Chapter 13 Ownership and Management

Copyright © 2007 by Nelson, a division of Thomson Canada Limited 2 Summary of Objectives  To assess the advantages of types of business ownership  To identify factors to include in a lease or offer to purchase  To establish what protection occurs from trademark registration  To examine insurance requirements for businesses

Copyright © 2007 by Nelson, a division of Thomson Canada Limited 3 Types of Business Structures  Sole proprietorship  Partnership  Corporation

Copyright © 2007 by Nelson, a division of Thomson Canada Limited 4 Sole Proprietorship  Business is owned by one individual  Assets and liabilities are the responsibility of the individual, not the business.  Business income is reported on the individual’s tax return.  Business losses can be offset.

Copyright © 2007 by Nelson, a division of Thomson Canada Limited 5 Partnership  A business involving two or more individuals  The partnership is created expressly or by conduct of the parties  Income and assets are shared as arranged  Partnership income is reported on individuals’ tax returns  An actual or apparent partner may bind other partners in obligations to third parties  Limited liability partnerships are allowed  Partners owe each other a duty of good faith

Copyright © 2007 by Nelson, a division of Thomson Canada Limited 6 Corporations  Created by statute with a separate existence from their owners  Corporations file their own tax returns.  Liability is limited to the amount invested.  Personal assets of shareholders are protected.  Government filing requirements and fees  Records must be kept for review at head office.

Copyright © 2007 by Nelson, a division of Thomson Canada Limited 7 Chains and Franchises  A chain – one business owner operates at several locations  A franchise – franchisee pays royalties to franchiser for its reputation and quality and for market development

Copyright © 2007 by Nelson, a division of Thomson Canada Limited 8 Buying a Hospitality Business  Have an accountant and a lawyer review books and recordsbooks and records licences, leases, title to property, trade nameslicences, leases, title to property, trade names key management personnel or union issueskey management personnel or union issues

Copyright © 2007 by Nelson, a division of Thomson Canada Limited 9 Non Competition Clauses  There may be a clause in the purchase agreement to restrict the seller from competing with the business for a reasonable amount of time within a reasonable geographical location.  There may be a clause in an employment contract which restricts an employee from using trade secrets, confidential information and trade connections.

Copyright © 2007 by Nelson, a division of Thomson Canada Limited 10 Financing a Hospitality Business  Funding sources include the Federal Business Development Bank, stock market investors, banks and other lenders  Other methods of funding include equity financing, debt financing and sale of assets.

Copyright © 2007 by Nelson, a division of Thomson Canada Limited 11 Real and Personal Property  Real property includes land, buildings and fixtures (items affixed to the building).  Personal property includes chattels (tangible items) and intangibles (intellectual property, financial papers and rights such as those under a contract).

Copyright © 2007 by Nelson, a division of Thomson Canada Limited 12 Ownership of Land  A business may own a freehold interest in land and fixtures.  Ownership of land requires payment of property taxes and maintenance of the property.  The market value of land may fluctuate.

Copyright © 2007 by Nelson, a division of Thomson Canada Limited 13 Easements, Rights of Way, Restrictive Covenants  These are lesser interests in land than ownership  An easement is a right of use of another’s land for a specific purpose.  A restrictive covenant is a restriction placed on some aspect of land use.  Zoning is a restrictive covenant placed on land by a municipality.

Copyright © 2007 by Nelson, a division of Thomson Canada Limited 14 Mortgages  Land is used as security for a loan  A mortgage is required to be registered on the title to the property.  The amortization period is the time required to pay off the principal completely at a particular interest rate.

Copyright © 2007 by Nelson, a division of Thomson Canada Limited 15 Mortgages 2  A default on the payment of a mortgage may result in foreclosureforeclosure power of salepower of sale taking possession of the propertytaking possession of the property action on the covenantaction on the covenant seizure and sale of the property at auctionseizure and sale of the property at auction

Copyright © 2007 by Nelson, a division of Thomson Canada Limited 16 Liens and Leases  A supplier or worker who is not paid by an owner can register a lien against the title to the property.  A lease allows the lessee to use the lessor’s property for the duration of the lease in exchange for rent.

Copyright © 2007 by Nelson, a division of Thomson Canada Limited 17 Personal Property  Chattels are physical personal or business property not affixed to land or buildings.  Intangibles are not land and not chattelsare not land and not chattels include rights under a contract or debt instrument, goodwill, and ownership of a trademarkinclude rights under a contract or debt instrument, goodwill, and ownership of a trademark

Copyright © 2007 by Nelson, a division of Thomson Canada Limited 18 Personal Property 2  Personal property also includes equipment leases (instead of a purchase requiring chattels as security, equipment is simply leased)equipment leases (instead of a purchase requiring chattels as security, equipment is simply leased) conditional sales contracts (rather than lease and return equipment to lessor, the business acquires ownership at the end of the lease period after the payment of a lump sum)conditional sales contracts (rather than lease and return equipment to lessor, the business acquires ownership at the end of the lease period after the payment of a lump sum) chattel liens (an unpaid repairer or storer of equipment may be entitled to put a lien on it)chattel liens (an unpaid repairer or storer of equipment may be entitled to put a lien on it)

Copyright © 2007 by Nelson, a division of Thomson Canada Limited 19 Trademark  A trademark is a symbol, word, name or device used to identify or signify a company or its product.  A competitor is prevented by law from using the same or a slightly altered version of a trademark.

Copyright © 2007 by Nelson, a division of Thomson Canada Limited 20 Passing Off  To obtain an injunction to prevent the tort of passing off, the trademark owner must show a misrepresentation,a misrepresentation, by the defendant in the course of trade,by the defendant in the course of trade, to potential customers,to potential customers, which reasonably foreseeably could have the effect of injuring goodwill, andwhich reasonably foreseeably could have the effect of injuring goodwill, and which did or probably will injure the goodwill of the trademark owner’s business.which did or probably will injure the goodwill of the trademark owner’s business.

Copyright © 2007 by Nelson, a division of Thomson Canada Limited 21 Marketing and Public Relations  Direct marketing includes signs, business cards, brochures, and advertising.  Indirect marketing includes word of mouth, good service, and attractive amenities.  Hybrid marketing includes participating in community initiatives.

Copyright © 2007 by Nelson, a division of Thomson Canada Limited 22 Insurance  Insurance spreads the cost of potential loss among a group of similarly affected businesses.  Types of coverage include the following: Public liabilityPublic liability Fire and theftFire and theft Business interruptionBusiness interruption Event insuranceEvent insurance Fidelity insuranceFidelity insurance