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Ferrell Hirt Ferrell

BUSINESSA CHANGING WORLD

EIGHTH EDITION

Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

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CHAPTER 5 Small Business, Entrepreneurship, and Franchising

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CHAPTER 4 Options for Organizing Business

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Starting and GrowingA Business

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Forms of Business Ownership

Sole proprietorship Partnership Corporation

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Comparing Forms of Business Ownership

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Sole Proprietorship

Businesses owned and operated by one individual; the most common form of business organization in the United States

15-20 million in the U.S.

Nearly three-quarters of all businesses

Men 2x more likely than women to start own business

o Restaurants

o Hair salons

o Flower shops

o Dog kennels

o Independent grocery stores

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Advantages Disadvantages

Ease and cost of formation Unlimited liability

Secrecy Limited sources of funds

Distribution and use of profits Limited skills

Flexibility and control of the business

Lack of continuity

Government regulation Lack of Qualified Employees

Taxation Taxation

Sole Proprietorship

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Partnership

A form of business organization defined by the Uniform Partnership Act as “an association of two or more persons who carry on as co-owners of a business profit”

General partnership

Limited partnership

Articles of Partnership• Legal documents that set forth the basic agreement

between partners

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Two Types of Partnerships

General Partnership A partnership that involves a complete sharing in both

the management and the liability of the business

Limited Partnership A business organization that has at least one general partner,

who assumes unlimited liability, and at least one limited partner whose liability is limited to his or her investment in the business

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Articles of Partnership

Name, purpose, location

Duration of the agreement

Authority and responsibility of each partner

Character of partners (i.e., general or limited, active or silent)

Amount of contribution from each partner

Division of profits or losses

Salaries of each partner

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Articles of Partnership

How much each partner is allowed to withdraw

Death of partner

Sale of partnership interest

Arbitration of disputes

Required and prohibited actions

Absence and disability

Restrictive covenants

Buying and selling agreements

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Partnerships

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Advantages Disadvantages

Ease of organization Unlimited liability

Capital & credit Business responsibility

Knowledge & skills Life of the partnership

Decision making Distribution of profits

Regulatory controls Limited sources of funds

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Corporations

Legal entities created by the state whose assets and liabilities are separate from its owners Have most of the rights of people

Typically owned by shareholders /stockholders

A corporation is created (incorporated) under the laws of the state in which it incorporates

The individuals creating the corporation are called incorporators

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Articles of Incorporation

Legal documents filed with basic information about the business with the appropriate state office (often the Secretary of State) Common elements:

Name & address of corporation

Objectives of the corporation

Classes of stock (common, preferred, voting, nonvoting) and number of shares of each class of stock

Financial capital required at time of incorporation

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Articles of Incorporation

Provisions for transferring shares of stock

Regulation of internal corporate affairs

Address of business office

Names and addresses of the initial board of directors

Names and addresses of the incorporators

The state issues a corporate charter based on the information in the articles of incorporation.

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Types of Corporations

A corporation doing business in the state in which it is chartered is a domestic corporation.

When a corporation does business in other states, it is then referred to as a foreign corporation.

If a corporation does business outside the nation in which it is incorporated, it is termed an alien corporation.

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Types of Corporations

Private Corporation A corporation owned by just one or a few people who are

closely involved in managing the business

Public Corporation A corporation whose stock anyone may buy, sell, or trade

Initial Public Offering A private corporation who wishes to go “public” to raise

additional capital and expand. The IPO is selling a corporation’s stock on public markets for the first time

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Types of Corporations

Quasi-Public Corporation Corporation owned and operated by the federal, state,

or local government

NASA, U.S. Postal Service

Non-Profit Corporation Focuses on providing a service rather than earning a profit but is

not owned by a government entity

Mercy Corps., The Conservation Fund

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Elements of a Corporation

Board of Directors: A group of individuals, elected by the stockholders to oversee the general operation of the corporation, who set the corporation’s long-range objectives.

Inside Directors Individuals who serve on a board and are employed by the

corporation (usually executives of the corporation)

Outside Directors Individuals who serve on a board who are not directly

affiliated with the corporation (usually executives of other corporations)

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Stock Ownership

Preferred Stock A special type of stock whose owners, though not generally

having a say in running the company, have a claim to profits before other stockholders do.

Common Stock Stock whose owners have voting rights in the corporation, yet do

not receive preferential treatment regarding dividends.

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Corporations

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Advantages Disadvantages

Limited liability Double taxation

Transfer of ownership Forming a corporation

Perpetual life Disclosure of information

External sources of funds Employee-owner separation

Expansion potential

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Other Types of Business Ownership

Joint Venture A partnership established for a specific project or for a limited

time

Control can be divided equally, or with one party taking more responsibility for decision making

S-Corporation (S-Corp) Corporation taxed as though it were a partnership (no double-

taxation) with restrictions on shareholders.

Very popular with entrepreneurs

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Other Types of Business Ownership:

S-Corporations

Subchapter S-Corporation Popular because the form eliminates double-taxation

Combines the taxation structure of partnerships with legal environment of C-corporations

Qualifications:

• Only 1 class of stock

• Less than 100 shareholders

• Shareholders must be U.S. citizens or residents

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Other Types of Business Ownership:

Limited Liability

Limited Liability Company (LLC) Form of ownership that provides

limited liability and taxation like a partnership but places fewer restrictions on members

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Other Types of Business Ownership: Cooperative

Cooperative (Co-Op) An organization composed of individuals or small

businesses that have banded together to reap the benefits of belonging to a larger organization

Can take many different forms (retail, housing, social, worker)

Co-ops are increasingly popular with small farmers and artisans

Gives small producers more power as a group

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Trends in Business Ownership

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MergerThe combination of two companies (usually corporations) to form a new company

Horizontal merger: When firms that make and sell similar products merge.

Vertical merger: When companies operating at different but related levels of an industry merge.

Conglomerate merger: When firms in unrelated industries merge.

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Trends in Business Ownership

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AcquisitionThe purchase of one company by another, usually by buying its stock and/or assuming its debt.

Corporate raider: A company or individual who wants to acquire or take over another company and first offers to buy some or all of its stock at a premium in a tender offer.

Poison pill: The firm allows stockholders to buy more shares of a stock at lower prices than the current market value to head off a hostile takeover.

Shark repellant: Management requires a large majority of stockholders to approve a takeover.

White knight: A more acceptable firm that is willing to acquire a threatened company.

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Trends in Business Ownership

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Leveraged Buyout (LBO)A purchase in which a group of investors borrows money from banks and other institutions to acquire a company (or a division of one), using the assets of the purchased company to guarantee repayment of the loan.

Mergers and acquisitions (particularly the merger mania in the late 20th century) have been criticized

Executives have to focus excessively on avoiding takeovers, not on managing the business