Chapter 5 Choosing a Form of Business Ownership. Copyright © Houghton Mifflin Company. All rights...

Chapter 5

Choosing a Formof Business Ownership

Copyright © Houghton Mifflin Company. All rights reserved. 5 | 2

Sole Proprietorships

“…a business that is owned (and usually operated) by one person.”


Forming a Sole Proprietorship

Simplest form of ownershipEasiest to startOwner decides to start business and begins operationsCommon in:

RetailingServiceAgriculture

©2007 Microsoft PowerPoint


Figure 5.1: Relative Percentages of Sole Proprietorships, Partnerships, and

Corporations in the U.S.


Figure 5.2: Total Sales Receiptsof American Businesses


Advantages ofSole Proprietorships

Ease of Start-up & Closure Pride of Ownership Retention of All Profits Flexibility of Being Your Own Boss No Special Taxes


Disadvantages ofSole Proprietorships

Unlimited LiabilityLack of ContinuityLack of MoneyLimited Management SkillsDifficulty 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

© 2007 Digital Vision/Triangle Images


Types of Partners

o General- person who assumes full or shared responsibility for operating a businesso Active in day-to-day business operationso Each partner can enter into contracts on behalf of

other partnerso Assumes unlimited liability

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


Articles of Partnership

“…an agreement listing and explainingthe terms of the 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 LiabilityManagement

DisagreementsLack of ContinuityFrozen Investment

©Digital 2007 Vision/Triangle Images


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.”


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 lawyerWhere to incorporate

Cost of incorporating Advantages/disadvantages of each state’s corporate laws & tax

structureCorporate Location

Domestic corporation- a corporation in state in which it is incorporated

Foreign corporation- a corporation in any state in which is does business except the one in which it is incorporated

Alien corporation- a corporation chartered by a foreign gov’t and conducting business in the U.S.

Organizational Meeting


Corporate Charter

“…a contract between a corporation andthe state in which the state recognizes

the formation of the artificial person thatis the corporation.”


Stockholders’ Rights

Common Stock- owned by individuals who vote on corporate matters, whose claims on profit/assets are subordinate to othersPreferred Stock- owned by individuals/firms who do not have voting rights, whose claims on dividends paid before those of common-stockDividend- a distribution of earnings to stockholdersProxy- legal form listing issues to be decided at stockholders’ meeting and enabling stockholders to transfer voting rights to other individual(s)


Corporate Structure

Board of Directors- top governing body of corporation, members are elected by stockholdersCorporate Officers- chairman of the board, president, executive vice presidents, corporate secretary, treasurer, and other top executive appointed by board of directors


Figure 5.4: Hierarchyof Corporate Structure


Charter and Article ofIncorporation Include:

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


Board FAQ’s

• The average size of boards is 16• Most boards pay members:

– Stock options– Travel reimbursement– Cash stipends

• Directors of top 250 companies average $238,000 - $261,000 (over $1,000 per hour) Source: Steven Hall & Associates 2008 study


FAQ’s

• Most Boards organized into committees (i.e. compensation committee)

• Many Boards have term limits and evaluations of performance

• Boards generally meet every quarter


Boards• Pepsi Cola• Microsoft

• Family Boards

© 2009 South-Western, a division of Cengage Learning23


Advantagesof Corporation

Limited Liability Ease of Raising Capital Ease of Transfer of Ownership Perpetual Life Specialized Management

©2007 Digital Vision/Triangle Images


Disadvantagesof Corporations

Difficulty and Expense of FormationGovernment Regulation and Increased

PaperworkConflict within CorporationDouble TaxationLack of Secrecy


Table 5.1: Largest U.S.Industrial Corporations

Source: Fortune 500. Copyright © 2006 Time, Inc., the Fortune website at www.fortune.com; accessed October 2, 2006.


Largest PrivateCorporations (2004)

Rank Name Industry Rev($M)

1 Cargill Crops $62,900

2 Koch IndustriesOil & Gas $50,000e

3 Mars Food Processing $18,000e

4 Publix Super Markets Retail Grocery $16,946

5 Bechtel Const. Services $16,337

e = Forbes estimate

“Largest Private Cos.”, Forbes.com, http://www.forbes.com/lists/results.jhtml?passListId=21&passYear=2004&passListType=Company&searchParameter1=unset&searchParameter2=unset&resultsStart=1&resultsHowMany=25&resultsSortProperties=%2Bnumberfield1%2C%2Bstringfield8&resultsSortCategoryName=rank&passKeyword=&category1=category&category2=category


Table 5.2: 10 Aspect of Business That May Require Legal Help


Table 5.3: Advantages/Disadvantagesof Forms of Ownership


S-Corporations

S Corporation taxed as partnershipS 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-LiabilityCompanies (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 5.4: Advantages/Disadvantagesof Corporations and LLCs


Not-for-Profit Corporations

“…a corporation organized to provide a social, educational, religious, or other service rather than to earn a profit.”


Cooperatives, JointVentures, and Syndicates

Cooperative- association of individuals or firms, purpose is 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


CorporateGrowth From Within

Expand present operations

Introduce/sell new related products

Sale of present products to new geographic markets/groups of consumers

Has relatively little adverse effect on firm

©2007 Digital Vision


Corporate GrowthThrough Mergers/Acquisitions

Merger- purchase of one corporation by another Hostile takeover- situation in which

management and board of directors of firm targeted for acquisition disapprove of merger Corporate Raider Tender Offer Proxy Fight


The Acquisition ofJordan’s Furniture


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


Biggest TelecomDeals Each Year

Year Value ($B)

2006 $67.0 AT&T bids for BellSouth

2005 $31.5 Telefonica buys 02

2004 $41.0 Cingular buys AT&T Wireless

2003 ----- [no major deals]

2002 $29.2Comcast buys AT&T Broadband

“AT&T + BellSouth by the Numbers”, TeleGeography, March 15,2006, http://www.telegeography.com/wordpress/?m=200603


Figure 5.5: Three Typesof Growth by Merger


Current Merger Trends

o Takeovero Pro- makes company more profitableo Con- does not enhance profitability, only ones who

benefit are investment bankers, brokerage firms, takeover “artists”

o Next Centuryo Cash-rich companies acquire businesses to enhance

their position in the marketplaceo More foreign companies/investors

o Leveraged Buyout (LBO)- purchase arrangement allowing firm’s managers, employees, investors to purchase company, taking firm private

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