Chapter 5 Options for Organizing Business

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Forms of Business Ownership Sole proprietorship Partnership Corporation

Comparing the Forms of Business Ownership Source: U.S. Bureau of the Census, Statistical Abstract of the U.S. 2003, (Washington, D.C.: U.S. Government Printing Office, 2004), p. 459. 5-6

Various Forms of Business Ownership

Forms of Business Ownership Sole Proprietorship Businesses owned and operated by one individual; the most common form of business organization in the United States

Forms of Business Ownership Sole Proprietorship Many restaurants Hair salons Flower shops Dog kennels Independent grocery stores

Forms of Business Ownership Sole Proprietorship -- Facts 15-20 million in the U.S. 80% of all businesses Men 2x more likely than women to start own business

Forms of Business Ownership Advantages of a Sole Proprietorship Ease and cost of formation Secrecy Distribution and use of profits Flexibility and control of the business Government regulation Taxation

Forms of Business Ownership Disadvantages of a Sole Proprietorship Unlimited liability Limited sources of funds Limited skills Lack of continuity Lack of Qualified Employees Taxation

Forms of Business Ownership Partnership A form of business organization defined by the Uniform Partnership Act as “an association of two or more persons who carry on as co-owners of a business for profit”

Forms of Business Ownership Types of Partnerships General partnership Limited partnership

Forms of Business Ownership General partnership A partnership that involves a complete sharing in both the management and the liability of the business

Forms of Business Ownership Limited partnership A business organization that has at least one general partner, who assumes unlimited liability, and at least one limited partner whose liability is limited to his or her investment in the business.

Articles of Partnership Legal documents that set forth the basic agreement between partners.

Articles of Partnership Name, purpose, location Duration of the agreement Authority and responsibility of each partner Character of partners (i.e., general or limited, active or silent) Amount of contribution from each partner Division of profits or losses Salaries of each partner

Articles of Partnership How much each partner is allowed to withdraw Death of partner Sale of partnership interest Arbitration of disputes Required and prohibited actions Absence and disability Restrictive covenants Buying and selling agreements

Partnerships Advantages & Disadvantages Ease of organization Capital & credit Knowledge & skills Decision making Regulatory controls Disadvantages Unlimited liability Business responsibility Life of the partnership Distribution of profits Limited sources of funds Taxation of partnerships

Keys to Success in Business Partnerships Keep profit sharing and ownership at 50-50 Partners should have different & complementary skill sets Honest is critical Maintain face-to-face communications Transparency – sharing information Awareness of funding constraints and limited resources To be successful, you need experience Family is priority; limit associated problems Do not become too infatuated with “the idea” think implementation Couple optimism with realism in sales and growth expectations

Forms of Business Ownership Corporations Legal entities created by the state whose assets and liabilities are separate from its owners..

Forms of Business Ownership Corporations Typically owned by many individuals and/or organizations who own shares of the business – stock (shareholders or stockholders)

Corporations Stock & Dividends Stock – shares of a corporation that may be bought or sold Dividends – profits of a corporation that are distributed in the form of cash payments to stockholders.

Corporations Creating a Corporation A Corporation is created (incorporated) under the laws of the state in which it incorporates. The individuals creating the corporation are called incorporators.

Corporations Articles of Incorporation Legal documents filed with basic information about the business with the appropriate state office (often the secretary of state).

Articles of Incorporation Common Elements Name & address of corporation Objectives of the corporation Classes of stock (common, preferred, voting, nonvoting) Number of shares of each class of stock Financial capital required at time of incorporation Provisions for transferring shares of stock Regulation of internal corporate affairs Address of business office Names and addresses of the initial board of directors Names and addresses of the incorporators

Corporations Private corporation Public corporation Types of Corporations Private corporation Public corporation Quasi-public corporation Non-profit corporation

Corporations Types of Corporations Private corporation – a corporation owned by just one or a few people who are closely involved in managing the business

Corporations Types of Corporations Public Corporation– a corporation whose stock anyone may buy, sell, or trade.

Corporations Types of Corporations Initial Public Offering (IPO) – A private corporation who wishes to go “public” to raise additional capital and expand. The IPO is selling a corporation’s stock on public markets for the first time.

Corporations Types of Corporations Quasi-public corporation – Corporation owned and operated by the federal, state, or local government -- (NASA, U.S. Postal Service).

The Largest U.S. Corporations Fortune’s 2007 rankings of America’s largest corporations Company Revenues ($millions) 1 Wal-Mart $378,799 2 Exxon Mobil $372,824 3 Chevron $210,783 4 General Motors $182,347 5 Conoco Phillips $178,558 6 General Electric $176,656 7 Ford Motor $172,468 8 Citigroup $159,229 9 Bank of America $119,190 10 AT&T $118,928

Corporations Types of Corporations Non-profit corporation – focuses on providing a service rather than earning a profit but are not owned by a government entity (American Red Cross)

Board of directors Preferred stock Common stock Corporations Elements of a Corporation Board of directors Preferred stock Common stock

Corporations Board of Directors Board of Directors – a group of individuals elected by the stockholders to oversee the general operation of the corporation who set the corporation’s long-range objectives.

Corporations Board of Directors Inside Directors – individuals who serve on the board and are employed by the corporation (usually executives of the corporation). Outside Directors – individuals who serve on the board who are not directly affiliated with the corporation (usually Executives of other corporations).

Corporations Stock Ownership Preferred stock – a special type of stock whose owners, though not generally having a say in running the company, have a claim to profits before other stockholders do. Common Stock – stock whose owners have voting rights in the corporation, yet do not receive preferential treatment regarding dividends.

Corporations Advantages: Disadvantages: Limited liability Transfer of ownership Perpetual life External sources of funds Expansion potential Disadvantages: Double taxation Forming a corporation Disclosure of information Employee-owner separation

Other Types of Business Ownership Joint Ventures S Corporations (S-Corp) Limited Liability Companies (LLC’s) Cooperatives (Co-op’s)

Other Types of Business Ownership Joint Venture Joint Venture -- a partnership established for a specific project or for a limited time (Audi & Volkswagen joint venture)

Other Types of Business Ownership S-Corporation (S-Corp) – corporation taxed as though it were a partnership with restrictions on shareholders. Very popular with entrepreneurs.

Other Types of Business Ownership Limited Liability Company (LLC)– form of ownership that provides limited liability and taxation like a partnership but places fewer restrictions on members. (Segway)

Other Types of Business Ownership Cooperative (Co-Op)– an organization composed of individuals or small businesses that have banded together to reap the benefits of belonging to a larger organization.

Trends in Business Ownership Mergers Acquisitions

Other Types of Business Ownership Merger – the combination of two companies (usually corporations) to form a new company Acquisition – the purchase of one company by another, usually by buying its stock and/or assuming its debt.

Types of Business Ownership Major Mergers and Acquisitions Worldwide Transaction in millions of U.S. dollars Rank Year Acquirer Target Transaction Value 1 2000 AOL Time Warner $164,747 2 Glaxo Welcome SmithKline Beecham PLc $75,961 3 2004 Royal Dutch Petroleum Shell Transport & Trading $74,559 4 2006 AT&T BellSouth Corp $72,671 5 2001 Comcast AT&T Broadband $72,041

Other Types of Business Ownership Leveraged buyout (LBO) – a purchase in which a group of investors borrows money from banks and other institutions to acquire a company (or a division of one) using the assets of the purchased company to guarantee repayment of the loan.