Forms of Ownership Chapter 5

1-2 Chapter 5 Objectives After studying this chapter, you will be able to: Define sole proprietorship and explain the six advantages and six disadvantages of this ownership model. Define partnership and explain the six advantages and three disadvantages of this ownership model. Define corporation and explain the four advantages and six disadvantages of this ownership model. 5-2

1-3 Chapter 5 Objectives Cont. Explain the concept of corporate governance and identify the three groups responsible for ensuring good governance. Identify the potential advantages of pursuing mergers and acquisitions as a growth strategy, along with the potential difficulties and risks. Define strategic alliances and joint ventures and explain why a company would choose these options over a merger or acquisition. 5-3

5-4 Business Ownership 5-4 Partnership SoleProprietorship Corporation

Forms of Business Ownership 1-5

5-6 Sole Proprietorship A sole proprietorship is a business owned by one person (although it may have many employees), and it is the easiest and least expensive form of business to start. Unlimited liability: A legal condition under which any damages or debts incurred by a business are the owner’s personal responsibility

5-7 Advantages of Sole Proprietorships 5-7 Simplicity Single layer of taxation Privacy Flexibility and control Fewer limitations on personal income Personal satisfaction

5-8 Disadvantages of Sole Proprietorships 5-8 Financial liability Demands on the owner Limited managerial perspective Resource limitations No employee benefits for the owner Finite life span

5-9 Partnerships If starting a business on your own seems a little intimidating, you might decide to share the risks and rewards of going into business with a partner. Limited liability: A legal condition in which the maximum amount each owner is liable for is equal to whatever amount each invested in the business.

5-10 Partnerships 5-10 General Partnerships Limited Partnerships UnlimitedLiabilityUnlimitedLiability EqualPartnersEqualPartners ShareOwnershipShareOwnershipLimitedLiabilityLimitedLiability UnequalPartnersUnequalPartners PassiveInvestorsPassiveInvestors

5-11 Partnership Advantages 5-11 Simplicity Single layer of taxation More resources Cost sharing Broader skill and experience base Longevity

1-12 Partnership Disadvantages 5-12 Unlimited liability Potential for conflict Expansion, succession, and termination issues

1-13 The Partnership Agreement 5-13 Decision-Making Authority Dispute Resolution Procedures Profit-sharing Percentages Management Responsibilities

5-14 Corporations Enter into contracts Buy and sell property Sue and be sued Face limited liability 5-14

5-15 Ownership of Corporations Shareholders Stock Certificates 5-15

5-16 Public Versus Private Ownership Public Corporation Public Corporation Private Corporation Private Corporation Not Publicly Traded Not Publicly Traded Few Shareholders Few Shareholders Publicly Traded Publicly Traded Many Shareholders Many Shareholders

5-17 Advantages of Corporations 5-17 Ability to raise capital Liquidity Longevity Limited liability Liquidity: A measure of how easily and quickly an asset such as corporate stock can be converted into cash by selling it

5-18 Disadvantages of Corporations 5-18 Cost and complexity Reporting requirements Managerial demands Possible loss of control Double taxation Short-term orientation of the stock market

5-19 Corporate Governance Describes all the policies, procedures, relationships, and systems in place to oversee the successful and legal operation of the enterprise Also refers to the responsibilities and performance of the board of directors specifically

5-20 Corporate Governance

5-21 Shareholders Proxy: A document that authorizes another person to vote on behalf of a shareholder in a corporation Shareholder activism: Activities undertaken by shareholders to influence executive decision making in areas ranging from strategic planning to social responsibility

5-22 Board of Directors Board of directors: A group of professionals elected by shareholders as their representatives, with responsibility for the overall direction of the company and the selection of top executives

5-23 Board Issues 5-23 Composition Education Liability Independent Board Chairs Recruiting Challenges

5-24 Corporate Officers Corporate Officers: The top executives who run a corporation Chief Executive Officer (CEO): The highest-ranking officer of a corporation

5-25 Merger In a merger, two companies join to form a single entity. Traditionally, mergers took place between companies of roughly equal size and stature, but mergers between companies of vastly difference sizes is common today.

5-26 Acquisition In an acquisition, one company simply buys a controlling interest in the voting stock of another company. Unlike the real or presumed marriage of equals in a merger, the buyer is definitely the dominant player in an acquisition.

5-27 Hostile takeover: Acquisition of another company against the wishes of management. Leveraged buyout (LBO): Acquisition of a company’s publicly traded stock, using funds that are primarily borrowed, usually with the intent of using some of the acquired assets to pay back the loans used to acquire the company. Hostile Takeovers & Leveraged Buyout (LBO)

5-28 Advantages of Mergers and Acquisitions Increase their buying power as a result of their larger size Increase revenue by cross-selling products to each other’s customers Increase market share by combining product lines Gain access to new expertise, systems, and teams of employees

5-29 Disadvantages of Mergers and Acquisitions Executives have to agree on how the merger will be financed Managers need to decide who will be in charge after they join forces Marketing departments need to figure out how to blend product lines, branding strategies, and advertising and sales efforts Incompatible information systems Companies must often deal with layoffs Incompatible organizational cultures

5-30 Types of Mergers 5-30

5-31 WhiteKnightWhiteKnightSharkRepellentSharkRepellentPoisonPillPoisonPill Hostile Takeover Tender Offer Proxy Fight Defensives against Mergers and Acquisitions

5-32 Strategic Alliances and Joint Ventures 5-32 Strategic alliance A long-term partnership between companies to jointly develop, produce, or sell products Joint venture A separate legal entity established by two or more companies to pursue shared business objectives

Applying What You’ve Learned 1.Define sole proprietorship and explain the six advantages and six disadvantages of this ownership model 2.Define partnership and explain the six advantages and three disadvantages of this ownership model 3.Define corporation and explain the four advantages and six disadvantages of this ownership model 5-33

Applying What You’ve Learned 4.Explain the concept of corporate governance and identify the three groups responsible for ensuring good governance 5.Identify the potential advantages of pursuing mergers and acquisitions as a growth strategy, along with the potential difficulties and risks 6.Define strategic alliance and joint venture and explain why a company would choose these options over a merger or an acquisition 5-34