Forms of Business Ownership ©William Klinger. This work is licensed under a Creative Commons Attribution 4.0 license  Adapted from Fundamentals of Business  Download this book for free at: https://vtechworks.lib.vt.edu/handle/10919/84848

Review Describe absolute and comparative advantage. How is trade measured? Explain licensing agreements and franchises. How do companies expand internationally? What differences between countries create challenges to business? Describe how governments and international bodies promote and regulate global trade.

Learning Objectives Identify the questions to ask in choosing the appropriate form of ownership for a business. Describe the sole proprietorship. Understand partnerships. Understand the corporate form. Examine special types of business ownership. Understand mergers and acquisitions. Adapted from Fundamentals of Business  Download this book for free at: ttp://hdl.handle.net/10919/70961

Factors to Consider Cost and complexity Control Taxes Skills needed Relationship with co-owners Financing Liability Legacy

Sole Proprietorship Simple to set up Owner has Disadvantages Complete control All income Profits taxed as personal income Disadvantages Unlimited liability May lack skills needed May lack financing Business ends when you leave

Partnership Partnership agreement spells out Disadvantages Financial contributions Revenue sharing Responsibilities Disadvantages Unlimited liability Limited Partnership General partner has unlimited liabilities Limited partners’ liabilities limited to investment

Corporation Legal entity Owned by shareholders Inc., Ltd., NV, GmbH Signs contracts Can own property Can sue/be sued Owned by shareholders Elect a Board of Directors, BOD BOD hires Chief Executive Officer, CEO

Corporation Pros Cons Limited liability Can sell stock Continuity Agency problem Double taxation Firm pays corporate tax Owners pay personal tax on dividends

Types of U.S. Businesses Figure CC BY 4.0. Retrieved from: https://commons.wikimedia.org/wiki/Category:Figures_from_Fundamentals_of_Business_by_Skripak

Limited-Liability Company, LLC Legal entity Owners are called “members” May have just one owner Pros Easy to form Limited liability No double taxation May be large E.g. Dominos, Crayola, many banks

LLC Owner may be personally liable if Personally guarantees a loan Fails to pay employment taxes Engages in fraud or illegal behavior Doesn’t treat LLC as separate entity

The Major Business Forms Liability Other Sole proprietorship Unlimited personal One owner Owner receives all profits Easy to form Limited financing Limited management skills Partnership Additional management skills Additional financing Potential personal conflicts Difficult to dissolve LLC Limited Single taxation Certain restrictions Corporation Harder to form and run Double taxation

Cooperative (co-op) Form Owners are users of its services Examples Ocean Spray Cooperative Southern States Cooperative REI

Not-For-Profit Corporation (Nonprofit) Formed for public purpose Charity Religion Education Scientific Literary Does not pay income tax Donations are tax-deductible

Mergers & Acquisitions Two companies combine Acquisition One company purchases another Hostile takeover Look for synergy

Types of Mergers & Acquistions Horizontal Companies are in the same business E.g. Adidas acquired Reebok Vertical Firms in same value chain for a product Goal is to reduce costs E.g. Ebay bought PayPal, Coke bought bottlers Conglomerate Firms in unrelated businesses Why do firms do this?