Chapter 4 Selecting a Form of Business Ownership
Chapter 4: Selecting a Form of Business Ownership Exploring Business 2. 0 © 2012 Flat World Knowledge 4 -1
Chapter Objectives 1. 2. 3. 4. 5. 6. 7. 8. 4 -2 Identify the questions to ask in choosing the appropriate form of ownership for a business Describe the sole proprietorship form of organization, and specify its advantages and disadvantages Identify the different types of partnerships and explain the importance of a partnership agreement Describe the advantages and disadvantages of the partnership form of organization Explain how corporations are formed and how they operate Discuss the advantages and disadvantages of the corporate form of ownership Examine special types of business ownership, including S-corporations, limited -liability companies, cooperatives, and not-for-profit corporations Define mergers and acquisitions, and explain why companies are motivated to merge or acquire other companies Exploring Business 2. 0 © 2012 Flat World Knowledge
Factors to Consider in Selecting Legal Form 1) 2) 3) 4) 5) 6) 7) 8) What are you willing to do? How much control would you like? Share profits? Special Taxes? Skills Needed? Business continuance? Financing Needs? Liability exposure? Exploring Business 2. 0 © 2012 Flat World Knowledge 4 -3
Sole Proprietorship 4 -4 “…a business owned by only one person. ” Exploring Business 2. 0 © 2012 Flat World Knowledge
Positive Characteristics of Sole Proprietorship RMost common- 72% REasiest and cheapest RFew government regulations RComplete Control RGet all earned income RNo special taxes Exploring Business 2. 0 © 2012 Flat World Knowledge 4 -5
Negative Characteristics of Sole Proprietorship TSupply all talents TDeath = dissolution TOwn Resources = financing TUnlimited liability Exploring Business 2. 0 © 2012 Flat World Knowledge 4 -6
Sole Proprietorship & Unlimited Liability Exploring Business 2. 0 © 2012 Flat World Knowledge 4 -7
General Partnership “…a business owned jointly by two or more people. ” Exploring Business 2. 0 © 2012 Flat World Knowledge 4 -8
Characteristics of General Partnership R 10% of businesses RSome large = Big 4 accounting firms RRelatively easy & inexpensive RShared responsibility & talent RFinancing easier RContinuity not issue RNo special taxes T More complex than sole proprietorship TDisputes among partners TUnlimited liability including for partner actions TShared decisions TShare profits Exploring Business 2. 0 © 2012 Flat World Knowledge 4 -9
General Partnership & Unlimited Liability Exploring Business 2. 0 © 2012 Flat World Knowledge 4 -10
Partnership Agreement ? Cash/Contribution of partners ? Division of partnership income/loss ? Partner responsibilities ? Conditions for sale ? Conditions for dissolving ? Conditions for settling disputes Exploring Business 2. 0 © 2012 Flat World Knowledge
Limited Partnership 4 -12 ØHas two types of partners: • General- runs business and responsible for liability • Limited- limited involvement, losses = investment Exploring Business 2. 0 © 2012 Flat World Knowledge
Limited Partnership Limited Partner General Partner Limited Partner Exploring Business 2. 0 © 2012 Flat World Knowledge
Corporation 4 -14 “…a legal entity separate from the parties who own it. ” Exploring Business 2. 0 © 2012 Flat World Knowledge
Characteristics of Corporation as Legal Entity 4 -15 1) 2) 3) 4) 5) Enter into binding contracts Buy/Sell property Sue/Be sued Responsible for all actions Taxed Exploring Business 2. 0 © 2012 Flat World Knowledge
Types of U. S. Businesses Exploring Business 2. 0 © 2012 Flat World Knowledge 4 -16
Characteristics of Shareholders 4 -17 v. Invest money (stock or shares) v. Ownership % = % of total shares v. Elects Board of Directors Exploring Business 2. 0 © 2012 Flat World Knowledge
Board of Directors 1) 2) 3) 4) 5) 6) 7) Outside group of people Responsible for governing Oversees major policies & decisions Sets goals Holds management accountable Hires/Evaluates CEO Approves dividends Exploring Business 2. 0 © 2012 Flat World Knowledge 4 -18
Corporation • Benefits RLimited Liability RFinancial Resources RSpecialized management R Continuity & transferability • Drawbacks TGoals of management & shareholders differ TCostly to set up TRegulation & Gov’t Oversight TDouble taxation Exploring Business 2. 0 © 2012 Flat World Knowledge 4 -19
Privately-Held Corporation 4 -20 “…stock is held by only a few individuals. . . not allowed to sell it to the general public. ” Exploring Business 2. 0 © 2012 Flat World Knowledge
Other Types of Business Ownership S-Corp. § Taxed only once § Limited liability protection § Qualify • • <100 stockholders U. S. resident/citizen 100% agreement on decision to form Restrictions on profit sharing Limited-Liability Corp. § Members not personally liable § Taxed once § No ownership restrictions Exploring Business 2. 0 © 2012 Flat World Knowledge 4 -21
Other Types of Business Ownership (cont’d) Cooperatives § Business owned by those using services § Shares financial success with members Not-For-Profit Corp. § Public service rather than financial gain § Exempt from taxes § Contributions tax deductible Exploring Business 2. 0 © 2012 Flat World Knowledge 4 -22
Merger V. Acquisition t. Merger- two companies combine to form new company t. Acquisition- purchase of one company by another Exploring Business 2. 0 © 2012 Flat World Knowledge 4 -23
Motives Behind Mergers & Acquisitions 1) Gain complementary products 2) Attain new markets or distribution channels 3) Realize more efficient economies of scale Exploring Business 2. 0 © 2012 Flat World Knowledge 4 -24
Hostile Takeover “…a takeover resisted by the targeted company’s management and its board of directors. ” Exploring Business 2. 0 © 2012 Flat World Knowledge 4 -25
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