1. Introduction to Business 1 BUS-101 Instructor: Erlan Bakiev, Ph.D.

2. Forms of Business Ownership
In this chapter you'll explore one of the most fundamental and important questions in business: What legal form should the company take? You'll start by considering the three major types of ownership—sole proprietorships, partnerships, and corporations—then look at current trends in mergers and acquisitions. The chapter concludes with an overview of joint ventures and strategic partnerships.
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Excellence in Business, 3e

3. Business Ownership Three Common Forms Sole Proprietorships
Partnerships
Corporations
The three most common forms of business ownership are sole proprietorship, partnership, and corporation. Each form has its own characteristic internal structure, legal status, size, and fields to which it is best suited. Each has key advantages and disadvantages for the owners.
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4. Sole Proprietorship Advantages Disadvantages Ease of establishment
Self-satisfaction
Privacy
Tax advantages
Unlimited liability
Personal pressure
Difficult to get funding
Limited life
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. Many farms, retail establishments, and small service businesses are sole proprietorships, as are many home-based businesses (such as caterers, consultants, and computer programmers).
A sole proprietorship has many advantages. One is ease of establishment. All you have to do to launch a sole proprietorship is obtain necessary licenses, start a checking account for the business, and open your doors. Another advantage is the satisfaction of working for yourself. As a sole proprietor, you also have the advantage of privacy; you do not have to reveal your performance or plans to anyone. Although you may need to provide financial information to a banker if you need a loan, and you must provide certain financial information when you file tax returns, you do not have to prepare any reports for outsiders as you would if the company were a public corporation.
One major drawback of a sole proprietorship is the proprietor’s unlimited liability. From a legal standpoint, the owner and the business are one and the same. In some cases, the sole proprietor’s independence can also be a drawback because it means that the business depends on the talents and managerial skills of one person. Other disadvantages include the difficulty of a single-person operation obtaining large sums of capital and the limited life of a sole proprietorship.
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5. Business Partnerships
General Partnerships
Limited Partnerships
Unlimited
Liability
Equal
Partners
Share
Ownership
Limited
Unequal
Passive
Investors
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. In that case, you would form a partnership—a legal association of two or more people as co-owners of a business for profit.
Partnerships are of two basic types. In a general partnership, all partners are considered equal by law, and all are liable for the business’s debts. To guard against personal liability exposure, some organizations choose to form a limited partnership. Under this type of partnership one or more persons act as general partners who run the business, while the remaining partners are passive investors (that is, they are not involved in managing the business). These partners are called limited partners because their liability (the amount of money they can lose) is limited to the amount of their capital contribution.
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Excellence in Business, 3e

6. Business Partnerships in Turkey
Ordinary (Unregistered) Partnership
Registered Partnership
Limited Partnership
Partnership Partially Limited by Shares
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7. Partnership Advantages
Easy to Establish
Tax Advantages
Strength in Numbers
Diversity of Skills
Proprietorships and partnerships have some of the same advantages. Like proprietorships, partnerships are easy to form. Partnerships also provide the same tax advantages as proprietorships, because profits are taxed at individual income-tax rates rather than at corporate rates.
However, in a couple of respects, partnerships are superior to sole proprietorships, largely because there’s strength in numbers. When you have several people putting up their money, you can start a more ambitious enterprise. In addition, the diversity of skills that good partners bring to an organization leads to innovation in products, services, and processes, which improves your chances of success.
The partnership form of ownership also broadens the pool of capital available to the business. Not only do the partners’ personal assets support a larger borrowing capacity, but the ability to obtain financing increases because general partners are legally responsible for paying off the debts of the group. Finally, by forming a partnership you increase the chances that the organization will endure, because new partners can be drawn into the business to replace those who die or retire.
Increased Capital
Extended Life
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8. Partnership Disadvantages
Unlimited
Liability
Interpersonal
Problems
Unproductive
Partners
Managing
Partner
Law Suits
Debts
Except in limited liability partnerships, at least one member of every partnership must be a general partner. All general partners have unlimited liability. Thus, if one of the firm’s partners makes a serious business or professional mistake and is sued by a disgruntled client, all general partners are financially accountable. At the same time, general partners are responsible for any debts incurred by the partnership
Another disadvantage of partnerships is the potential for interpersonal problems. Difficulties often arise because each partner wants to be responsible for managing the organization. Electing a managing partner to lead the organization may diminish the conflicts, but disagreements are still likely to arise. Moreover, the partnership may have to face the question of what to do with unproductive partners.
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9. Partnership Agreement
Division
of Profits
Dispute
Resolution
A partnership agreement is a written document that states all the terms of operating the partnership by spelling out the partners’ rights and responsibilities. Although the law does not require a written partnership agreement, it is wise to work with a lawyer to develop one. One of the most important features of such an agreement is to address sources of conflict that could result in battles between partners. The agreement spells out such details as the division of profits, decision-making authority, expected contributions, and dispute resolution. Moreover, a key element of this document is the buy/sell agreement, which defines the steps a partner must take to sell his or her partnership interest or what will happen if one of the partners dies.
Decision-Making
Authority
Expected
Contributions
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10. Face Limited Liability
Corporations
Enter Into Contracts
Buy and Sell Property
Sue and Be Sued
Face Limited Liability
A corporation is a legal entity with the power to own property and conduct business. A corporation can receive, own, and transfer property; make contracts; sue; and be sued. Unlike the case with sole proprietorships and partnerships, a corporation’s legal status and obligations exist independently of its owners.
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11. Ownership of Corporations
Shareholders
Shareholders
Shareholders
Shareholders
Shareholders
Shareholders
Last Claim on Distributed
Profits and Assets
Cash or Stock Dividends
Full Voting Rights
Common Stock
First Claim on Dividends
and Assets
Cash or Stock Dividends
Minimal Voting Rights
Preferred Stock
The corporation is owned by its shareholders, who are issued shares of stock in return for their investments. These shares are represented by a stock certificate, and they may be bequeathed or sold to someone else.
Most stock issued by corporations is common stock. Owners of common stock have voting rights and get one vote for each share of stock they own. Besides conferring voting privileges, common stock frequently pays dividends, payments to shareholders from the company’s profits. In addition to dividends, common shareholders can earn a return on their investment.
In contrast to common stock, preferred stock does not usually carry voting rights. It does, however, give preferred shareholders the right of first claim on the corporation’s assets (in the form of dividends) after all the company’s debts have been paid. This right is especially important if the company ever goes out of business. Moreover, preferred shareholders get their dividends before common shareholders do.
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12. Public Versus Private Ownership
Corporation
Private
Not Publicly
Traded
Few
Shareholders
Publicly
Many
The stock of a private corporation such as Kinko’s is held by only a few individuals or companies and is not publicly traded. By withholding their stock from public sale, the owners retain complete control over their operations and ownership. Private corporations finance their operating costs and growth from either company earnings or other sources, such as bank loans. By contrast, the stock of a public corporation is held by and available for sale to the general public; thus the company is said to be publicly traded.
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13. Advantages of “Going Public”
Ready supply of capital
Increased liquidity
Enhanced visibility
Independent market value
Increased flexibility
As you'll read in Chapter 6, the primary reason for "going public" is to help finance the enterprise. In addition to providing a ready supply of capital, public ownership has other advantages and disadvantages. Among the advantages are increased liquidity, enhanced visibility, and the establishment of an independent market value for the company. Moreover, having a publicly traded stock gives companies flexibility to use such stock to acquire other firms.
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14. Disadvantages of “Going Public”
High cost
SEC filing requirements
Reduced ownership control
Demands of public exposure
Pressure for quarterly results
Nevertheless, selling stock to the public also has distinct disadvantages: (1) The cost of going public is high (up to hundreds of thousands of dollars or more), (2) the filing requirements with the Securities and Exchange Commission (SEC) are burdensome, (3) ownership control is reduced, (4) management must be ready to handle the administrative and legal demands of heightened public exposure, and (5) the company is subjected to the stock market's incessant demand for quarterly results.
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15. Corporations Advantages Disadvantages Access to capital
Limited liability
Increased liquidity
Unlimited life span
Excess paperwork
Burdensome costs
Double taxation
Disclosure requirements
No other form of business ownership can match the success of the corporation in bringing together money, resources, and talent; in accumulating assets; and in creating wealth. The corporation has certain inherent qualities that make it the best vehicle for reaching those objectives. One such quality is limited liability. Although a corporate entity can assume tremendous liabilities, it is the corporation that is liable and not the private shareholders.
In addition to limited liability, corporations that sell stock to the general public have the advantage of liquidity, which means that investors can easily convert their stock into cash by selling it on the open market. Thus, corporations tend to be in a better position than proprietorships and partnerships to make long-term plans, with their unlimited life span and funding available through the sale of stock.
Corporations are not without some disadvantages. The paperwork and costs associated with incorporation can be burdensome, particularly if you plan to sell stock. In addition, corporations are taxed twice. They must pay federal and state corporate income tax on the company’s profits, and individual shareholders must pay income taxes on their share of the company’s profits received as dividends. Another drawback pertains to publicly owned corporations. As mentioned earlier, such corporations are required by the government to publish information about their finances and operations.
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16. Types of Corporations Subchapter S Corporation Limited
Liability Company
Subsidiary
Certain types of corporations enjoy special privileges provided they adhere to strict guidelines and rules. One special type of corporation is known as the S corporation (or subchapter S corporation). An S corporation distinction is made only for federal income tax purposes; otherwise, in terms of legal characteristics, it is no different from any other corporation. Basically, the owners receive the tax advantages of a partnership while they raise money through the sale of stock. In addition, income and tax deductions from the business flow directly to the owners, who are taxed at individual income-tax rates, just as they are in a partnership.
Limited liability companies (LLCs) are another special type of corporation. These flexible business entities combine the tax advantages of a partnership with the personal liability protection of a corporation. Furthermore, LLCs are not restricted in the number of shareholders they can have, and members’ participation in management is not restricted as it is in limited partnerships.
Some corporations are not independent entities; that is, they are owned by a single entity. Subsidiary corporations, for instance, are partially or wholly owned by another corporation known as a parent company, which supervises the operations of the subsidiary. A holding company is a special type of parent company that owns other companies for investment reasons and usually exercises little operating control over those subsidiaries.
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17. Corporate Governance Elect Appoint Hire Common Shareholders Board
of Directors
Corporate
Officers
Employees of
the Company
Individuals
Companies
Non-profits
Pensions
Mutual Funds
Dividends
Corporate Affairs
Strategic Plans
Select Officers
Finances
Chief Executive
Chief Financial
Chief Operations
Operations
Finance
Marketing
Personnel
Engineering
The term corporate governance can be used in a broad sense to describe all the policies, procedures, relationships, and systems in place to oversee the successful and legal operation of the enterprise; media coverage tends to define governance in a more narrow sense: as the responsibilities and performance of the board of directors specifically.
Shareholders of a corporation can be individuals, other companies, nonprofit organizations, pension funds, and mutual funds. All shareholders who own voting shares are invited to an annual meeting to choose directors, select an independent accountant to audit the company’s financial statements, and attend to other business.
Representing the shareholders, the board of directors is responsible for declaring dividends, guiding corporate affairs, reviewing long-term strategic plans, selecting corporate officers, and overseeing financial performance. Corporate governance has come under close scrutiny in recent years, with critics and regulators claiming that a number of corporate officials in companies such as Enron and WorldCom have failed to uphold their obligations to shareholders.
The center of power in a corporation often lies with the chief executive officer, or CEO. Together with the chief financial officer (CFO) and the chief operating officer (COO), the CEO is responsible for establishing company policies, managing corporate direction, and making the big decisions that will affect the company’s growth and competitive position.
Employees occupy positions is various departments: for example, operations, finance, marketing, personnel, and engineering.
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18. Reform: Board-Related Issues
Composition
Education
Liability
Recruiting
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19. Business Combinations
Mergers
Consolidations
Two of the most popular forms of business combinations are mergers and consolidations. The two terms often discussed together, usually with the shorthand phrase "M & A," or used interchangeably (although they are technically different).
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. Companies can merge by either pooling their resources or through a purchase of the assets of one company by the other. Although it's not a strictly a merger, a consolidation, in which the two companies created a new, third entity which then purchases the two original companies, is often lumped together with the other two merger approaches.
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. In most acquisitions, the selling parties agree to be purchased. However, in a small minority of situations, a buyer attempts to acquire a company against the wishes of management. In these hostile takeovers, the buyer tries to convince enough shareholders to go against management and vote to sell.
A leveraged buyout (LBO) occurs when one or more individuals purchase a company’s publicly traded stock by using borrowed funds. The debt is expected to be repaid with funds generated by the company’s operations and, often, by the sale of some of its assets.
Acquisitions
Leveraged
Buy-Outs
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20. Types of Business Mergers
Vertical
Horizontal
Conglomerate
Whether it's technically a merger or an acquisition, the combination can take one of several forms (usually all referred to as mergers for simplicity's sake):
A vertical merger occurs when a company purchases a complementary company at a different level in the "value chain," often when a company purchases one of its suppliers or one of its customers. For instance, a car manufacturer and a windshield manufacturer would be a vertical merger since the two companies complement each other in the creation of automobiles.
A horizontal merger involves two similar companies at the same level, such as a combination of two car manufacturers, two windshield manufacturers, two banks, or two retail chains.
In a conglomerate merger, the two firms offer dissimilar products or services, often in widely different industries.
A market extension merger combines firms that offer similar products and services in different geographic markets.
Companies pursue a product extension merger when they need to round out a product line. This approach is common in the computer industry, where larger customers expect suppliers to provide a wide range of goods and services.
Market Extension
Product Extension
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21. Mergers and Acquisitions
Advantages
Economies of Scale
Efficiencies
Synergies
Disadvantages
High-Risk Corporate Debt
Management Distractions
Culture Clashes
Business combinations provide several financial and operational advantages. Combined entities hope to eliminate expenditures for redundant resources; 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 to provide more comprehensive offerings; eliminate manufacturing overcapacity; and gain access to new expertise, systems, and teams of employees who already know how to work together. Often these advantages are grouped under umbrella terms such as economies of scale, efficiencies, or synergies, which generally mean that the benefits of working together will be greater than if each company continued to operate independently.
Despite the promise of economies of scale, studies of merged companies show that 65 to 85 percent of these deals fail to actually achieve promised efficiencies. Part of the problem with mergers is that companies often borrow immense amounts of money to acquire a firm, and the loan payments on this corporate debt gobble up cash needed to run the business. Moreover, managers must help combine the operations of the two entities, pulling them away from their normal day-to-day responsibilities. Another obstacle that companies face when combining forces is that they tend to underestimate the difficulties of merging two cultures.
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22. Trends in Mergers and Acquisitions
Year
Number
Value (in billions)
1970
5,152
$16
1975
2,297
$12
1980
1,889
$44
1985
3,001
$180
1990
2,074
$108
Every year, a few mega-deals catch everyone's attention, but in reality, several thousand mergers and acquisitions occur every year in the United States, and thousands more take place in other countries.
As the table above shows, merger activity tapered off through the 1970s, during the waning years of the conglomeration age. The 1980s saw a brief surge in activity, but nothing like the boom of the late 1990s, which was fueled by the rapid price increases in dot-com and other technology stocks. Tens of thousands of mergers and acquisitions took place during this period, including a number of huge deals in such major industries as news and entertainment media (AOL and Time Warner), automobiles (Chrysler and Daimler-Benz), oil (Exxon and Mobil), and banking (Travelers and Citicorp). However, when the stocks that financed so much of this activity cooled or collapsed, the number of mergers and acquisitions fell off rapidly as well. Then as the stock market began to show signs of recovery in 2003 and 2004, deal activity began to pick up again.
1995
3,510
$356
2000
11,123
$1,269
2003
8,232
$530
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23. Defenses Against Mergers and Acquisitions
Tender Offers
Poison Pill
Hostile
Takeovers
Shark Repellent
Every corporation that sells stock to the general public is potentially vulnerable to takeover by any individual or company that buys enough shares to gain a controlling interest. Basically, a hostile takeover can be launched in one of two ways: by tender offer or by proxy fight. In a tender offer, the raider offers to buy a certain number of shares of stock in the corporation at a specific price. The price offered is generally more than the current stock price so that shareholders are motivated to sell. The raider hopes to get enough shares to take control of the corporation and to replace the existing board of directors and management. In a proxy fight, the raider launches a public relations battle for shareholder votes, hoping to enlist enough votes to oust the board and management.
Corporate boards and executives have devised a number of schemes to defend themselves against unwanted takeovers:
The poison pill. This plan, triggered by a takeover attempt, makes the company less valuable in some way to the potential raider; the idea is to discourage the takeover from actually happening.
The shark repellent. This tactic is more direct; it is simply a requirement that stockholders representing a large majority of shares approve of any takeover attempt. Of course, such a plan is viable only if the management team has the support of the majority of shareholders.
The white knight. This tactic uses a friendly buyer to take over the company before a raider can. White knights usually agree to leave the current management team in place and to let the company continue to operate in an independent fashion.
Proxy Fights
White Knight
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Excellence in Business, 3e

24. Strategic Alliances and Joint Ventures
Gain Credibility
Expand Markets
Access Technology
Chapter 3 discussed strategic alliances and joint ventures from the perspective of international expansion, defining a strategic alliance as a long-term partnership between companies to jointly develop, produce, or sell products and a joint venture as a separate legal entity established by the strategic partners. Strategic alliances can accomplish many of the same goals as a merger, consolidation, or acquisition without requiring a painstaking process of integration.
They can help a company gain credibility in a new field, expand its market presence, gain access to technology, diversify offerings, and share best practices without forcing the partners to become permanently entangled.
Diversity Offerings
Share Best Practices
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Excellence in Business, 3e