1. © Prentice Hall, 2007Excellence in Business, 3eChapter 5 - 1 Forms of Business Ownership

2. © Prentice Hall, 2007Excellence in Business, 3eChapter 5 - 2 Business Ownership Three Common Forms Sole Proprietorships Sole Proprietorships Partnerships Corporations

3. © Prentice Hall, 2007Excellence in Business, 3eChapter 5 - 3 Ease of establishment Self-satisfaction Privacy Tax advantages Unlimited liability Personal pressure Difficult to get funding Limited life Sole Proprietorship – an organization that is owned and usually managed by one person. AdvantagesDisadvantages

4. Liability Liability – creditors’ claims to the assets of a business (money owed) Unlimited liability – a liability that holds the owner fully responsible for a company’s debts Limited liability – a claim that holds a firm’s owners responsible for no more than the capital that they have invested © Prentice Hall, 2007Excellence in Business, 3eChapter 5 - 4

5. © Prentice Hall, 2007Excellence in Business, 3eChapter 5 - 5 Partnership - legal form of business with two or more co- owners. General Partnerships Limited Partnerships UnlimitedLiabilityUnlimitedLiability EqualPartnersEqualPartners ShareOwnershipShareOwnershipLimitedLiabilityLimitedLiability UnequalPartnersUnequalPartners PassiveInvestorsPassiveInvestors

6. Partners © Prentice Hall, 2007Excellence in Business, 3eChapter 5 - 6

7. © Prentice Hall, 2007Excellence in Business, 3eChapter 5 - 7 Easy to Establish Tax Advantages Strength in Numbers Diversity of Skills Extended Life Increased Capital Partnership Advantages

8. © Prentice Hall, 2007Excellence in Business, 3eChapter 5 - 8 Partnership Disadvantages Unlimited Liability Unlimited Liability Interpersonal Problems Interpersonal Problems Unproductive Partners Unproductive Partners Managing Partner Managing Partner Law Suits Debts

9. © Prentice Hall, 2007Excellence in Business, 3eChapter 5 - 9 Partnership Agreement a written document that states all the terms of operating the partnership by spelling out the partner’s rights and responsibilities. Decision-Making Authority Dispute Resolution Division of Profits Expected Contributions

10. © Prentice Hall, 2007Excellence in Business, 3eChapter 5 - 10 Corporations a legal entity with the power to own property and conduct business Enter Into Contracts Buy and Sell Property Sue and Be Sued Face Limited Liability

11. © Prentice Hall, 2007Excellence in Business, 3eChapter 5 - 11 Corporations  Access to capital  Limited liability  Increased liquidity  Unlimited life span  Excess paperwork  Burdensome costs  Double taxation  Disclosure requirements AdvantagesDisadvantages

12. © Prentice Hall, 2007Excellence in Business, 3eChapter 5 - 12 Ownership of Corporations 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

13. © Prentice Hall, 2007Excellence in Business, 3eChapter 5 - 13 Public Versus Private Ownership PublicCorporationPublicCorporationPrivateCorporationPrivateCorporation Not Publicly Traded TradedFewShareholdersFewShareholdersPubliclyTradedPubliclyTradedManyShareholdersManyShareholders

14. © Prentice Hall, 2007Excellence in Business, 3eChapter 5 - 14 Advantages of “Going Public” Ready supply of capital Increased liquidity (the ability of an asset to be converted into cash quickly and without any price discount) Enhanced visibility Independent market value Increased flexibility

15. © Prentice Hall, 2007Excellence in Business, 3eChapter 5 - 15 Disadvantages of “Going Public” High cost SEC filing requirements Reduced ownership control Demands of public exposure Pressure for quarterly results

16. Types of Corporations © Prentice Hall, 2007Excellence in Business, 3eChapter 5 - 16 Subchapter S Corporation - a cross between a partnership and a corporation. They are taxed like partnerships, but shareholders have limited liability. There are many restrictions, including a limit of 75 shareholders and limits on income sources. Limited Liability Company - allows firms to pay taxes like partnerships while protecting shareholders from personal liability beyond their investments. Unlike S corporations, their size is not limited, but their existence is limited to 30 years. Subsidiary Corporation - partially or wholly owned by another corporation known as a parent company, which supervises its operations.

17. Corporations (cont.) Holding company – special type of parent company that owns other companies for investment reasons & has little operating control Alien corporation – operates in the US but is incorporated in another country Foreign or out-of-state corporation - incorporated in one state & does business in several other states –Domestic corporation –Operates only in the state where it is incorporated © Prentice Hall, 2007Excellence in Business, 3eChapter 5 - 17

18. © Prentice Hall, 2007Excellence in Business, 3eChapter 5 - 18 Corporate Governance Common Shareholders Individuals Companies Non-profits Pensions Mutual Funds Board of Directors Dividends Corporate Affairs Strategic Plans Select Officers Finances Corporate Officers Chief Executive Chief Financial Chief Operations Employees of the Company Operations Finance Marketing Personnel Engineering ElectAppointHire

19. © Prentice Hall, 2007Excellence in Business, 3eChapter 5 - 19

20. Shareholders © Prentice Hall, 2007Excellence in Business, 3eChapter 5 - 20

21. Board of Directors Represent the shareholders Responsible for declaring dividends Responsible for guiding corporate affairs Responsible for reviewing long-term strategic plans Responsible for selecting corporate officers Responsible for overseeing financial performance Power to vote on major management decisions Several may be inside directors, company employees Some boards act independently of the company while others act as rubberstamps Directors involved in corporate strategy, evaluation of executives, etc. Directors are often compensated with stock to give them a stake in their decisions © Prentice Hall, 2007 Excellence in Business, 3eChapter 5 - 21

22. © Prentice Hall, 2007Excellence in Business, 3eChapter 5 - 22 Reform: Board-Related Issues Composition Education Liability Recruiting

23. © Prentice Hall, 2007Excellence in Business, 3eChapter 5 - 23 Business Combinations Merger - Merger - One company buys another (or parts of another) and emerges as controlling corporation Merger - Merger - One company buys another (or parts of another) and emerges as controlling corporation Consolidation -An entirely new firm is created by two or more companies that pool their interests Consolidation -An entirely new firm is created by two or more companies that pool their interests Leveraged Buy-Outs – Occurs when one or more individuals purchase a company’s publicly traded stock by using borrowed funds Leveraged Buy-Outs – Occurs when one or more individuals purchase a company’s publicly traded stock by using borrowed funds Acquisitions - Acquisitions - purchasing another company’s voting stock in exchange for cash, stock, security Acquisitions - Acquisitions - purchasing another company’s voting stock in exchange for cash, stock, security

24. © Prentice Hall, 2007Excellence in Business, 3eChapter 5 - 24 Types of Business Mergers Vertical - Vertical - a company purchases a complementary company at a different level in the “value chain” Horizontal - Horizontal - involves two similar companies at the same level because they are often between competitors, regulators review these combinations carefully to avoid creating monopolies Conglomerate - Conglomerate - two firms offer dissimilar products or services, often in widely different industries Market Extension - Market Extension - combines firms that offer similar products and services in different geographic locations Product Extension - Product Extension - used when a company needs to round out a product line

25. © Prentice Hall, 2007Excellence in Business, 3eChapter 5 - 25 Mergers and Acquisitions AdvantagesAdvantages Economies of Scale EfficienciesEfficiencies SynergiesSynergiesDisadvantagesDisadvantages High-Risk Corporate Debt Management Distractions Culture Clashes

26. © Prentice Hall, 2007Excellence in Business, 3eChapter 5 - 26 Trends in Mergers and Acquisitions YearNumberValue (in billions) 1970 1975 1980 1985 1990 1995 2000 2003 5,152 2,297 1,889 3,001 2,074 3,510 11,123 8,232 $16 $12 $44 $180 $108 $356 $1,269 $530

27. © Prentice Hall, 2007Excellence in Business, 3eChapter 5 - 27 Defenses Against Mergers and Acquisitions White Knight Shark Repellent Poison Pill HostileTakeoversHostileTakeovers Tender Offers Proxy Fights

28. © Prentice Hall, 2007Excellence in Business, 3eChapter 5 - 28 Strategic Alliances and Joint Ventures Gain Credibility Expand Markets Access Technology Diversity Offerings Share Best Practices