Forms of Business Ownership

Forms of Business Ownership
Chapter 4 Copyright © Cengage Learning. All rights reserved.

Sole Proprietorships A business that is owned (and usually operated) by one person The simplest form of business ownership and the easiest to start Many large businesses began as a small struggling sole proprietorships The most widespread form of business ownership SOLE PROPRIETORHIP: OWNED AND OPERATED BY 1 PERSON EASISEST BUSINESS FORM TO START IE LOCAL DELI OR LAUNDERMAT IN NEIGHBORHOOD Copyright © Cengage Learning. All rights reserved.

Reasons People Go into Business for Themselves
YOU ARE YOUR OWN BOSS REQUIRE A LOT OF DEDICATION AND COMMITMENT DO YOU OR ANYONE YOU KNOW OWN THEIR OWN BUSINESS? Source: Timothy S. Hatten, Small Business Management: Entrepreneurship and Beyond, 3rd ed. Copyright © 2006 by Houghton Mifflin Company. Used by permission. Data from A Small Business Primer. Copyright © Cengage Learning. All rights reserved.

Reasons People Go into Business for Themselves
GO OVER BRIEFLY Source: Timothy S. Hatten, Small Business Management: Entrepreneurship and Beyond, 3rd ed. Copyright © 2006 by Houghton Mifflin Company. Used by permission. Data from A Small Business Primer. Copyright © Cengage Learning. All rights reserved.

Relative Percentages of Sole Proprietorships, Partnerships, and Corporations in the U.S. Sole proprietorships are most common in retailing, agriculture, and the service industries 20.6M IN THE USA 71.8% OF BUSINESS IN USA LARGEST BUSINESS FORM IN USA Source: U.S. Bureau of the Census, Statistical Abstract of the United States, Washington, D.C., 2008, p. 487 ( Copyright © Cengage Learning. All rights reserved.

Advantages and Disadvantages of Sole Proprietorships
Copyright © Cengage Learning. All rights reserved.

Advantages and Disadvantages of Sole Proprietorships
Ease of start-up and closure Pride of ownership Retention of all profits Flexibility of being your own boss No special taxes DISADVANTAGES Unlimited liability A legal concept that holds a business owner personally responsible for all the debts of the business Lack of continuity Lack of money Limited management skills Difficulty in hiring employees ADVANTAGES: NO CONTRACTS OR AGREEMENTS NEEDED…NO MINIMUM CAPITAL REQUIREMENT OWNER INVESTS A LOT OF TIME AND HARD WORK. OWNER REAPS ALL OF THE REWARDS AND RISKS IN SOLVING PROBLEMS, OPERATING THE BUSINESS, AND SATISFYING THEIR CUSTOMERS ALL PROFITS EARNED BY THE SOLE PROPRIETORSHIP BECOME THE PERSONAL EARNINGS OF ITS OWNER COMPLETELY FREE TO MAKE YOUR OWN DECISIONS AND FOLLOW YOUR OWN STRATEGY. OPEN NEW STORES OR GO ONLINE…ITS THEIR CHOICE SOLE PROP. DOES NOT PAY THE SPECIAL STATE AND FEDERAL INCOME TAXES THAT COOPERATIONS MUST PAY. THERE IS ALSO A LIMITED AMOUNT OF THINGS THE OWNER CAN DO IN A DAY DISADVANTAGES: THE SOLE PROP. CAN HAVE HIS OR HER ASSETS SEIZED TO PAY OFF CREDITORS IF OWNER DIES, RETIRES, OR BECOMES INCOMPETENT, THE BUSINESS CEASES TO EXIST. BANKS, SUPPLIERS, AND OTHER LENDERS ARE USUALLY UNWILLING TO LEND TO SOLE PROP (SEEN MORE AS A RISK BC OR LIMITED CAPITAL) SOLE PROP IS THE SOLE MANAGER. SOLE SALESPERSON, SOLE ACCOUNTANT, AND SOMETIMES JANITOR. BUSINESS CAN SUFFER IF ONE COMPONENT IS MISSING OR THE OWNER DOES NOT KNOW ABOUT A CERTAIN AREA OF THE BUSINESS POTENTIAL EMPLOYEES MAY FEEL THERE IS NO ROOM FOR ADVANCEMENT IN A FIRM WHERE THE OWNER ASSUMES ALL MANAGERIAL RESPONSIBILITIES. Copyright © Cengage Learning. All rights reserved.

Partnerships A voluntary association of two or more persons to act as co-owners of business for profit Less common form of ownership than sole proprietorship or corporation No legal limit on the maximum number of partners; most have only 2 Large accounting, law, and advertising partnerships have multiple partners Partnerships are usually a pooling of special talents or the result of a sole proprietor taking on a partner GO OVER Copyright © Cengage Learning. All rights reserved.

Types of Partners General partner A person who assumes full or shared responsibility for operating a business General partnership: a business co-owned by two or more general partners who are liable for everything the business does Limited partner A person who contributes capital to a business but has no management responsibility or liability for losses beyond the amount he or she invested in the partnership Limited partnership: a business co-owned by one or more general partners who manage the business and limited partners who invest money in it GP: both partners responsibilities LP: one partner is resp for 50 and the other is resp. for their 50. the gps run business and operations and the lps invest the money Copyright © Cengage Learning. All rights reserved.

The Partnership Agreement
Articles of partnership An agreement listing and explaining the terms of the partnership Agreement should state Who will make final decisions What each partner’s duties will be How much each partner will invest How much profit or loss each partner receives or is responsible for How the partnership can be dissolved Copyright © Cengage Learning. All rights reserved.

Advantages and Disadvantages of Partnerships
Unlimited liability Management disagreements Lack of continuity Frozen investment ADVANTAGES Ease of start-up Availability of capital and credit Personal interest Combined business skills and knowledge Retention of profits No special taxes ADVANTAGES: LEGAL REQUIREMENTS ARE LIMITED TO REGESTERING THE NAME OF THE BUSINESS AND PURCHASING LICENCING PERMITS PARTNERSHIPS USUALLY HAVE MORE CAPITAL THAN SOLE PROPS. USUALLY LOOK BETTER TO CREDITORS BC OF THEIR GREATER CAPITAL GPS ARE CONCERNED ABOUT OPERATIONS OF THE FIRM…THEY ARE RESP. FOR THE ACTIONS OF OTHER GPS AND THEMSELVES AS WELL AS THE LPS. IF A PARTNER IS WEAK IN CRUNCHING NUMBERS PER SAY, ANOTHER CAN COMPENSATE FOR THAT ALL PROFITS BELONG TO THE GPS AND LPS LIKE SOLE PROP., EACH PARTNER IS TAXED ON THEIR OWN SHARE. DISADVANTAGES: EACH GP IS LEGALLY AND PERSONALLY LIABLE FOR DEBTS AND ACTIONS OF ANY OTHER PARTNER, EVEN IF THEY DID NOT DO IT THEMSELVES. LPS RISK THEIR INVESTMENT WHEN GPS MESS UP. ONE PARTNER DOES SOMETHING THAT DISRUPS THE OTHER PARTNERS (IE USING A GOOD SHARE OF $ FOR OWN USE OR UNDISCLOSED PURCHASES) PARTNERSHIP DIES WHEN ONE PARTNER DIES OR LEAVES OR BECOMES INCOMPETANT. EASY TO INVEST IN A PARTNERSHIP, YET HARD TO GET OUT) Copyright © Cengage Learning. All rights reserved.

Corporations An artificial person created by law with most of the legal rights of a real person, including the rights to start and operate a business, to buy or sell property, to borrow money, to sue or be sued, and to enter into binding contracts There are 5.6 million corporations in the U.S. They comprise only 20% of all businesses, but they account for 83.8 % of sales revenues GO OVER Copyright © Cengage Learning. All rights reserved.

Corporate Ownership Corporate ownership Stock The shares of ownership of a corporation Stockholder A person who owns a corporation’s stock Closed corporation A corporation whose stock is owned by relatively few people and is not sold to the general public Open corporation A corporation whose stock is bought and sold on security exchanges and can be purchased by any individual STOCK: THE SHARES OF OWNERSHIP OF A COOPERATION STOCKHOLDERS: THOSE WHO OWN SHARES OF STOCK IN A COOPERATION CLOSED CORP: COPORATION WHOS STOCK IS HELD BY RELATIVLY FEW PEOPLE AND NOT BROUGHT AND SOLD ON SECURITY EXCHANGES OPEN CORP: COOPERATION WHOS STOCK IS SOLD TO THE GENERAL PUBLIC, CAN BE PURCHASED BY AN INDIVIDUAL, AND IS TRADED ON PUBLIC EXCHANGES Copyright © Cengage Learning. All rights reserved.

When Legal Help Is Required

Where to incorporate Businesses can incorporate in any state they choose Some states offer fewer restrictions, lower taxes, and other benefits to attract new firms Domestic corporation A corporation in the state in which it is incorporated Foreign corporation A corporation in any state in which it does business except the one it which it is incorporated Alien corporation A corporation chartered by a foreign government and conducting business in the U.S. QUESTIONS TO ASK WHEN INCOOPERATING: A BUSINESS CAN INCOROPRATE IN ANY STATE IT CHOOSES. SOME STATES ARE MORE FAVORABLE AND OFFER FEWER RESTRICTIONS AS WELL AS OTHER BENEFITS SUCH AS LOWER COOPERATE TAXES (IE MARYLAND) DOMESTIC COOPERATION: A BUSINESS IS INCORPORATED IN THE SAME STATE IT CONDUCTS BUSINESSA FOREIGN CORP: A BUSINESS IN INCORPORATED IN ONE STATE YET CONDUCTS BUSINESS IN OTHER STATES Alien Corp: Corp chartered by foreign gov but conducts business in usa Copyright © Cengage Learning. All rights reserved.

Articles of Incorporation
A contract between the corporation and the state in which the state recognizes the formation of the artificial person that is the corporation Articles of incorporation includes Firm’s name and address Incorporators’ names and addresses Purpose of the corporation Maximum amount of stock and types of stock to be issued Rights and privileges of stockholders Length of time the corporation is to exist CORPORATE CHARTER: A CONTRACT BETWEEN THE COOPERATION AND THE STATE IN WHICH THE STATE RECOGNIZES THE FORMATION OF THE ARTIFICIAL ENTITY THAY INCLUDES THE ARTICLES OF INCORPORATION Copyright © Cengage Learning. All rights reserved.

Stockholders’ rights Common stock Stock owned by individuals or firms who may vote on corporate matters but whose claims on profit and assets are subordinate to the claims of others Preferred stock Stock owned by individuals or firms who usually do not have voting rights but whose claims on dividends are paid before those of common-stock holders (in arrears) Dividend A distribution of earnings to the stockholders of a corporation Proxy A legal form listing issues to be decided at a stockholders’ meeting and enabling stockholders to transfer their voting rights to some other individual or individuals STONG STOCK MEANS STRONG DIVIDNED: COMPANY HAS GOOD RETAINED EARNINGS STOCK DIVIDEND REDUCTION: EARNINGS ARE DECREASING SIGNAL Less outstanding shares means that price increases Treasury Stock: Stock that the company repurchases Copyright © Cengage Learning. All rights reserved.

Organizational meeting
The last step in forming a corporation The incorporators and original stockholders meet to elect their first board of directors Board members are directly responsible to stockholders for how they operate the firm Go over Copyright © Cengage Learning. All rights reserved.

Board of directors The top governing body of a corporation, the members of which are elected by the stockholders Responsible for setting corporate goals, developing strategic plans to meet those goals, and the firm’s overall operation Outside directors: experienced managers or entrepreneurs from outside the corporation who have specific talents Inside directors: top managers from within the corporation BODS HAVE A FIDUCIARY DUTY TOWARDS THEIR STOCKHOLDERS AND TRY TO INCREASE THE INTRINSIC VALUE OF THEIR SHARES Copyright © Cengage Learning. All rights reserved.

Corporate officers The chairman of the board, president, executive vice presidents, corporate secretary, treasurer, and any other top executive appointed by the board Implement the chosen strategy and direct the work of the corporation, periodically reporting results to the board and stockholders GO OVER Copyright © Cengage Learning. All rights reserved.

Hierarchy of Corporate Structure
Stockholders exercise a great deal of influence through their right to elect the board of directors GO OVER Copyright © Cengage Learning. All rights reserved.

Advantages and Disadvantages of Corporations

Advantages and Disadvantages of Corporations
Limited liability Each owner’s financial liability is limited to the amount of money that he or she has paid for the corporation’s stock Ease of raising capital Ease of transfer of ownership Perpetual life Specialized management DISADVANTAGES Difficulty and expense of formation Government regulation and increased paperwork Conflict within the corporation Double taxation Lack of secrecy ADVANTAGES: CREDITORS ONLY HAVE A CLAIM ON THE ASSETS OF THE CORP. NOT THE PERSONAL OWNERS ASSETS MOST EFFECTIVE BUSINESS FORM TO RAISE CAPITAL OWNERSHIP IS TRANSFERRED WHEN STOCKS ARE SOLD. NO RESTRICTIONS ON THE SALE OR PURCHASE OF STOCK. USUALLY NOT MORE THAN 51% WHY? IT IS A “LEGAL PERSON” THAT EXISTS AFTER ITS OWNERS PASS AWAY ABLE TO RECRUIT MORE SKILLED, KNOWLEDGABLE, AND TALANTED MANAGERS THAN PROPS. OR PARTNERSHIPS. DISADVANTAGES: COSTLY AND COMPLEX PROCESS CORPS MUST FILE REPORTS ON THEIR BUSINESS OPERATIONS AND FINANCES WITH LOCAL, STATE, AND FEDERAL GOVERNMENTS AND MUST MAKE PERIODIC REPORTS TO THEIR STOCKHOLDERS. PRESSURES TO INCREASE SALES, REDUCE EXPENSES, AND INCREASE PROFITS LEADS TO STRESS AND TENSION FOR MANAGERS AND EMPLOYEES CORPS MUST PAY A TAX ON PROFITS THEN THEY MUST PAY TAXES ON PROFITS RECEIVED ON DIVIDENDS HARD TO KEEP OPERATIONS CONFIDENTIAL AND STRATEGY IS EASILY EXPOSED…HARD TO ESTABLISH A COMPETITIVE ADVANTAGE. Copyright © Cengage Learning. All rights reserved.

Advantages and Disadvantages

Special Types of Business Ownership
S-corporations Income is taxed only as the personal income of stockholders) Limited-liability company (LLC) limited-liability protection and is taxed like a partnership Provides limited liability protection Owners and managers make managerial decisions S CORP QUALIFICATIONS: NO MORE THAN 100 STOCKHOLDERS STOCKHOLDERS MUST BE INDIVIDUALS, ESTATES, OR EXEMPT ORGS ONLY ONE CLASS OF OUTSTANDING STOCK THE FIRM MUST BE A DOMESTIC CORP Copyright © Cengage Learning. All rights reserved.

Advantages and Disadvantages

Government-owned corporations
Purpose To ensure that a public service is available Examples National Aeronautics and Space Administration (NASA), Federal Deposit Insurance Corporation (FDIC) OWNED AND OPERATED BY A STATE, LOCAL, OR FEDERAL GOVERNMENT PROFIT IS SECONDARY Copyright © Cengage Learning. All rights reserved.

501c Not-for-profit corporations
Examples Charities, museums, private schools, and colleges are organized as not-for-profits primarily to ensure limited liability NON 4 PROFIT: COOPERATION ORGANIZED TO PROVIDE SOCIAL, EDUCATIONAL, RELIGIOUS, OR OTHER SERVICES RATHER THAN MAKING PROFITS (IE Volunteers of America) Copyright © Cengage Learning. All rights reserved.

Joint Ventures Agreements between two or more groups to form a business entity in order to achieve a specific goal or to operate for a specific period of time Example: Wal-Mart and India’s Bharti Enterprises Some are successes while others are failures 2 parts greater than the sum (synergy) Copyright © Cengage Learning. All rights reserved.

Syndicates Temporary associations of individuals or firms organized to perform a specific task that requires a large amount of capital Most commonly used to underwrite large insurance policies, loans, and investments Usually under the project management realm Copyright © Cengage Learning. All rights reserved.

Corporate Growth from within Introducing new products Entering new markets Expanding profits and operations mergers and acquisitions Merger Hostile takeover Tender offer Proxy fight Merger: THE PURCHASE OF ONE CORP BY ANOTHER HOSTILE TAKEOVER: A SITUATION IN WHICH MANAGEMENT AND THE BODS OF A FIRM TARGETED FOR ACQUISITION DISPROVE OF THE MERGER TENDER OFFER: OFFER TO PURCHASE THE FIRM TARGETED FOR ACQUISITION AT A PRICE JUST HIGH ENOUGH TO MAKE THEM SELL THEIR SHARES PROXY FIGHT: RAIDERS ATTEMPT TO GATHER ENOUGH SHAREHOLDER VOTES TO CONTROL THE TARGETED COMPANY. Copyright © Cengage Learning. All rights reserved.

Three Types of Growth by Merger
HOROZONTAL MERGER: A MERGER BETWEEN FIRMS THAY MAKE AND SELL SIMILAR PRODUCTS OR SERVICES IN SIMILAR MARKETS VERTICAL MERGERS: MERGER BETWEEN FIRMS THAT OPERATE AT DIFFERENT BUT RELATED LEVELS IN THE PRODUCTION AND MARKETING OF A PRODUCT CONGLOMERATE MERGER: MERGER BETWEEN FIRMS IN COMPLETELY DIFFERENT INDUSTRIES Copyright © Cengage Learning. All rights reserved.

Biggest Mergers Target Acquirer Value ($ billions) Date Mannesmann Vodafone Airtouch $172.2 2/2000 Time Warner America Online $112.1 1/2001 Warner-Lambert Pfizer $111.8 6/2000 Mobil Exxon $85.6 12/1999 SmithKline Glaxo Wellcome $79.6 12/2000 Ameritech SBC Communications $76.2 10/1999 GTE Bell Atlantic $74.9 Aventis SA Sanofi-Synthelabo $71.3 6/2004 Amoco British Petroleum $64.3 12/1998 Source: Updated 7:24 PM.PT, Sun, February 15, 2009. Copyright © Cengage Learning. All rights reserved.

Reasons for Merger/Acquisition
Scale—gain revenue, channels, etc. Geographic reach—access new markets Customers—new lists Products—new products for existing customers Segments—new vertical markets Channels—new ways of delivering same products and services Employees—new talent quickly Technology—adding key capabilities GO OVER Source: “Preparing for the Merger/Acquisition Decision—How to Position Your Company in a Consolidating Collaboration & Conferencing Marketplace,” Wainhouse Research, 2004, Copyright © Cengage Learning. All rights reserved.

Debate Issue: Should the Government Restrict Corporate Merger Activity? YES Takeovers and mergers do nothing to increase the productivity of the firm. Existing managers must spend time and effort to fend off hostile mergers—time that could be invested in product development. The only people that benefit from corporate takeovers and mergers are the corporate raiders. NO Firms that are taken over are more productive because unneeded assets are sold. A takeover shakes up existing management and makes managers more productive. Less productive managers may be fired. Corporate raiders have a basic right to take over a firm if they can acquire enough stock. Copyright © Cengage Learning. All rights reserved.

Chapter Quiz In the United States, the form of business ownership that generates the largest amount of sales revenues is the sole proprietorship. partnership. corporation. limited liability company. S-corporation. Which of the following is not an advantage of a sole proprietorship? Flexibility No special taxes Pride of ownership Retention of all profits Unlimited liability cebea Copyright © Cengage Learning. All rights reserved.

Chapter Quiz (cont’d) A business co-owned by one or more general partners who manage the business and limited partners who invest money into it is called a not-for-profit partnership. limited partnership. general partnership. limited liability company. S-partnership. Copyright © Cengage Learning. All rights reserved.

Chapter Quiz (cont’d) A corporation that received its corporate charter in California and doing business in Oregon is called a(n) ____________corporation in Oregon. alien domestic visiting international foreign A ____________ is a merger between firms that make and sell similar products or services in similar industries. horizontal merger vertical merger conglomerate merger hostile takeover tender offer Copyright © Cengage Learning. All rights reserved.

Answers to Chapter Quiz
In the United States, the form of business ownership that generates the largest amount of sales revenues is the sole proprietorship. partnership. corporation. (Correct) limited liability company. S-corporation. Which of the following is not an advantage of a sole proprietorship? Flexibility No special taxes Pride of ownership Retention of all profits Unlimited liability (Correct) Copyright © Cengage Learning. All rights reserved.

Answers to Chapter Quiz (cont’d)
A business co-owned by one or more general partners who manage the business and limited partners who invest money into it is called a not-for-profit partnership. limited partnership. (Correct) general partnership. Limited liability company. S-partnership. Copyright © Cengage Learning. All rights reserved.

Answers to Chapter Quiz (cont’d)
A corporation that received its corporate charter in California and doing business in Oregon is called a(n) ____________corporation in Oregon. alien domestic visiting international foreign (Correct) A ____________ is a merger between firms that make and sell similar products or services in similar industries. horizontal merger (Correct) vertical merger conglomerate merger hostile takeover tender offer Copyright © Cengage Learning. All rights reserved.

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