses. To increase profits, businesses are always trying to be more efficient and lower their costs.

Business drives the search for new technology and finding better ways of doing things. Many firms put their profits back into their business to improve their facilities and further expand upon their sales. A large number of businesses also devote a portion of their profits to community organizations and charitable foundations. All businesses are expected to pay taxes on their profits, which helps the entire country.

Not-for-profit businesses

In 2006, Warren Buffett (the billionaire chairman of Berkshire Hathaway) pledged $30 billion to the Bill & Melinda Gates Foundation, challenging the Microsoft founder and his wife to improve the lives of impoverished people across the globe. Like any good investment manager, Buffett recently asked the couple for a progress report. In response, Bill and Melinda thanked Buffet for his donation and shared some of their successes, including:

• 122 million — number of children’s lives saved since 1991
• 86 percent — percentage of children worldwide who receive basic vaccines — the highest percentage in history
• 300 million — number of women in exploited nations who use modern contraceptives
• 75 million — number of women in self-help groups in India

Source:

Gates, M. B. (2017, February 17). How the Gates Foundation is spending Warren Buffett’s $30B “investment.” New York Post. Retrieved December 7, 2021, from https://nypost.com/2017/02/16/how-the-gates-foundation-spent-warren-buffetts-30b-investment/

Many businesses exist to collect revenue in support of charitable organizations, community groups, special projects, or local arts.

For example, various provincial and territorial Humane Societies across the country raise money through donations to protect animals and the earth. After their expenses are paid, their profits go directly to their charitable programs.

Other examples of not-for-profit businesses are museums, community centres, hospitals, schools, associations for finding a cure for diseases, and countless other groups that operate for the benefit of others.

Some businesses are owned by members who pay to belong to a special buying group. These businesses are profitable, but the profit is used to lower the prices of goods, make business improvements, or as a rebate (money given back) to the members. Since no one gets to keep the profit, the business is considered not-for-profit. These businesses are called co-operatives, and you will learn more about them later in this learning activity.

In each of the following examples, identify whether the business is for-profit or not-for-profit.

Forms of business ownership

Now that you are familiar with the two types of businesses, for-profit and not-for-profit, you’ll consider another important criterion for defining a business: who owns it. Explore the five forms of business ownership by pressing on the following tabs.

Now you’ll examine each type of business ownership in more detail.

Sole proprietorships

Sole proprietorship advantages

Have you ever sold lemonade, shoveled snow, babysat, tutored, or mowed lawns for other people? Did you accept money for your service? If you did, you ran your own business! As the owner, you are the proprietor, and because you are the only owner, your business is considered a sole proprietorship.

In this situation, imagine all the money you earned was yours to keep. If your lemonade stand sold $50 worth of lemonade, while incurring expenses (lemonade, cups, supplies) of $30, you made $20 profit for yourself. Isn’t it great to be your own boss? You decide what time to open and close. You might even decide that the lemonade business isn’t for you. Sole proprietorships are the easiest types of businesses to start and to end.

Sole proprietorship disadvantages

Perhaps you’d like to market your business to increase sales. Is marketing your expertise? If it isn’t, how effective will your advertising be? One challenge of being a sole proprietor is that you may lack certain skills. Like most people, you can’t be great at all things! You can hire the experts, but it will cost you.

If you’d like to expand your business and buy two more lemonade stands, you are responsible for coming up with the funds. It’s tough to get money (financing) to improve the business, while owning a business by yourself. It is also unlikely that a bank will lend to you, as they consider sole proprietorships to be risky, in terms of recouping their loan.

Additionally, as a sole proprietor, you (or your parent/guardian if you are a minor) are responsible for any losses and risks. If someone were to sue you for any damages, you would be liable. “Unlimited liability” means that your assets can be seized and used to pay for any such losses.

Partnerships

Partnership advantages and disadvantages

A partnership involves two or more business owners. These partners are legally bound to each other in a partnership agreement. A partnership agreement outlines how the shares of profits will be split, as well as the amount of liability each person assumes.

Let’s assume you decide to enter a partnership because you have discovered that running the lemonade stand by yourself is a lot of work. A sense of shared responsibility and access to your partner’s skills and knowledge are two of the major advantages to being in a partnership. It is definitely a win-win situation. However, as per your partnership agreement, your profits will also be split. Fortunately, with two of you, there will likely be more profit to share, as you'll likely be open longer or able to produce more product.

Like a sole proprietorship, a partnership has unlimited liability. Each party is personally liable for any losses, debts, and risks. Even though you have both entered into a partnership agreement, you and your partner may not agree on all things. What will you do in those cases? As a sole proprietor, you can make all the decisions yourself. However, as a partner, you must consider the input of all owners.

Some partnership agreements create a limited partnership, which states that the liability of the partners is limited to the amount that each of them has invested in the business. The personal property of the partners is usually not part of the business. The difficulty with having a limited partnership is that banks and suppliers may not want to extend credit to a partnership with limited liability because they think they won’t get their money back.

Most partnerships are general partnerships, meaning that they are the same as sole proprietorships, only with more owners. This arrangement works well when the owners share their knowledge and their money, but not so well when the partners disagree with each other. An extremely important part of a partnership agreement, other than how the profits are divided, is how one partner can leave the business without losing their investment in it. A good partnership agreement makes the buyout requirements very clear.

Corporations

Corporation advantages and disadvantages

Your lemonade stand is doing well! You wish to expand your business. Perhaps you are thinking it’s time you start selling your lemonade at carnivals in a large tent rather than through your homemade stand. This type of structure can cost up to $10,000. Where will you get the money?

You might consider becoming a corporation if you need money and no one will lend it to you. A corporation is considered to be its own legal entity, completely separate from the people involved in the business. A corporation can borrow money, buy products, and sue, or be sued in its own right. It is a separate business person, as defined by the law.

Investors own a corporation by buying one or more shares of the business. If you are the sole investor, you might own 100% of the shares, whereas two investors might each own 50% of the shares.

There is no limit to how many shares a corporation distributes; it may include one investor or hundreds of thousands of investors. The business that the investors create becomes a new legal entity and conducts its activities in its own name or number (some corporations have a number instead of a name). A corporation is an ideal type of business for firms that want to raise a great deal of money, or for smaller firms with a great idea but limited startup funds.

Why would people want to buy a share? As owners, they provide input in running the corporation. Shares are worth votes. The more voting shares you have, the more votes you have. Typically, the voting shareholders elect the directors (at least one) by voting at the company’s annual meeting. Shareholders also decide how much of the profit will be kept in the business to help it expand, pay off its debts, buy new products, and so on.

Things to consider

How a corporation’s shares are allocated, to whom, and in what proportion, can increase your risk substantially.

Allocating shares

Do you notice any risks associated with how a corporation allocates its shares? If you sell all of your shares to other people, you no longer have any financial stake in your own company. Other people own it completely and can vote to run it by common agreement among voting shareholders. They can even decide to fire you! It is important that you maintain some financial control of the business, usually by owning a substantial percentage of shares that can influence the voting.

If you own 51 percent or more of your company, you have ultimate control. Any less than that enables an investor to buy the majority of your company’s shares from all the other shareholders. This is called a takeover.

To avoid this, when you initially sell your shares, the Initial Public Offering (IPO) for a corporation will provide a portion of the shares to the owners who started the business as a way of compensating them for their original idea. In this case, you would structure the share offering to ensure that you and your partner retain a substantial piece of your company.

After all, the company was your idea and you have put in considerable effort to establish the business and acquire customers. As a result, investors have confidence in the profitability of your business. They want to receive a very good return on their investment with you and are willing to invest in a company that you control.

Liability issues

The larger the business, the more likely it is that liability issues will occur.

The corporation offers its owners an element of protection.

Unlike a sole proprietorship or partnership, a corporation has limited liability. Shareholders are not personally liable for more than their shares are worth. If someone or some other business sues a corporation for more than it is worth, the corporation declares bankruptcy and the shareholders lose the value of their investment in that company. They would not be required to pay anything more. Therefore, in order to protect themselves, some suppliers, investors, banks, and customers may avoid doing business with a corporation.

A supplier, for example, might refuse to sell you a truck on credit because, if your business went bankrupt, they will not be able to recover their debt. If your partnership went bankrupt, you may be required to pay your debt to the truck supplier, using your personal assets such as your house, investments, or personal property. In the case of a corporation, the truck supplier cannot force investors to use anything other than their investment in the specific company to pay the debt. Therefore, the law states that all corporations must inform the general public that they have limited liability, by adding the word “limited” (Ltd.) or “incorporated” (Inc.) to their name.

Co-operatives

A co-operative is a type of business that is owned and managed by its members. There are consumer co-operatives, such as the Niagara Food Co-op, which is owned by its customers. There are also retail co-operatives, such as The Big Carrot in Toronto, which is owned by its workers.

Each member of a particular co-operative has one vote. Every member is equal; no one can have more than one vote. Decisions are made by the group, or by a manager hired by the group. All co-operatives are organized according to democratic principles.

Instead of deciding to incorporate, let's imagine you create a co-operative with your workers who now become members of your lemonade stand. Your co-operative consists of four different members.

This means that the common expenses (heat, property taxes, mortgage costs, electricity, and so on) are shared, which makes the costs of the operation much cheaper for each member. Your members really like this type of business, as there is a community to consult and share ideas with. However, you notice that since you have become a cooperative, it takes a lot longer to make decisions since everyone has one equal vote. You also realize that you have lost complete control over making decisions. Even though sales are up, you are getting a smaller share of the profits.

Take a moment to examine the following article, "The Big Carrot: A Local Toronto Co-operative,(Opens in new window)" which shares a success story of a Toronto-based co-operative, a local grocery store run by its employees.

Franchises

Franchise advantages and disadvantages

You may be aware that Tim Hortons is an internationally known Canadian business. But, did you know that Tim Hortons, one of Canada’s most known and beloved businesses, is a franchise? This means that every store you visit is owned by either a sole proprietor, partner, or corporation. Owning a franchise such as Tim Hortons has many benefits, the most obvious being that it already has a successful business formula. Everything is provided for the franchisee (the person who will run the store). However, this doesn’t mean that the owner gets to do whatever they want.

When aiming to purchase a franchise, the franchisee will need to sign a franchise agreement. This agreement lists all the details of how to run the business. The company selling the franchise is known as the franchisor and they make all the decisions. The franchisee must abide by certain rules, including the following:

• how to advertise
• how to stock and sell products
• the price points at which to sell the products

In addition, a franchisee must come up with a substantial initial payment to purchase the business and then give up a percentage of sales to the franchisor every month.

Franchisees have very little independence. It is almost as if they are employees of the franchisor.

Would you like to become a Tim Hortons franchisee? How much are you prepared to invest? Becoming an owner of a Tim Hortons franchise isn’t easy. It will cost you $50,000 up front for the franchise fee. Additionally, you must have a net worth of at least $1.5 million dollars. Then, there are additional financial terms and a number of criteria that you’ll need to meet. Your business is likely to be successful; it is Tim Hortons, after all. So, set your goals and start saving…

Three business ownership categories

By now, you’ve learned that there are five forms of business ownership, including the following:

1. Sole proprietorship
2. Partnership
3. Corporation
4. Co-operative
5. Franchise

Next, you’ll discover three distinct business categories, including the following:

• Crown corporations, a business owned by the government
• public corporations, a business owned by shareholders who buy and sell their shares publicly
• private businesses, a business that is privately owned

Press on the following tabs to learn more.

What do businesses do?

Creating new products

Several types of businesses create new products. Primary industries, for example, find or create products from nature and sell them. Fish, meat, fruit, oil, water, minerals, and wood are all items that primary industries find in nature, alter somewhat, and sell to processors.

Processing industries convert many of the raw materials from the primary industries into usable products, for example: iron ore into steel, sugar cane into raw sugar, oil into nylon, and so on. Processed goods, as well as some types of raw materials, are sold to manufacturers, who convert them into products that don’t require further alterations, such as nails and nylon, canned tuna and cans, potato chips, and microchips. These businesses are all involved in production in some way, as they produce actual products. You’ll learn much more about production later in the course.

Providing services

Many businesses that exist to provide helpful services do things for their consumers, and their consumers may include other businesses. In fact, the service industry is categorized into two major sectors: business services and consumer services.

Business services

Businesses provide a variety of business or professional services, including the following:

• accounting
• logistics (shipping)
• cleaning
• legal
• insurance

Consumer services

Perhaps some of the following services are on your list:

• medical or dental
• telecommunications (Internet, landlines, cell phones, cable)
• entertainment (movie theatres, concerts, sporting events)
• food and beverage (restaurants, fast food)
• cleaning (laundry, dry cleaning)
• travel (airline, bus, train, subway, taxi), rental (cars), or accommodations (hotels, motels, hostels)
• personal care (hair stylists, barbers, spas)
• home care (landscaping, repair)
• legal, accounting

Many consumer services also sell products. Movie theatres sell popcorn, hair stylists sell hair products, and chiropractic doctors sell orthotics. When a service business sells products, the product sales segment of the business is classified as a retail segment.

Selling products (distributive businesses)

Many businesses are organized to sell products to others, either to other businesses or to consumers. Press on the following tabs to learn about the three categories of distributive businesses:

Types of business

How to choose a business

Revisit the list of businesses you created at the beginning of this learning activity. Now that you’ve learned about the various forms of businesses and the advantages and disadvantages of each, how might you re-categorize these? Assuming that you’d like to start your own business, what category of business will you start? Does a sole proprietorship appeal to you or perhaps a partnership or corporation? Will you invest in a factory or buy a franchise? Perhaps you’d like to organize a not-for-profit venture to increase awareness of an important issue, such as global climate change. The most important factor in starting your own business is to think about what you would like to do. Once you have figured out what type of business you want to start, there are additional factors to consider, including the following:

• start-up costs and financing
• availability of skills
• level of risk
• complexity of production
• resource requirements
• advantages and limitations of a home-based business

This is your business and a lot is at stake, so be sure to explore each of the following considerations/factors in detail by pressing on the following tabs. Once you’re finished, continue with the Assessment Opportunity.

Nice job! In this learning activity, you learned about the different types of business that exist in Canada and the different types of business ownership. After exploring the advantages and disadvantages of each type of ownership, you moved on to consider the things businesses do. You also identified what goes into starting a business, including the levels of risk and general complexity. You concluded with an assessment analyzing two business ventures.

In the next learning activity, you’ll review ethics in business.