© prentice hall, 2007excellence in business, 3echapter 5 - 1 forms of business ownership

© Prentice Hall, 2007 Excellence in Business, 3e Chapter 5 - 1

Forms of Forms of Business OwnershipBusiness Ownership


Business OwnershipBusiness Ownership

Three Common FormsThree Common Forms

SoleProprietorships

SoleProprietorships PartnershipsPartnerships CorporationsCorporations


Ease of establishment

Self-satisfaction

Privacy

Tax advantages

Unlimited liability

Personal pressure

Difficult to get funding

Limited life

Sole Proprietorship – Sole Proprietorship – an organization that is owned and usually managed

by one person.

Advantages Disadvantages

LiabilityLiability

• Liability – creditors’ claims to the assets of a business (money owed)

• Unlimited liability – a liability that holds the owner fully responsible for a company’s debts

• Limited liability – a claim that holds a firm’s owners responsible for no more than the capital that they have invested



Partnership -Partnership -legal form of business with legal form of business with twotwo or more or more

co-owners.co-owners.

General Partnerships General Partnerships Limited PartnershipsLimited Partnerships

UnlimitedUnlimitedLiabilityLiability

UnlimitedUnlimitedLiabilityLiability

Equal Equal PartnersPartners

Equal Equal PartnersPartners

ShareShareOwnershipOwnership

ShareShareOwnershipOwnership

LimitedLimitedLiabilityLiability

LimitedLimitedLiabilityLiability

UnequalUnequalPartnersPartners

UnequalUnequalPartnersPartners

PassivePassiveInvestorsInvestors

PassivePassiveInvestorsInvestors

PartnersPartners



Easy to EstablishEasy to EstablishEasy to EstablishEasy to Establish Tax AdvantagesTax AdvantagesTax AdvantagesTax Advantages

Strength in NumbersStrength in NumbersStrength in NumbersStrength in Numbers Diversity of SkillsDiversity of SkillsDiversity of SkillsDiversity of Skills

Extended LifeExtended LifeExtended LifeExtended LifeIncreased CapitalIncreased CapitalIncreased CapitalIncreased Capital

Partnership AdvantagesPartnership Advantages


Partnership Partnership DisadvantagesDisadvantages

UnlimitedLiability

UnlimitedLiability

InterpersonalProblems

InterpersonalProblems

UnproductivePartners

UnproductivePartners

ManagingPartner

ManagingPartnerLaw SuitsLaw SuitsDebtsDebts


Partnership AgreementPartnership Agreementa written document that states all the terms of operating the a written document that states all the terms of operating the

partnership by spelling out the partner’s rights and partnership by spelling out the partner’s rights and responsibilities.responsibilities.

Decision-MakingAuthority

DisputeResolution

Divisionof Profits

ExpectedContributions


CorporationsCorporationsa legal entity with the power to own property and conduct a legal entity with the power to own property and conduct

businessbusiness

Enter Into ContractsEnter Into Contracts

Buy and Sell PropertyBuy and Sell Property

Sue and Be SuedSue and Be Sued

Face Limited LiabilityFace Limited Liability


CorporationsCorporations

Access to capital

Limited liability

Increased liquidity

Unlimited life span

Excess paperwork

Burdensome costs

Double taxation

Disclosure requirements

Advantages Disadvantages


Ownership of CorporationsOwnership of Corporations

Shareholders Shareholders

Shareholders

Shareholders

Shareholders

Shareholders

Last Claim on DistributedProfits and Assets

Cash or Stock Dividends

Full Voting Rights

Common Stock

First Claim on Dividendsand Assets

Cash or Stock Dividends

Minimal Voting Rights

Preferred Stock


Public Versus Private Public Versus Private OwnershipOwnership

PublicPublicCorporationCorporation

PublicPublicCorporationCorporation

PrivatePrivateCorporationCorporation

PrivatePrivateCorporationCorporation

Not PubliclyNot PubliclyTradedTraded

Not PubliclyNot PubliclyTradedTraded

FewFewShareholdersShareholders

FewFewShareholdersShareholders

PubliclyPubliclyTradedTradedPubliclyPubliclyTradedTraded

ManyManyShareholdersShareholders

ManyManyShareholdersShareholders


Advantages Advantages of “Going Public”of “Going Public”

• Ready supply of capital

• Increased liquidity (the ability of an asset to be converted into cash quickly and without any price discount)Enhanced visibility

• Independent market value

• Increased flexibility


Disadvantages Disadvantages of “Going Public”of “Going Public”

• High cost

• SEC filing requirements

• Reduced ownership control

• Demands of public exposure

• Pressure for quarterly results

Types of CorporationsTypes of Corporations


Subchapter S Corporation - a cross between a partnership and a corporation. They are taxed like partnerships, but shareholders have limited liability. There are many restrictions, including a limit of 75 shareholders and limits on income sources.

Limited Liability Company - allows firms to pay taxes like partnerships while protecting shareholders from personal liability beyond

their investments. Unlike S corporations, their size is not limited, but their existence is limited to 30 years.

Subsidiary Corporation - partially or wholly owned by another

corporation known as a parent company, which supervises its operations.

Corporations (cont.)Corporations (cont.)• Holding company – special type of parent company

that owns other companies for investment reasons & has little operating control

• Alien corporation – operates in the US but is incorporated in another country

• Foreign or out-of-state corporation - incorporated in one state & does business in several other states– Domestic corporation– Operates only in the state where it is

incorporated



Corporate GovernanceCorporate Governance

CommonShareholders

•Individuals

•Companies

•Non-profits

•Pensions

•Mutual Funds

Boardof Directors

•Dividends

•Corporate Affairs

•Strategic Plans

•Select Officers

•Finances

CorporateOfficers

•Chief Executive

•Chief Financial

•Chief Operations

Employees ofthe Company

•Operations

•Finance

•Marketing

•Personnel

•Engineering

Elect Appoint Hire

ShareholdersShareholders


Board of DirectorsBoard of Directors• Represent the shareholders• Responsible for declaring

dividends• Responsible for guiding

corporate affairs• Responsible for reviewing

long-term strategic plans• Responsible for selecting

corporate officers• Responsible for overseeing

financial performance• Power to vote on major

management decisions

• Several may be inside directors, company employees

• Some boards act independently of the company while others act as rubberstamps

• Directors involved in corporate strategy, evaluation of executives, etc.

• Directors are often compensated with stock to give them a stake in their decisions



Reform: Board-Related Reform: Board-Related IssuesIssues

CompositionComposition

EducationEducation

LiabilityLiability

RecruitingRecruiting


Business CombinationsBusiness Combinations

Merger -Merger -One company buys another (or parts of another) and emerges as controlling corporation

Merger -Merger -One company buys another (or parts of another) and emerges as controlling corporation

Consolidation -An entirely new firm is created by two or more companies that pool their interests

Consolidation -An entirely new firm is created by two or more companies that pool their interests

Leveraged Buy-Outs – Leveraged Buy-Outs – Occurs when one or more individuals purchase a company’s publicly traded stock by using borrowed funds

Leveraged Buy-Outs – Leveraged Buy-Outs – Occurs when one or more individuals purchase a company’s publicly traded stock by using borrowed funds

Acquisitions -Acquisitions -purchasing another company’s voting stock in exchange for cash, stock, security

Acquisitions -Acquisitions -purchasing another company’s voting stock in exchange for cash, stock, security


Types of Business Types of Business MergersMergers

Vertical - Vertical - a company purchases a complementary company at a different level in the “value chain”

Horizontal - Horizontal - involves two similar companies at the same level because they are often between competitors, regulators review these combinations carefully to avoid creating monopolies

Conglomerate -Conglomerate -two firms offer dissimilar products or services, often in widely different industries Market Extension - Market Extension - combines firms that offer similar products and services in different geographic locations

Product Extension - Product Extension - used when a company needs to round out a product line


Mergers and Mergers and AcquisitionsAcquisitions

AdvantagesAdvantagesAdvantagesAdvantages

Economies of ScaleEconomies of ScaleEconomies of ScaleEconomies of Scale

EfficienciesEfficienciesEfficienciesEfficiencies

SynergiesSynergiesSynergiesSynergies

DisadvantagesDisadvantagesDisadvantagesDisadvantages

High-Risk Corporate DebtHigh-Risk Corporate DebtHigh-Risk Corporate DebtHigh-Risk Corporate Debt

Management DistractionsManagement DistractionsManagement DistractionsManagement Distractions

Culture ClashesCulture ClashesCulture ClashesCulture Clashes


Trends in Mergers and Trends in Mergers and AcquisitionsAcquisitions

Year Number Value (in billions)

1970

1975

1980

1985

1990

1995

2000

2003

5,152

2,297

1,889

3,001

2,074

3,510

11,123

8,232

$16

$12

$44

$180

$108

$356

$1,269

$530


Defenses AgainstDefenses AgainstMergers and AcquisitionsMergers and Acquisitions

White KnightWhite KnightWhite KnightWhite Knight

Shark RepellentShark RepellentShark RepellentShark Repellent

Poison PillPoison PillPoison PillPoison Pill

Hostile Hostile TakeoversTakeoversHostile Hostile

TakeoversTakeovers

Tender OffersTender OffersTender OffersTender Offers

Proxy FightsProxy FightsProxy FightsProxy Fights


Strategic Alliances Strategic Alliances and Joint Venturesand Joint Ventures

Gain CredibilityGain Credibility

Expand MarketsExpand Markets

Access TechnologyAccess Technology

Diversity OfferingsDiversity Offerings

Share Best PracticesShare Best Practices

© prentice hall, 2007excellence in business, 3echapter 5 - 1 forms of business ownership

Documents

epartners prentice hall

capital limited liability

partnership agreementa

firms owners responsible

corporations access

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corporationsa legal