The Three Primary Forms of Business Organizations Sole proprietorships Partnerships Corporations

Comparison of Sole Proprietorships, Partnerships, and Corporations 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.

Sole Proprietorships A sole proprietorship is a business owned and operated by one individual Common examples include Many restaurants Barber shops Flower shops Dog kennels Independent grocery stores

Advantages and Disadvantages of the Sole Proprietorship Ease and cost of formation Secrecy Distribution and use of profits Control of the business Government regulation Easy to close the business Disadvantages Unlimited liability Limited sources of funds Limited skills Lack of continuity Lack of qualified employees

Partnerships A partnership is an association of two or more persons who carry on as co-owners of a business for profit. Represents just 8 percent of U.S. businesses Accounts for only 10 percent of sales Accounts for 19 percent of income

Types of Partnerships General partnership: Limited partnership: Partners completely share in the management of the business Limited partnership: One general partner with unlimited liability and one limited partner with limited liability Joint venture: A partnership established for a specific project or a limited time

Issues and Provisions in 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 Source: “Partnership Agreement,” State of New Jersey, www.state.nj.us/njbiz/s_step2_partagree.html (accessed June 6, 2006).

Issues and Provisions in 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 Source: “Partnership Agreement,” State of New Jersey, www.state.nj.us/njbiz/s_step2_partagree.html (accessed June 6, 2006).

Advantages and Disadvantages of Partnerships Ease of organization Availability of capital and credit Combined knowledge and skills Decision making Regulatory controls Disadvantages Unlimited liability Business responsibility Life of the partnership Distributions of profits Limited sources of funds Taxation

Corporation Legal entity, created by the state, whose assets and liabilities are separate from its owners

Types of Corporations Domestic Foreign Alien Does business in the state in which it is chartered Foreign Does business in states other than the state where it is chartered Alien Does business outside of the nation where it is incorporated

Types of Corporations Private Public Corporation owned by only one person or a few people closely involved in its management Public Corporation whose stock anyone may buy, sell, or trade

Types of Corporations Quasi-public Nonprofit Owned and operated by a federal, state, or local government Nonprofit Focus is on providing a service not making a profit

The Largest U.S. Corporations, Arranged by Revenues

The Largest U.S. Corporations, Arranged by Revenues

The Elements of a Corporation The Board of Directors Inside directors Outside directors Stock Ownership Preferred stock Common stock

Advantages and Disadvantages of Corporations 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 Ownership Joint Ventures S-corporations Limited Liability Companies (LLC) Cooperatives (Co-op)

How Do Corporations Grow? Expanding operations New product development Market expansion Mergers Acquisitions Leveraged buyouts (LBO)

Merger When two companies (usually corporations) combine to form a new company Horizontal Vertical Conglomerate

Acquisition When one company purchases another, generally by buying most of its stock The acquired company may become a subsidiary of the buyer

The Jargon of the Merger, Acquisition, and LBO The Corporate Raider The Tender Offer The Poison Pill Shark Repellant The White Knight

Leveraged Buyout (LBO) A group of investors borrow money from banks and other institutions to acquire a company (or a division of one) The assets of the purchased company are used to guarantee repayment of the loan Did You Know? Worldwide LBOs are on the decline. More LBOs occur in Europe than in U.S.

Major Mergers and Acquisitions 2000-2006

Solve the Dilemma What are some of the advantages and disadvantages of Thomas and Bryan forming a corporation? What are the advantages and disadvantages of their forming a partnership? Which organizational form do you think would be best for Thomas and Bryan’s company and why?

Explore Your Career Options Are salary and advancement opportunities the most important considerations in evaluating a job offer?

Additional Discussion Questions and Exercises Which form of ownership is the most popular in the United States? Which form accounts for the highest percentage of total business sales? What is meant by “double taxation” for corporate income? What is the difference between a foreign corporation and an alien corporation?

Additional Discussion Questions and Exercises What is the difference between quasi-public corporations and nonprofit corporations? In a leveraged buyout (LBO), what assets or collateral do the investors use to guarantee repayment of the loan to the banks or other institutions from which they borrowed money?

Chapter 5 Quiz A corporation doing business in the state in which it is chartered is known as an alien corporation a domestic corporation a foreign corporation a quasi-public corporation. Which one of the following is considered an advantage of the sole proprietorship form of organization? ease of business dissolution unlimited liability limited sources of funds limited life of the business

Chapter 5 Quiz At one time, the Ford family owned all of the stock in the Ford Motor Company. Such family ownership of a corporation is typical of a public corporation quasi-public corporation private corporation nonprofit corporation. Owners of common stock have a claim to any profits before any stockholders do carry a cumulative claim to dividends. have no say in running the company elect the board of directors

Multiple Choice Questions about the Video Auntie Anne borrowed $6,000 to buy a ______ store concession stand Pizza oven Pretzel recipe Television advertisement How many stores does Auntie Anne’s Pretzels have in the U.S.? 200 100 550 850 325