Chapter 4 Choosing a Form of Business Ownership

Learning Objectives 1. Describe the advantages and disadvantages of sole proprietorships. 2. Explain the different types of partners and the importance of partnership agreements. 3. Describe the advantages and disadvantages of partnerships. 4. Summarize how a corporation is formed. 5. Describe the advantages and disadvantages of a corporation. 6. Examine special types of corporations, including S-corporations, limited-liability companies, and not-for-profit corporations. 7. Discuss the purpose of a cooperative, joint venture, and syndicate. 8. Explain how growth from within and growth through mergers can enable a business to expand. Copyright © Cengage Learning. All rights reserved. Chapter 4 | Slide 2

Sole Proprietorship …a business that is owned (and usually operated) by one person. Copyright

Reasons People Go into Business for Themselves Source: Timothy S. Hatten, Small Business Management: Entrepreneurship and Beyond, 3 rd ed. Copyright © 2006 by Houghton Mifflin Company. Used by permission. Data from A Small Business Primer. Copyright © Cengage Learning. All rights reserved. Chapter 4 | Slide 4

SBA Online The Small Business Administration website Ø explores topics important to new and established businesses Ø answers questions such as • Which legal form is best? • How to get financing? Ø offers SBA answer desk where you can submit questions about specific concerns http: //www. sbaonline. sba. gov Copyright © Cengage Learning. All rights reserved. Chapter 4 | Slide 5

Forming a Sole Proprietorship § Simplest form of ownership § Easiest to start § Owner decides to start business and begins operations § Common in • Retailing • Service • Agriculture Copyright © Cengage Learning. All rights reserved. Chapter 4 | Slide 6

Figure 4. 1: Relative Percentages of Sole Proprietorships, Partnerships, and Corporations in the U. S. Source: U. S. Bureau of the Census, Statistical Abstract of the United States, Washington, D. C. , 2009, p. 483 (www. census. gov). Copyright © Cengage Learning. All rights reserved. Chapter 4 | Slide 7

Figure 4. 2: Total Sales Receipts of American Businesses Source: U. S. Bureau of the Census, Statistical Abstract of the United States, Washington, D. C. , 2009, p. 483 (www. census. gov). Copyright © Cengage Learning. All rights reserved. Chapter 4 | Slide 8

Advantages of Sole Proprietorships ü Ease of Start-up and Closure ü Pride of Ownership ü Retention of All Profits ü Flexibility of Being Your Own Boss ü No Special Taxes Copyright © Cengage Learning. All rights reserved. Chapter 4 | Slide 9

Disadvantages of Sole Proprietorships ü Unlimited Liability ü Lack of Continuity ü Lack of Money ü Limited Management Skills ü Difficulty in Hiring Employees Copyright © Cengage Learning. All rights reserved. Chapter 4 | Slide 10

Partnerships § A voluntary association of 2 or more persons to act as co-owners of a business for profit § Much less common than sole proprietorship or corporation § No legal maximum on number of partners Copyright © Cengage Learning. All rights reserved. Chapter 4 | Slide 11

Types of Partners Ø General ─ person who assumes full or shared responsibility for operating a business § Is active in day-to-day business operations § Can enter into contracts on behalf of other partners § Assumes unlimited liability Ø Limited ─ person who contributes capital to a business but assumes no management responsibility or losses beyond amount he/she invested Copyright © Cengage Learning. All rights reserved. Chapter 4 | Slide 12

Types of Partnerships § General ─ business co-owned by 2 or more general partners who are liable for everything the business does § Limited ─ business co-owned by 1 or more general partners who manage the business and limited partners who invest money in it § Master Limited ─ owned and managed like a corporation but often taxed like a partnership National Association of Publicly Traded Partnerships www. naptp. org Copyright © Cengage Learning. All rights reserved. Chapter 4 | Slide 13

Articles of Partnership …an agreement listing and explaining the terms of the partnership. Copyright

Figure 4. 3: Articles of Partnership Copyright © Cengage Learning. All rights reserved. Chapter

Advantages of Partnerships ü Ease of Start-up ü Availability of Capital and Credit ü Personal Interest ü Combined Business Skills and Knowledge ü Retention of Profits ü No Special Taxes Copyright © Cengage Learning. All rights reserved. Chapter 4 | Slide 16

Disadvantages of Partnerships ü Unlimited Liability ü Management Disagreements ü Lack of Continuity ü

Corporation …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. Copyright © Cengage Learning. All rights reserved. Chapter 4 | Slide 18

Table 4. 1: The Seven Largest U. S. Industrial Corporations Source: Fortune website at www. fortune. com, accessed April 6, 2009. Copyright © Cengage Learning. All rights reserved. Chapter 4 | Slide 19

Corporate Ownership § Stock ─ shares of ownership of a corporation § Stockholder ─ 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 can be bought and sold by any individual Copyright © Cengage Learning. All rights reserved. Chapter 4 | Slide 20

Forming a Corporation § Consult a lawyer § Decide where to incorporate • Cost of incorporating • Advantages/disadvantages of each state’s corporate laws and tax structure § Choose corporate location • Domestic corporation ─ in state in which it is incorporated • Foreign corporation ─ in any state in which it does business except the one in which it is incorporated • Alien corporation ─ chartered by a foreign government and conducting business in the U. S. § Hold organizational meeting Copyright © Cengage Learning. All rights reserved. Chapter 4 | Slide 21

Table 4. 2: 10 Aspects of Business That May Require Legal Help Copyright ©

Corporate Charter …a contract between a corporation and the state in which the state recognizes the formation of the artificial person that is the corporation. Copyright © Cengage Learning. All rights reserved. Chapter 4 | Slide 23

Charter and Articles of Incorporation ü Firm’s name and address ü Incorporators’ names and addresses ü Purpose of corporation ü Maximum amount of stock and types of stock to be issued ü Rights and privileges of stockholders ü Length of time corporation is to exist Copyright © Cengage Learning. All rights reserved. Chapter 4 | Slide 24

Stockholders’ Rights § Common Stock owned by individuals who vote on corporate matters and whose claims on profit/assets are subordinate to others § Preferred Stock owned by individuals/firms who do not have voting rights, whose claims on dividends are paid before those of common-stock owners § Dividend a distribution of earnings to stockholders § Proxy legal form listing issues to be decided at stockholders’ meeting and enabling stockholders to transfer voting rights to other individual(s) Copyright © Cengage Learning. All rights reserved. Chapter 4 | Slide 25

Corporate Dividends Paid to Stockholders Spotlight Source: U. S. Department of Commerce Bureau of Economic Analysis website at www. bea. gov, accessed April 13, 2009. Copyright © Cengage Learning. All rights reserved. Chapter 4 | Slide 26

Corporate Structure Ø Board of Directors top governing body of corporation, members are elected by stockholders Ø Corporate Officers chairman of the board, president, executive vicepresidents, corporate secretary, treasurer, and other top executives appointed by board of directors Copyright © Cengage Learning. All rights reserved. Chapter 4 | Slide 27

Advantages of Corporations ü Limited Liability ü Ease of Raising Capital ü Ease of Transfer of Ownership ü Perpetual Life ü Specialized Management Copyright © Cengage Learning. All rights reserved. Chapter 4 | Slide 28

Disadvantages of Corporations ü Difficulty and Expense of Formation ü Government Regulation and Increased Paperwork ü Conflict within Corporation ü Double Taxation ü Lack of Secrecy Copyright © Cengage Learning. All rights reserved. Chapter 4 | Slide 29

Table 4. 3: Some Advantages and Disadvantages of a Sole Proprietorship, Partnership, and Corporation

S-Corporation § Corporation taxed as partnership § Criteria: • No more than 100 stockholders • Stockholders must be individuals, estates, or • • exempt organizations Only 1 class of stock Must be domestic corporation No nonresident-alien stockholders All stockholders must agree to S-corporation Copyright © Cengage Learning. All rights reserved. Chapter 4 | Slide 31

Limited-Liability Company (LLC) § Provides limited liability protection, taxed like a partnership § Advantages: • With 2 or more members = taxed as partnership avoiding double taxation, 1 member = taxed as sole proprietorship • Extends protection of personal assets • More management flexibility when compared to corporations Copyright © Cengage Learning. All rights reserved. Chapter 4 | Slide 32

Table 4. 4: Some Advantages and Disadvantages of a Regular Corporation, S-Corporation, and Limited-Liability

Not-for-Profit Corporations …a corporation organized to provide a social, educational, religious, or other service rather than to earn a profit. Copyright © Cengage Learning. All rights reserved. Chapter 4 | Slide 34

Cooperatives, Joint Ventures, and Syndicates § Cooperative association of individuals or firms organized to perform some business function for members § Joint Venture agreement between 2 or more groups to form business entity to achieve specific goal or operate for specific period § Syndicate temporary association of individuals or firms organized to perform specific task requiring large amount of capital Copyright © Cengage Learning. All rights reserved. Chapter 4 | Slide 35

Corporate Growth from Within ü Expand present operations ü Introduce/sell new related products ü Sell present products to new geographic markets / groups of consumers Growth from within has relatively little adverse effect on firm. Copyright © Cengage Learning. All rights reserved. Chapter 4 | Slide 36

Corporate Growth Through Mergers/Acquisitions § Merger purchase of one corporation by another § Hostile takeover purchase in which management and board of directors of firm targeted for acquisition disapprove of merger • Corporate raider • Tender offer • Proxy fight Copyright © Cengage Learning. All rights reserved. Chapter 4 | Slide 37

Types of Mergers Ø Horizontal between firms that make and sell similar products/services in similar markets Ø Vertical between firms that operate at different levels in the production and marketing of a product Ø Conglomerate between firms in completely different industries Copyright © Cengage Learning. All rights reserved. Chapter 4 | Slide 38

Figure 4. 5: Three Types of Growth by Merger Copyright © Cengage Learning. All

Biggest Mergers Target Acquirer Value Date ($ billions) 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 Smith. Kline Glaxo Wellcome 79. 6 12/2000 Ameritech SBC Communications 76. 2 10/1999 GTE Bell Atlantic 74. 9 6/2000 Aventis SA Sanofi-Synthelabo 71. 3 6/2004 Amoco British Petroleum 64. 3 12/1998 Source: MSNBC, www. msnbc. msn. com/id/6880681, February 15, 2009. Copyright © Cengage Learning. All rights reserved. Chapter 4 | Slide 40

Current Merger Trends § Takeover • Pro: makes company more profitable • Con: does not enhance profitability; only ones who benefit are investment bankers, brokerage firms, takeover “artists” § 21 st Century • Cash-rich companies acquire businesses to enhance their position in the marketplace • More foreign companies/investors § Leveraged Buyout (LBO) • purchase arrangement allowing firm’s managers, employees, investors to purchase company, taking firm private Copyright © Cengage Learning. All rights reserved. Chapter 4 | Slide 41

Chapter Quiz 1. In the United States, the form of business ownership that generates the largest amount of sales revenues is the a) b) c) d) e) sole proprietorship. partnership. corporation. limited-liability company. S-corporation. Copyright © Cengage Learning. All rights reserved. Chapter 4 | Slide 42

Chapter Quiz (cont. ) 2. Which of the following is not an advantage of a sole proprietorship? a) b) c) d) e) Flexibility No special taxes Pride of ownership Retention of all profits Unlimited liability Copyright © Cengage Learning. All rights reserved. Chapter 4 | Slide 43

Chapter Quiz (cont. ) 3. A business co-owned by one or more general partners who manage the business and limited partners who invest money in it is called a a) b) c) d) e) not-for-profit partnership. limited partnership. general partnership. limited-liability company. S-partnership. Copyright © Cengage Learning. All rights reserved. Chapter 4 | Slide 44

Chapter Quiz (cont. ) 4. A corporation that received its corporate charter in California and is doing business in Oregon is called a(n) ______corporation in Oregon. a) b) c) d) e) alien domestic visiting international foreign Copyright © Cengage Learning. All rights reserved. Chapter 4 | Slide 45

Chapter Quiz (cont. ) 5. A ______ is a merger between firms that make and sell similar products or services in similar industries. a) b) c) d) e) horizontal merger vertical merger conglomerate merger hostile takeover tender offer Copyright © Cengage Learning. All rights reserved. Chapter 4 | Slide 46