1. BUSINESS Ferrell Hirt Ferrell A CHANGING WORLD FHF EIGHTH EDITION
McGraw-Hill/Irwin
Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

2. 2 Starting and Growing A Business part FHF
In chapter four, we consider the various options that are available for organizing a business. The organization of a business is very important as it affects how it operates, how much tax it pays, and how much control the owners have. We will consider the primary forms of business ownership that include sole proprietorship, partnerships, and corporations. In addition, the advantages and disadvantages of each form of organization will be discussed.
CHAPTER 4 Options for Organizing Business
CHAPTER 5 Small Business, Entrepreneurship, and Franchising
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3. Forms of Business Ownership
Sole proprietorship
Partnership
Corporation
A business’s legal form of ownership affects how it operates, how much in taxes it pays and how much control its owners have.
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4. Comparing Forms of Business Ownership
Notice that sole proprietorships far outnumber corporations or partnerships in the United States, but that they bring in the smallest share of sales and income. Corporations tend to be much larger and therefore represent the majority of sales and income.
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5. Comparing Forms of Business Ownership
Students may want to look at this table in more detail. It is Table 4.1 in their textbooks.
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6. Sole Proprietorship
Businesses owned and operated by one individual; the most common form of business organization in the United States
15-20 million in the U.S.
Nearly three-quarters of all businesses
Men 2x more likely than women to start own business
Restaurants
Hair salons
Flower shops
Dog kennels
Independent grocery stores
Many sole proprietorships focus on services.
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7. Sole Proprietorship Advantages Disadvantages
Ease and cost of formation
Unlimited liability
Secrecy
Limited sources of funds
Distribution and use of profits
Limited skills
Flexibility and control of the business
Lack of continuity
Government regulation
Lack of Qualified Employees
Taxation
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8. 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 profit”
General partnership
Limited partnership
Articles of Partnership
Legal documents that set forth the basic agreement between partners
Partnerships can consist of two or more individuals, or of organizations. Large organizations even occasionally form strategic partnerships in order to take advantage of the other’s knowledge and skills.
A formal articles of partnership document is not always required, but is highly recommended as it formally lays out the terms of the partnership.
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9. 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
A limited partner’s primary role is to provide funding for the partnership. Limited partnerships are most common in risky industries where the chance of loss is great.
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10. 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
Legal documents that solidify the basic agreement between partners. Not all states require an articles of partnership, but it is highly recommended.
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11. 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
A limited partner’s primary role is to provide funding for the partnership. Limited partnerships are most common in risky industries where the chance of loss is great.
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12. Partnerships Advantages Disadvantages Ease of organization
Unlimited liability
Capital & credit
Business responsibility
Knowledge & skills
Life of the partnership
Decision making
Distribution of profits
Regulatory controls
Limited sources of funds
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13. Keys to Success in Partnership
Keep profit sharing and ownership at 50-50
Partners should have different & complementary skill sets
Honesty is critical
Maintain face-to-face communications
Transparency – share 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
Partnerships, like all relationships, can be complicated. These are some tips to make sure a partnership is successful.
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14. Relationships, not Partnerships
Strategic partnerships require relationship building
Putting two businesses or individuals together does not create a successful partnership without relationships
Microsoft and Cisco formed a strategic partnership to create better computer networking solutions.
Click on the hyperlink for a video (4:18) on the importance of relationship building in partnerships.
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15. Corporations
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
The corporation is what most people think of when they think of businesses. This is because they tend to be larger and more visible than other forms of business organization. They are also longer-lived.
Stocks are shares of the business that individuals and organizations can purchase to become partial owners.
Sometimes, a corporation’s profits are distributed to shareholders through dividends, which are cash payments that many (but not all) corporations make.
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16. 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
Every state has a different procedure for incorporation. Some states are considered easier than others.
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17. 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.
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18. 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.
These terms may seem strange to students. A foreign corporation is not a corporation from another country, but rather one doing business in a state in which it is not incorporated.
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19. …continued on next page
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
Private corporations tend to be smaller, and they do not issue stock. Private corporations go public through an initial public offering. Some private corporations are forced to go public in order to quickly raise funds (such as when a principle owner dies).
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20. Types of Corporations http://www.youtube.com/watch?v=VOl_-weiG1E
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
There are a number of different kinds of corporations that work a bit like hybrids. Quasi-public corporations and non-profits have different goals than most other corporations– namely, they are not motivated as much by profits. Click on hyperlinks to access corresponding websites.
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21. Largest U.S. Corporations
The United States is home to some of the largest corporations in the world. This is a list of the top 10. Other large corporations, such as Microsoft, started out as small companies and met with incredible success.
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22. 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)
Some of the important duties of the Board are to select the chairman of the board, and president and CEO of the company. Boards of directors are legally liable for mismanagement of the firm, even though many board members are not involved in day-to-day operations of the company. No matter how hands-off it is, the board remains legally culpable for the actions of a firm. Directors can come from within or outside the company. It is essential to have a knowledgeable, well-qualified and independent board of directors. Many companies in recent years could have staved off disaster if their boards had been better equipped to deal with problems.
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23. Stock Ownership http://www.youtube.com/watch?v=0-HRM4V7EX8
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.
Preferred stock owners are a special class because they receive dividends first. Most preferred stock shares have a cumulative claim to dividends, meaning if a company does not pay dividends one year, preferred stock holders will receive those accumulated dividends the next year.
Common stockholders do not always get dividend payments, but they are the voting owners of the corporation and therefore get a say in the decisions of the business. Common stockholders also have preemptive right to purchase new shares of stock when they are issued (another perk over preferred shareholders).
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24. Corporations Advantages Disadvantages Limited liability
Double taxation
Transfer of ownership
Forming a corporation
Perpetual life
Disclosure of information
External sources of funds
Employee-owner separation
Expansion potential
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25. Corporations Can Do Good
Greyston Bakery (Located in Yonkers, NY)
Founded with a goal of providing quality products to a low-income neighborhood
Provides jobs for the “unemployable” in the community
Donates 100% of its $6 million annual profits to the Greyston Foundation, which supports local community development causes
Click on the hyperlink to access a short video (2:45) of an interview with the CEO of Greyston Bakery.
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26. 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
The following are less common alternative types of business ownership. They all have their pros and cons.
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27. 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
S-Corporations, because of their limits on shareholders, tend to be smaller businesses. This may be a good organizational form for a small business, however, and is popular with entrepreneurs.
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28. 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
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29. 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
Organic Valley
Largest co-op of independent farmers in the U.S.
Product dairy, meat and vegetable products
Provides Stonyfield Farm with dairy products
Click on the logo to access the Organic Valley website.
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30. Trends in Business Ownership
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.
There are different ways to merge, as outlined in this slide.
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31. Trends in Business Ownership
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.
Acquisitions are not always welcome by the corporation being acquired, and the business may fight the process.
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32. Trends in 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.
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
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