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Forms of Ownership

Chapter 5

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Chapter 5 ObjectivesAfter studying this chapter, you will be able to:

• Define sole proprietorship and explain the six advantages and six disadvantages of this ownership model.

• Define partnership and explain the six advantages and three disadvantages of this ownership model.

• Define corporation and explain the four advantages and six disadvantages of this ownership model.

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Chapter 5 Objectives Cont.

• Explain the concept of corporate governance and identify the three groups responsible for ensuring good governance.

• Identify the potential advantages of pursuing mergers and acquisitions as a growth strategy, along with the potential difficulties and risks.

• Define strategic alliances and joint ventures and explain why a company would choose these options over a merger or acquisition.

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Business Ownership

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PartnershipPartnership

Sole Sole ProprietorshipProprietorship

CorporationCorporation

Forms of Business Ownership

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Sole Proprietorship

A sole proprietorship is a business owned by one person (although it may have many employees), and it is the easiest and least expensive form of business to start.

Unlimited liability: A legal condition under which any damages or debts incurred by a business are the owner’s personal responsibility

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Advantages ofSole Proprietorships

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• Simplicity

• Single layer of taxation

• Privacy

• Flexibility and control

• Fewer limitations on personal income

• Personal satisfaction

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Disadvantages ofSole Proprietorships

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• Financial liability

• Demands on the owner

• Limited managerial perspective

• Resource limitations

• No employee benefits for the owner

• Finite life span

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Partnerships

If starting a business on your own seems a little

intimidating, you might decide to share the risks

and rewards of going into business with a partner.

Limited liability: A legal condition in which the

maximum amount each owner is liable for is equal

to whatever amount each invested in the business.

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Partnerships

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General PartnershipsGeneral Partnerships Limited PartnershipsLimited Partnerships

UnlimitedUnlimitedLiabilityLiability

UnlimitedUnlimitedLiabilityLiability

Equal Equal PartnersPartners

Equal Equal PartnersPartners

ShareShareOwnershipOwnership

ShareShareOwnershipOwnership

LimitedLimitedLiabilityLiability

LimitedLimitedLiabilityLiability

UnequalUnequalPartnersPartners

UnequalUnequalPartnersPartners

PassivePassiveInvestorsInvestors

PassivePassiveInvestorsInvestors

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Partnership Advantages

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• Simplicity

• Single layer of taxation

• More resources

• Cost sharing

• Broader skill and experience base

• Longevity

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Partnership Disadvantages

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• Unlimited liability

• Potential for conflict

• Expansion, succession, and termination issues

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The Partnership Agreement

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Decision-MakingAuthority

DisputeResolutionProcedures

Profit-sharing Percentages

Management Responsibilities

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Corporations

• Enter into contracts

• Buy and sell property

• Sue and be sued

• Face limited liability

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Ownership of Corporations

• Shareholders

• Stock Certificates

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Public Versus Public Versus Private OwnershipPrivate Ownership

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Advantages of Corporations

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• Ability to raise capital

• Liquidity

• Longevity

• Limited liabilityLiquidity: A measure of how easily and quickly an asset such as corporate stock can be converted into cash by selling it

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Disadvantages of Corporations

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• Cost and complexity

• Reporting requirements

• Managerial demands

• Possible loss of control

• Double taxation

• Short-term orientation of the stock market

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Corporate Governance

• Describes all the policies, procedures,

relationships, and systems in place to oversee

the successful and legal operation of the

enterprise

• Also refers to the responsibilities and

performance of the board of directors

specifically

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Corporate Governance

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Shareholders

Proxy: A document that authorizes another

person to vote on behalf of a shareholder in a

corporation

Shareholder activism: Activities

undertaken by shareholders to influence

executive decision making in areas ranging from

strategic planning to social responsibility

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Board of Directors

Board of directors:

A group of professionals elected by shareholders

as their representatives, with responsibility for the

overall direction of the company and the selection

of top executives

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Board Issues

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• Composition

• Education

• Liability

• Independent Board Chairs

• Recruiting Challenges

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Corporate Officers

Corporate Officers:

The top executives who run a corporation

Chief Executive Officer (CEO):

The highest-ranking officer of a corporation

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Merger

In a merger, two companies join to form a

single entity. Traditionally, mergers took place

between companies of roughly equal size and

stature, but mergers between companies of vastly

difference sizes is common today.

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Acquisition

In an acquisition, one company simply buys

a controlling interest in the voting stock of another company. Unlike the real or presumed marriage of equals in a merger, the buyer is definitely the dominant player in an acquisition.

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Hostile takeover: Acquisition of another

company against the wishes of management.

Leveraged buyout (LBO): Acquisition of a

company’s publicly traded stock, using funds that

are primarily borrowed, usually with the intent of

using some of the acquired assets to pay back the

loans used to acquire the company.

Hostile Takeovers & Leveraged Buyout (LBO)

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Advantages of Mergers and Acquisitions

• Increase their buying power as a result of their larger size

• Increase revenue by cross-selling products to each other’s customers

• Increase market share by combining product lines

• Gain access to new expertise, systems, and teams of employees

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Disadvantages of Mergers and Acquisitions

• Executives have to agree on how the merger will be financed

• Managers need to decide who will be in charge after they join forces

• Marketing departments need to figure out how to blend product lines, branding strategies, and advertising and sales efforts

• Incompatible information systems

• Companies must often deal with layoffs

• Incompatible organizational cultures

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Types of Mergers

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WhiteWhiteKnightKnightWhiteWhiteKnightKnight

SharkSharkRepellentRepellent

SharkSharkRepellentRepellent

PoisonPoisonPillPill

PoisonPoisonPillPill

Hostile TakeoverHostile TakeoverHostile TakeoverHostile Takeover

Tender OfferTender OfferTender OfferTender Offer Proxy FightProxy FightProxy FightProxy Fight

Defensives against Mergers and Acquisitions

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Strategic Alliances and Joint Ventures

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• Strategic alliance A long-term partnership between companies to jointly develop, produce, or sell products

• Joint venture A separate legal entity established by two or more companies to pursue shared business objectives

Applying What You’ve Learned

1. Define sole proprietorship and explain the six advantages and six disadvantages of this ownership model

2. Define partnership and explain the six advantages and three disadvantages of this ownership model

3. Define corporation and explain the four advantages and six disadvantages of this ownership model

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Applying What You’ve Learned

4. Explain the concept of corporate governance and identify the three groups responsible for ensuring good governance

5. Identify the potential advantages of pursuing mergers and acquisitions as a growth strategy, along with the potential difficulties and risks

6. Define strategic alliance and joint venture and explain why a company would choose these options over a merger or an acquisition

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