FHF Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

part CHAPTER 5 Small Business, Entrepreneurship, and Franchising 2 CHAPTER 4 Options for Organizing Business FHF 4-2

FHF Forms of Business Ownership  Sole proprietorship  Partnership  Corporation 4-3

FHF Comparing Forms of Business Ownership 4-4

FHF Sole Proprietorship Businesses owned and operated by one individual; the most common form of business organization in the United States  million in the U.S.  Nearly three-quarters of all businesses  Men 2x more likely than women to start own business o Restaurants o Hair salons o Flower shops o Dog kennels o Independent grocery stores 4-5

FHF 4-6AdvantagesDisadvantages Ease and cost of formationUnlimited liability SecrecyLimited sources of funds Distribution and use of profitsLimited skills Flexibility and control of the businessLack of continuity Government regulationLack of Qualified Employees Taxation Sole Proprietorship

FHF PartnershipPartnership 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 profit”  General partnership  Limited partnership  Articles of Partnership Legal documents that set forth the basic agreement between partners 4-7

FHF Two Types of Partnerships General Partnership  A partnership that involves a complete sharing in both the management and the liability of the business 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 4-8

FHF 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 4-9 …continued on next page

FHF 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 4-10

FHF PartnershipsPartnerships 4-11 AdvantagesDisadvantages Ease of organizationUnlimited liability Capital & creditBusiness responsibility Knowledge & skillsLife of the partnership Decision makingDistribution of profits Regulatory controlsLimited sources of funds

FHF CorporationsCorporations Legal entities created by the state whose assets and liabilities are separate from its owners  Have most of the rights of people  Typically owned by shareholders /stockholders  A corporation is created (incorporated) under the laws of the state in which it incorporates  The individuals creating the corporation are called incorporators 4-12

FHF Articles of Incorporation Legal documents filed with basic information about the business with the appropriate state office (often the Secretary of State)  Common elements: Name & address of corporation Objectives of the corporation Classes of stock (common, preferred, voting, nonvoting) and number of shares of each class of stock Financial capital required at time of incorporation 4-13 …continued on next page

FHF Articles 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  The state issues a corporate charter based on the information in the articles of incorporation. 4-14

FHF Types of Corporations  A corporation doing business in the state in which it is chartered is a domestic corporation.  When a corporation does business in other states, it is then referred to as a foreign corporation.  If a corporation does business outside the nation in which it is incorporated, it is termed an alien corporation. 4-15

FHF Types of Corporations Private Corporation  A corporation owned by just one or a few people who are closely involved in managing the business Public Corporation  A corporation whose stock anyone may buy, sell, or trade Initial Public Offering  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 4-16 …continued on next page

FHF Types of Corporations Quasi-Public Corporation  Corporation owned and operated by the federal, state, or local government  NASA, U.S. Postal Service Non-Profit Corporation  Focuses on providing a service rather than earning a profit but is not owned by a government entity  Mercy Corps., The Conservation Fund 4-17

FHF Elements of a Corporation 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.  Inside Directors  Individuals who serve on a board and are employed by the corporation (usually executives of the corporation)  Outside Directors  Individuals who serve on a board who are not directly affiliated with the corporation (usually executives of other corporations) 4-18

FHF 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. 4-19

FHF CorporationsCorporations 4-20 AdvantagesDisadvantages Limited liabilityDouble taxation Transfer of ownershipForming a corporation Perpetual lifeDisclosure of information External sources of fundsEmployee-owner separation Expansion potential

FHF Other Types of Business Ownership Joint Venture  A partnership established for a specific project or for a limited time  Control can be divided equally, or with one party taking more responsibility for decision making S-Corporation (S-Corp)  Corporation taxed as though it were a partnership (no double-taxation) with restrictions on shareholders.  Very popular with entrepreneurs 4-21 …continued on next page

FHF Other Types of Business Ownership: S-Corporations Subchapter S-Corporation  Popular because the form eliminates double-taxation  Combines the taxation structure of partnerships with legal environment of C-corporations  Qualifications: Only 1 class of stock Less than 100 shareholders Shareholders must be U.S. citizens or residents 4-22 …continued on next page

FHF Other Types of Business Ownership: Limited Liability Limited Liability Company (LLC)  Form of ownership that provides limited liability and taxation like a partnership but places fewer restrictions on members 4-23 …continued on next page

FHF Other Types of Business Ownership: Cooperative 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 Can take many different forms (retail, housing, social, worker) Co-ops are increasingly popular with small farmers and artisans Gives small producers more power as a group 4-24

FHF Trends in Business Ownership 4-25 Merger The combination of two companies (usually corporations) to form a new company  Horizontal merger: When firms that make and sell similar products merge.  Vertical merger: When companies operating at different but related levels of an industry merge.  Conglomerate merger: When firms in unrelated industries merge. …continued on next page

FHF Trends in Business Ownership 4-26 Acquisition The purchase of one company by another, usually by buying its stock and/or assuming its debt.  Corporate raider: A company or individual who wants to acquire or take over another company and first offers to buy some or all of its stock at a premium in a tender offer.  Poison pill: The firm allows stockholders to buy more shares of a stock at lower prices than the current market value to head off a hostile takeover.  Shark repellant: Management requires a large majority of stockholders to approve a takeover.  White knight: A more acceptable firm that is willing to acquire a threatened company. …continued on next page

FHF Trends in Business Ownership 4-27 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.  Mergers and acquisitions (particularly the merger mania in the late 20th century) have been criticized  Executives have to focus excessively on avoiding takeovers, not on managing the business