Types of Organizations
Forms of Business Ownership
Pharmaceutical company
Rug & upholstery
Real estate company
Car dealership
Vermont Banker’s Association
Jewelry manufacturing and imports
Advertisement company
EMC Technology
Dairy farm Law firm
Experian Information Solutions (worldwide)
Apartment management company / boat cruises
Telephone device company
Internet company
Trading company
Bicycle & Sports company
Your family’s involvement in business / 3 forms of ownership
3 major forms of business1. Sole / single proprietorship
One owner Source of investment: personal funds Examples: bakery, flowershop, meat market
2. Partnership 2+ owners, general partners, limited partners Source of investment: personal funds of partners Examples: law / accounting firms, medical / dental practices
Combination: Cooperatives a combination of several sole proprietorships
and/or partnerships for greater production and marketing power
3 major forms of business (cont’d)
Corporation Owned by the shareholders = investors Under control of the Board of Directors,
which is elected by the stockholders Source of investment: stock issues
3
Proportions of U.S. Firms in Terms of Type of Business and Sales Revenue
Sole Proprietorship/Partnership
Advantages
Freedom
Simple to form
Low start up costs
Tax benefits
DisadvantagesUnlimited LiabilityLimited resourcesLimited
fundraising capability
Lack of continuityUnlimited LiabilityLegal principle holding owners responsible for
paying off all debts of a business
Stock: A share of ownership in a corporationTwo types: Common Stock & Preferred Stock
How a corporation issues Stock
Corporation XYZShareholders of Corporation XYZ
(Investment firms)
Other Investors
issues (= sells) stock (= shares)
pay $$$
IPO
Transfer of ownership in a corporation
Corporation XYZ Shareholders of Corporation XYZ
Other investors
Exchange stock (= shares)
CorporationAdvantages Limited financial
liability Ease of transfer of
ownership Legal entity Perpetual lifeEasier access to $$
$ / capital to grow the business (= stronger fundraising capability)
Disadvantages Double taxation Complicated and
expensive to form and manage
Subject to disclosure requirements by the government (the SEC = Securities & Exchange Commission)
The concept of Double Taxation
Income StatementCorporation
Sales$100
Expenses 80
Pre-tax income $ 20
Taxes (e.g. 50%) 10
Net income $ 10
Shareholder‘s Personal Income
Statement
Income from dividends $10
Taxes (e.g. 30%) $ 3Net income $ 7
Role of the (common) Stockholders (= Owners)
Rights Elect the Board of
Directors Benefit from stock
appreciation (increase in value)
Receive dividends Appoint auditors to
judge the company’s financial statements
Approve the issue of new shares / stocks or the repurchase of existing stocks
Risks The value of stock
declines. Dividends are cut or not
paid. In case of bankruptcy,
the stockholders are last in line to receive compensation (usually nothing is left).
Roles & Reporting Relationships
elect
hires / appoints
Role of the Board of DirectorsResponsibilities: Represent the stockholders Fulfill objective: maximize shareholders’ wealth Make sure that management acts in the best interest
of stockholders Hire the company president Declare dividends Set policy Focus on “big picture” issues, not day-to-day
managemento Strategic planningo Financial goal settingo Mergers and acquisitions
Role of the President / CEO (Chief Executive Officer)
Manage the day-to-day operationsHire and supervise other managers
Limited Liability Company(LLC)
A type of general partnershipPartners taxed at personal levelProvides limited liability for the partnersLaws and liability protection vary by stateRelatively new legal structure for a
business
Merger: The union of two corporations to form a new corporation: Former
companies cease to exist as independent companies.
Acquisition: A larger company buying a smaller one: Old company ceases to exist as
an independent entity.
Divestiture A firm selling off one or more of its business units (often unrelated or
underperforming)
Spin-off Setting up one or more of the company’s units as new businesses
(purpose: to raise capital): Giving a corporate business unit to shareholders who now own stock in the business unit as an independent company. They still own original company shares.
Joint venture 2 companies setting up a new (outside) company for collaboration
and joint ownership, often in another country: Both original companies continue to exist independently.
Special forms of changes in ownership
In the news --Examples of changes in ownership
1. United and Continental to merge. UAL Corp.'s United Airlines announced on Monday it will merge with Continental Airlines in a deal worth $3.2 billion, creating the world's largest airline. CNNMoney.com, 5/3/2010
2. Restructuring World: Major Spin-Offs From Major Companies. Motorola Inc. (NYSE: MOT) has restructured literally for almost the entire time I have covered equities. The mobile communications technology giant is about to be much different after its cell phone spin-off comes. 6/21/2010
3. BP, other oil companies divest less-significant propertiesBP's sale of oilfields and other energy assets to cover costs of the Gulf of Mexico oil spill has inspired other oil companies, including Royal Dutch Shell and ExxonMobil, to divest less important properties. Bloomberg Businessweek (1/13/2011)
4. Nokia, Pearson Set Up Digital Education Joint Venture In China. Nokia and education company Pearson have formed a joint venture in China dubbed Beijing Mobiledu Technologies… The new joint venture company aims to deliver a wide range of services to meet the demand for digital education in China. TechCrunch, 2/1/2010
Stakeholders
Anyone impacted by actions of a company (except for competitors)
Key stakeholder groups: The company and its employees Customers Investors (debt and equity) Society
How Does Type of Business Organization Impact Stakeholders?
Investors as stakeholders: Risk varies by structure. Much lower risk for corporations and LLCs. May receive dividends with corporations, and have the chance for stock value to
increase in a liquid trading market. The company as a stakeholder:
Funding ability, and therefore the ability to grow, varies by structure. Much stronger for corporations.
Society as a stakeholder: Greater growth potential enables corporations to provide more jobs, develop
worldwide, invest more in R&D to develop new products, etc. However, society has seen the need to regulate corporate power and disclosure
(for public corporations). Customers as stakeholders:
Corporations may have greater capacity to develop and distribute products; smaller companies (sole proprietorships, partnerships) may have closer customer ties and provide customized service.