Chapter 4 - Mid-State Technical Collegeinstructor.mstc.edu/instructor/ctomski/chapter 4.pdf ·...

Chapter 4

Choosing a Form of Business Ownership

Copyright © Cengage Learning. All rights reserved. Chapter 4 | Slide 2

Sole Proprietorship

…a business that is owned

(and usually operated) by one person.


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.


SBA Online

The Small Business Administration website

explores topics important to new and established businesses

answers questions such as

• Which legal form is best?

• How to get financing?

offers SBA answer desk where you can submit questions about specific concerns

http://www.sbaonline.sba.gov

http://www.sbaonline.sba.gov/


Forming a Sole Proprietorship

Simplest form of ownership

Easiest to start

Owner decides to start business and begins operations

Common in • Retailing

• Service

• Agriculture


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).

http://www.census.gov/


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).

http://www.census.gov/


Advantages 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 of Sole Proprietorships

Unlimited Liability

Lack of Continuity

Lack of Money

Limited Management Skills

Difficulty in Hiring Employees


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


Types of Partners

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

Limited ─ person who contributes capital to a business but assumes no management responsibility or losses beyond amount he/she invested


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

http://www.naptp.org/




Articles of Partnership

…an agreement listing and explaining the terms of the partnership.


Figure 4.3: Articles of Partnership


Advantages of Partnerships

Ease of Start-up

Availability of Capital and Credit

Personal Interest

Combined Business Skills and Knowledge

Retention of Profits

No Special Taxes


Disadvantages of Partnerships

Unlimited Liability

Management Disagreements

Lack of Continuity

Frozen Investment


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.


Table 4.1: The Seven Largest U.S. Industrial Corporations

Source: Fortune website at www.fortune.com, accessed April 6, 2009.

http://www.fortune.com/


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


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


Table 4.2: 10 Aspects of Business That May Require Legal Help


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.


Charter and Articles of Incorporation

Firm’s name and address

Incorporators’ names and addresses

Purpose of corporation

Maximum amount of stock and types of stock to be issued

Rights and privileges of stockholders

Length of time corporation is to exist


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)


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.

http://www.bea.gov/


Corporate Structure

Board of Directors top governing body of corporation, members are elected by stockholders

Corporate Officers chairman of the board, president, executive vice- presidents, corporate secretary, treasurer, and other top executives appointed by board of directors


Advantages of Corporations

Limited Liability

Ease of Raising Capital

Ease of Transfer of Ownership

Perpetual Life

Specialized Management


Disadvantages of Corporations

Difficulty and Expense of Formation

Government Regulation and Increased Paperwork

Conflict within Corporation

Double Taxation

Lack of Secrecy


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


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


Table 4.4: Some Advantages and Disadvantages of a Regular Corporation, S-Corporation, and Limited-Liability Company


Not-for-Profit Corporations

…a corporation organized to provide a social, educational,

religious, or other service rather than to earn a profit.


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


Corporate Growth from Within

Expand present operations

Introduce/sell new related products

Sell present products to new geographic markets / groups of consumers

Growth from within has relatively little adverse

effect on firm.


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


Types of Mergers

Horizontal between firms that make and sell similar products/services in similar markets

Vertical between firms that operate at different levels in the production and marketing of a product

Conglomerate between firms in completely different industries


Figure 4.5: Three Types of Growth by Merger


Biggest Mergers

Target Acquirer Value ($ 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 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.

http://www.msnbc.msn.com/id/6880681


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”

21st 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


1. In the United States, the form of business ownership that generates the largest amount of sales revenues is the

a) sole proprietorship.

b) partnership.

c) corporation.

d) limited-liability company.

e) S-corporation.

Chapter Quiz


2. Which of the following is not an advantage of a sole proprietorship?

a) Flexibility

b) No special taxes

c) Pride of ownership

d) Retention of all profits

e) Unlimited liability

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) not-for-profit partnership.

b) limited partnership.

c) general partnership.

d) limited-liability company.

e) S-partnership.



4. A corporation that received its corporate charter in California and is doing business in Oregon is called a(n) ____________corporation in Oregon.

a) alien

b) domestic

c) visiting

d) international

e) foreign



5. A ____________ is a merger between firms that make and sell similar products or services in similar industries.

a) horizontal merger

b) vertical merger

c) conglomerate merger

d) hostile takeover

e) tender offer


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