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EXPLORING BUSINESS V. 2.1 By Karen Collins

CHAPTER 4 SELECTING A FORM OF BUSINESS OWNERSHIP

CHAPTER OBJECTIVES Identify the questions to ask in choosing the appropriate form of ownership for a business. Describe the sole proprietorship form of organization, and specify its advantages and disadvantages. Identify the different types of partnerships and explain the importance of a partnership agreement. Describe the advantages and disadvantages of the partnership organization.

CHAPTER OBJECTIVES Explain how corporations are formed and how they operate. Discuss the advantages and disadvantages of the corporate form of ownership. Examine S-corporations, limited-liability companies, cooperatives, and not-for-profit corporations. Explain why companies are motivated to merge or acquire other companies.

FACTORS TO CONSIDER WHEN SELECTING LEGAL FORM How much control? Share profits? Liability exposure? Financing needs? Business set-up and reporting costs? Business continuance?

FORMS OF BUSINESS ORGANIZATION SOLE PROPRIETORSHIP Business only owned by one person. GENERAL PARTNERSHIP Business owned jointly by two or more people. CORPORATION Business is a legal entity separate from the parties who own it.

TYPES OF BUSINESS

SOLE PROPRIETORSHIP ADVANTAGESDISADVANTAGES Easiest and cheapest type of business to form Company is subject to few government regulations Owner has complete control over company Owner gets all income earned Company pays no income taxes Owner must supply all talent needed Proprietor’s death results in firm dissolution Owner must finance business using personal resources Owner is liable for all company debts

SOLE PROPRIETORSHIP

GENERAL PARTNERSHIP AND UNLIMITED LIABILITY

PARTNERSHIP AGREEMENT TERMS Cash/Contribution of partners Division of income/loss Partner responsibilities Conditions for sale Conditions for dissolving Conditions for settling disputes

GENERAL PARTNERSHIP ADVANTAGESDISADVANTAGES Relatively easy and inexpensive to set up Talented individuals share responsibility for running business Financing is easier; partnership can draw on resources of partners Continuity not issue; partnership can survive even if a partner dies Partnership pays no income taxes More complex to set up than sole proprietorship There can be disputes among partners Each partner is responsible for the actions of all partners (unlimited liability) Decisions are shared, which can creation friction and problems Profits are shared among partners

LIMITED PARTNERSHIP Has two types of partners: –General: runs business and responsible for liability. –Limited: limited involvement, mostly as an investor.

CORPORATION A corporation can: –Enter into binding contracts –Buy and sell property –Sue and be sued –Be held Responsible for its actions –Pay income and other taxes A LEGAL ENTITY THAT IS ENTIRELY SEPARATE FROM THE PARTIES WHO OWN IT (CALLED SHAREHOLDERS)

CHARACTERISTICS OF CORPORATIONS Enter into binding contracts. Buy/Sell property. Sue/Be sued. Responsible for all actions. Taxed.

CHARACTERISTICS OF SHAREHOLDERS Corporations are owned by shareholders. Owners of a corporation invest money in the business by buying shares of stock. Ownership percentage is represented by percent of total shares of stock owned. –For example, if the corporation has 100 shares of stock and you own 30, you own 30% of the corporation.

CHARACTERISTICS OF A BOARD OF DIRECTORS Responsible for governing corporation Most are from outside the company Oversees major policies and decisions Sets goals for the corporation Holds management accountable for achieving corporate goals. Hires and evaluates the Chief Executive Officer (CEO). Approves payment of dividends (earnings distributed to shareholders)

CORPORATION ADVANTAGESDISADVANTAGES Limited liability (owner cannot lose more than invested) Financial Resources (sell stock) Able to attract skilled and talented workers Continuity and transferability (corporations can exist forever) Goals of management and shareholders differ Costly to set up Heavy regulation and government oversight Double taxation (corporations are taxed on their earnings. When these earnings are distributed as dividends, shareholders pay taxes on the dividends).

PRIVATELY-HELD CORPORATION STOCK IS HELD BY ONLY A FEW INDIVIDUALS, NOT TO BE SOLD TO THE GENERAL PUBLIC

S-CORPORATION Chosen to limit the liability of its owners and avoid having their earnings taxed twice (first at corporate level and then at personal level). A disadvantage is that the owners have no flexibility in the way profits are divided among the owners. –In an S-corporation, profits must be allocated based on percentage ownership.

LIMITED LIABILITY CORPORATION (LLC) Chosen to limit the liability of its owners and avoid having their earnings taxed twice. Looks a lot like an S-Corporation, but there’s an important difference: –Profits do not have to be allocated to owners based on percentage ownership. Members can distribute profits in any way they want.

COOPERATIVE A COOPERATIVE is also known as a Co-Op Owned by those using its services. Those who belong, join together to market products, purchase supplies, and provide services for members. If cooperative makes a profit, it shares its financial success with its members.

NOT-FOR-PROFIT CORPORATION Sometimes called a non-profit organization Formed to serve a public purpose rather than for financial gain. Exempt from federal and state income taxes. Contributions to the not-for-profit corporation are tax deductible to donor

MERGERS AND ACQUISITIONS Merger: two companies combine to form new company. Acquisition: purchase of one company by another. Motives: –Gain complementary products. –Attain new markets or distribution channels. –Realize more efficient economies of scale. Hostile Takeover: a takeover resisted by the targeted company’s management and its board of directors.