1. Business Studies Chapter 5: Forms of ownership

2. Liability  Liability—the responsibility for debts or legal actions (damages) taken against a business.  Unlimited liability—a legal condition that makes the owner personally responsible for the business’s debts and damages.  Limited liability—a legal condition that limits the amount an individual owner is liable for damages and debts. The limit is equal to the amount that owner has invested in the business.

3. Types of business ownership  Sole proprietorship—a business owned by a single person  Partnership—two or more owners  General partnership  Limited partnership  Corporation—a legal entity, distinct from any individual persons, with the power to own property and conduct business  Shareholders  Private corporation  Public corporation

4. Sole proprietorships  A business owned by a single person  Home based  Consultants  Caterers  Farms  Retail establishments  Nike shop in a shopping mall  7/11  McDonalds

5. AdvantagesDisadvantages Sole proprietorships  Simplicity  Single tax (personal income)  Privacy  Flexibility & control  Few limitations on personal income  Personal satisfaction  Financial liability (personal responsibility)  Unlimited liability  Demands on the owner  Limited managerial view  Resource limitations  No employee benefits  Limited life span

6. Partnerships  An unincorporated company owned by two or more people  General partnership  All partners have authority to make decisions  Partners share liability for the firm’s obligations  Limited partnership  One or more persons act as general partners who run the business and have unlimited liability  Other partners are limited partners who’s liability is limited to the amount they invest in the business

7. Partnerships  Master Limited Partnership (MLP)—allowed to raise money by selling units of its ownership to the public  Energy industry  Limited Liability Partnership (LLP)—provides some liability protection to people in certain professions from major mistakes (e.g., doctors, lawyers, accountants)  Unlimited liability for their investment but limited liability for the partnership as a whole

8. AdvantagesDisadvantages Partnerships  Simplicity  Single layer taxation  More resources  Cost sharing  Broader skill set & experience  Longevity (PWC 1849)  Unlimited liability  Potential for conflict  Expansion, succession, termination issues

9. Corporations  A legal entity (a legal person) distinct from any individuals that can own property and conduct business  Shareholders own the corporation by purchasing shares of stock in the corporation  Private corporation—all the stock is owned by a few individuals or companies and not made available for sale to the public  Public corporations—stock may be sold to anyone who has the means to buy it

10. AdvantagesDisadvantages Corporations  Ability to raise capital  Liquidity  Longevity  Limited liability  Cost and complexity  Reporting requirements  Managerial demands  Possible loss of control  Double taxation  Short-term focus of the stock market

11. Special types of corporations  S corporation—combines the ability to raise capital with limited liability and federal tax advantages.  Number of shareholders limited to 100  Limited liability company (LLC)—combines limited liability with the pass through benefits of a partnership.  No restriction on the number of partners  Member’s role in management not restricted as in limited partnerships, ex. BMW of North America

12. Corporate governance Elect Shareholders (owners of the corporation) Hire Board of Directors (make major strategic decisions) Hire Corporate officers (top executives who run the company)

13. Corporate growth strategies  New products, new markets, or M&A  Merger—two companies agree to combine to make one larger company  Pool assets, or  One company buys the assets of another  Acquisition—one company buys controlling interest in the voting stock of another company  Managers agree to a price and encourage shareholders to vote for the acquisition  Managers don’t want to be taken over and discourage shareholders from voting for the takeover—hostile takeover  LBO—leveraged buyout—when someone buys a company with borrowed funds

14. AdvantagesDisadvantages M&A  Increase buying power  Cross-selling  Increase market share  Gain access to expertise  Reduce overlapping investments & costs  MS has acquired 130 companies since 1987  Agreement on financing  Management structure after the merger  Combining marketing efforts  MIS issues – compatibility  Staffing  Organizational culture issues

15. Strategic alliances & JVs  Strategic alliance—a long-term partnership to jointly develop, produce, or sell products  Joint venture—a separate legal entity established by 2 or more companies