Forms of Business

Organization
Chapter 10

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

• Characterized by differing degrees of

control and risk

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 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
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 Partnership
• 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
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 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

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 Corporation
• 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

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

Which is best? - It depends!

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 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!

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

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 Agents
- 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

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 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

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 Distributors
- 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
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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.

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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
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Choose the appropriate channel

• The appropriate distribution channel is a

function of risk and return, an integral
piece of your market entry strategy.

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 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

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 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
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 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

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 Control
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

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 Motivate
• 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”

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