1. Choosing a Form of Business Ownership
Chapter Four
Choosing a Form of
Business Ownership

2. Learning Objectives
Describe the advantages and disadvantages of sole proprietorships.
Explain the different types of partners and the importance of partnership agreements.
Describe the advantages and disadvantages of partnerships.
Summarize how a corporation is formed.
Describe the advantages and disadvantages of a corporation.
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3. Learning Objectives
Examine special types of corporations, including S-corporations, limited-liability companies, government-owned corporations, and not-for-profit corporations.
Discuss the purpose of a cooperative, joint venture, and syndicate.
Explain how growth from within and growth through mergers can enable a business to expand.

4. 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

5. Reasons People Go into Business for Themselves
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.

6. Relative Percentages of Sole Proprietorships, Partnerships, and Corporations in the U.S.
Sole proprietorships are most common in retailing, agriculture, and the service industries
Source: U.S. Bureau of the Census, Statistical Abstract of the United States, Washington, D.C., 2008, p. 487 (

7. 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

8. Class Exercise
You want to own and manage your own business. To help you evaluate your chances of success, answer these questions.
Do you have any experience in a business like the one you want to start?
Have you worked for someone else as a supervisor or manager?
Have you saved any money? How much?
Do you know how much money you will need to get your business started?
Do you know how much credit you can get from your suppliers and bankers?
Do you know the good and bad points about going it alone, having a partner, and incorporating your business?
What do you know about your potential customer?

9. 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

10. 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 contribute 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
Master limited partnership (MLP): a business partnership that is owned and managed like a corporation but taxed like a partnership

11. 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

12. 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

13. 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

14. The Seven Largest U.S. Industrial Corporations, Ranked by Sales Revenue
Source: Fortune website at accessed September 12, 2008.

15. Corporate Ownership Corporate ownership Stock Stockholder
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

16. Forming a Corporation Incorporation
The process of forming a corporation
Most experts recommend consulting a lawyer

17. When Legal Help Is Required

18. Forming a Corporation (cont’d)
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.

19. Forming a Corporation (cont’d)
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

20. Forming a Corporation (cont’d)
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
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

21. Forming a Corporation (cont’d)
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

22. Corporate Structure 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

23. Corporate Structure (cont’d)
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

24. Hierarchy of Corporate Structure
Stockholders exercise a great deal of influence through their right to elect the board of directors

25. 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

26. Advantages and Disadvantages

27. Special Types of Business Ownership
S-corporations
A corporation that is taxed as though it were a partnership (income is taxed only as the personal income of stockholders)
Advantages
Avoids double taxation of a corporation
Retains the corporation’s legal benefit of limited liability
S-corporation criteria
No more than 100 stockholders allowed
Stockholders must be individuals, estates, or exempt organizations
There can be only one class of outstanding stock
The firm must be a domestic corporation
There can be no nonresident-alien stockholders
All stockholders must agree to the decision to form an S-corporation

28. Special Types of Business Ownership (cont’d)
Limited-liability company (LLC)
A form of business ownership that provides limited-liability protection and is taxed like a partnership
Advantages
Avoids double taxation of a corporation
Retains the corporation’s legal benefit of limited liability
Provides more management flexibility
Difference between LLC and S-corporation
LLCs not restricted to 100 stockholders
LLCs have fewer restrictions on who can be a stockholder

29. Advantages and Disadvantages

30. Special Types of Business Ownership (cont’d)
Government-owned corporations
A corporation owned and operated by a local, state, or federal government
Purpose
To ensure that a public service is available
Examples
Tennessee Valley Authority (TVA), the National Aeronautics and Space Administration (NASA), and the Federal Deposit Insurance Corporation (FDIC)

31. Special Types of Business Ownership (cont’d)
Not-for-profit corporations
Corporations organized to provide social, educational, religious, or other services, rather than to earn a profit
Charities, museums, private schools, and colleges are organized as not-for-profits primarily to ensure limited liability

32. Cooperatives, Joint Ventures, Syndicates
Associations of individuals or firms whose purpose is to perform some business function for its members
Members benefit from the efficiencies of the cooperatives’ activities, such as reducing unit costs by making bulk purchases and coordinating services such as transportation, processing, and marketing products

33. Cooperatives, Joint Ventures, Syndicates (cont’d)
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
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

34. Corporate Growth Growth from within
Introducing new products
Entering new markets
Growth through mergers and acquisitions
Merger: the purchase of one corporation by another; essentially the same as an acquisition
Hostile takeover: a situation in which the management and board of directors of the firm targeted for acquisition disapprove of the merger
Tender offer: an offer to purchase the stock of a firm targeted for acquisition at a price just high enough to tempt stockholders to sell their shares
Proxy fight: a technique used to gather enough stockholder votes to control the targeted company

35. Corporate Growth (cont’d)
Current merger trends
Takeover advocates say
Companies that are taken over are made more profitable and productive
Proceeds from the sale of non-core subsidiaries help pay off debt or enhance the company
Takeover opponents say
Takeover threats force managers to spend time on defense rather than vital business activities
The only people who benefit from takeovers are investment bankers, brokerage firms, and takeover artists

36. Corporate Growth (cont’d)
Current merger trends
Mergers during the first part of the 21st century will be the result of cash-rich companies looking to enhance their position in the marketplace
There will be more mergers involving companies or investors from other countries
Future mergers and acquisitions will be driven by solid business logic and the desire to compete internationally
There will be more leveraged buyouts
A purchase arrangement that allows a firm’s managers and employees or a group of investors to purchase the company

37. Biggest Mergers Target Acquirer Value Date Mannesmann
($ 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.

38. 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
Source: “Preparing for the Merger/Acquisition Decision—How to Position Your Company in a Consolidating Collaboration & Conferencing Marketplace,” Wainhouse Research, 2004,

39. 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.

40. 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

41. 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.

42. 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

43. 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)

44. 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.

45. 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