Small Business Development and Ownership Structures in Canada

Small Business Development in Canada

Definition and Importance of Small Business

Small businesses are a critical component of the Canadian economy, providing employment and fostering innovation. According to Industry Canada, a small business is defined as an independent business having fewer than 100 employees, not dominant in its market, and with revenues not exceeding $2 million.

• Key Facts:

  • 98% of Canadian firms have fewer than 100 employees.

  • 2.8 million self-employed individuals in Canada.

  • SMEs (Small and Medium-sized Enterprises) account for almost 90% of total private sector employment (2018).

  • Small businesses respond to consumer needs and market gaps through innovation and improved goods/services.

• Example: A local bakery with 15 employees and annual revenue of $500,000 is considered a small business.

Challenges Facing Small Businesses

Despite their importance, small businesses face significant challenges in survival and growth.

• 68% of Canadians work in enterprises with fewer than 99 employees.

• Small business is the backbone of the Canadian economy.

• Survival Rates:

  • 1 in 5 close after 1 year

  • 1 in 4 close after 2 years

  • 2 in 5 close after 3 years

  • 1 in 2 close within 5 years

Average Annual Small Business Revenue

Revenue varies by location and incorporation status.

• Rural: $629,500.00

• Urban: $553,700.00

Reasons New Ventures Close

• Inexperience

• Overconfidence

• Lack of people skills

• Poor knowledge of finance

• Underestimating competition

Management Shortcomings

• Inadequate financing

• Underestimating start-up costs

• No profit for months/years

• Poor management leading to difficulty attracting/retaining talent

Government Regulation

Government regulation imposes administrative and financial burdens on small businesses.

• Costs for compliance and paperwork

• Taxes: provincial, federal, worker's compensation, pension, unemployment benefits

Forms of Private Business Ownership

Corporations

A corporation is a legal entity with assets and liabilities separate from its owners. Corporations can be large or small.

• Not-for-Profit Corporations: Organizations whose goals do not include pursuing profit.

Sole Proprietorships and Partnerships

• Sole Proprietorship: The owner is not legally separate from the business.

• Partnership: Two or more co-owners operate a business by legal agreement.

Business Planning and Support

The Business Plan

A business plan is a foundational document outlining goals, methods, standards, and frameworks for achievement.

• Defines mission and vision

• Analyzes unique advantage, customers, competition, and risks

Assistance for Small Businesses

• Business Development Bank of Canada (BDC): Provides support and resources for small businesses.

• Small Business Administration (SBA): U.S. counterpart offering similar support.

Financial Assistance

• Canada Small Business Financing Program (CSBFP): Government guarantees up to 85% of bank loans to small businesses.

• Federal assistance during downturns to help businesses survive.

Business Incubators

• Provide low-cost, shared facilities to help start-ups grow.

• Goal: Businesses operate independently after a few months/years.

• Over 1,250 incubators in North America; 93% run by not-for-profits.

Private Investors and Funding

Venture Capital

Venture capital is money invested in a small business by another business or group in exchange for ownership shares.

Selling Shares

• Common Shares: Basic ownership with voting rights.

• Preferred Shares: Priority in dividends, less voting power.

Angel Funders

Angel funders are individuals who invest their own money in start-ups, often in exchange for equity.

Emerging Business Owners

Women and Minority Entrepreneurs

• 50% of Canadian SMEs have at least one female owner.

• Women entrepreneurs' rate is about two-thirds that of men.

• Female millennials leave corporate life for entrepreneurship due to career progression limits, wage inequality, lack of mentors, and skipped promotions.

• Minorities start businesses to represent their communities and add diversity to goods/services.

Franchising

Franchising Basics

Franchising is a contract-based arrangement where a dealer markets a supplier's product/service, reducing start-up effort.

• Can involve goods or services

• Reduces time and effort to grow a business

The Franchising Sector in Canada

• Canada has the world's 2nd largest franchise industry

• Accounts for ~45% of all sales in Canada

• 1,200-1,300 franchise companies, 76,000 outlets, 1.5 million employees

• Franchising overseas is a growing trend

Franchising Agreements

• Franchisee: Individual/business buying the franchise

• Franchisor: Firm whose products are sold by the franchisee

• Franchising Agreement: Contract between franchisee and franchisor, often involving purchase fees and other costs

Benefits and Challenges of Franchising

Advantages	Disadvantages
Prior performance record	Franchise fees
Recognizable company name (brand)	Future payments (royalties)
Proven business model	Linked to reputation and management
Tested management program	Franchise agreement restrictions
Savings through volume purchases	Tight control

Freelancing

Freelancing refers to self-employment where individuals offer services to clients on a contract basis, often without forming a formal business entity.

Discussion and Ethical Considerations

Discussion Questions

• Is the business plan the foundation for success?

• How do entrepreneurship, small business, freelancing, and franchising relate?

• Why do minorities choose to start small businesses?

Four Great Questions

• How do cultural differences impact ethical standards in international business?

• How should leaders handle conflicts between ethics and financial benefit?

• Should companies monitor employee internet usage?

• What trends and regulatory roles shape ethical business practice?

Next Steps and Further Reading

• Entrepreneurship and starting a business

• Recommended reading: Boone, L.E., et al., Chapter 6

• Quiz available on Blackboard

Additional info: These notes expand on the original slides by providing definitions, examples, and context for business ownership, support structures, and challenges, as relevant to microeconomics topics such as market structure, entrepreneurship, and government intervention.