chapter 4 choosing a form of business ownership. copyright © cengage learning. all rights reserved....

Chapter 4

Choosing a Formof Business Ownership

Copyright © Cengage Learning. All rights reserved. Chapter 4 | Slide 2

Learning Objectives

1. Describe the advantages and disadvantages of sole proprietorships.

2. Explain the different types of partners and the importance of partnership agreements.

3. Describe the advantages and disadvantages of partnerships.4. Summarize how a corporation is formed.5. Describe the advantages and disadvantages of a corporation.6. Examine special types of corporations, including S-corporations,

limited-liability companies, and not-for-profit corporations.7. Discuss the purpose of a cooperative, joint venture, and

syndicate.8. Explain how growth from within and growth through mergers can

enable a business to expand.


Sole Proprietorship

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


Reasons People Go into Business for Themselves

Source: Timothy S. Hatten, Small Business Management: Entrepreneurship and Beyond, 3rd ed. Copyright © 2006 by Houghton Mifflin Company. Used by permission. Data from A Small Business Primer.


SBA Online

The Small Business Administration website

explores topics important to new and established businesses

answers questions such as

• Which legal form is best?

• How to get financing?

offers SBA answer desk where you can submit questions about specific concerns

http://www.sbaonline.sba.gov


Forming a Sole Proprietorship

Simplest form of ownership

Easiest to start

Owner decides to start business and begins operations

Common in• Retailing• Service• Agriculture


Figure 4.1: Relative Percentages of Sole Proprietorships, Partnerships, and Corporations in the

U.S.

Source: U.S. Bureau of the Census, Statistical Abstract of the United States, Washington,D.C., 2009, p. 483 (www.census.gov).


Figure 4.2: Total Sales Receiptsof American Businesses

Source: U.S. Bureau of the Census, Statistical Abstract of the United States,Washington, D.C., 2009, p. 483 (www.census.gov).


Advantages ofSole Proprietorships

Ease of Start-up and Closure

Pride of Ownership

Retention of All Profits

Flexibility of Being Your Own Boss

No Special Taxes


Disadvantages ofSole Proprietorships

Unlimited Liability

Lack of Continuity

Lack of Money

Limited Management Skills

Difficulty 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


Types of Partners

General ─ person who assumes full or shared responsibility for operating a business Is active in day-to-day business operations Can enter into contracts on behalf of other partners Assumes unlimited liability

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


Types of Partnerships

General ─ business co-owned by 2 or more general partners who are liable for everything the business does

Limited ─ business co-owned by 1 or more general partners who manage the business and limited partners who invest money in it

Master Limited ─ owned and managed like a corporation but often taxed like a partnership

National Association of Publicly Traded Partnerships

www.naptp.org


Articles of Partnership

…an agreement listing and explainingthe terms of the partnership.


Figure 4.3: Articles of 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 Liability

Management Disagreements

Lack of Continuity

Frozen Investment


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.


Table 4.1: The Seven Largest U.S.Industrial Corporations

Source: Fortune website at www.fortune.com, accessed April 6, 2009.


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 lawyer Decide where to incorporate

• Cost of incorporating• Advantages/disadvantages of each state’s corporate laws and

tax structure

Choose corporate location• Domestic corporation ─ in state in which it is incorporated• Foreign corporation ─ in any state in which it does business

except the one in which it is incorporated• Alien corporation ─ chartered by a foreign government and

conducting business in the U.S.

Hold organizational meeting


Table 4.2: 10 Aspects of Business That May Require Legal Help


Corporate Charter

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

the formation of the artificial person that is the corporation.


Charter and Articles ofIncorporation

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


Stockholders’ Rights

Common Stockowned by individuals who vote on corporate matters and whose claims on profit/assets are subordinate to others

Preferred Stockowned by individuals/firms who do not have voting rights, whose claims on dividends are paid before those of common-stock owners

Dividenda distribution of earnings to stockholders

Proxylegal form listing issues to be decided at stockholders’ meeting and enabling stockholders to transfer voting rights to other individual(s)


Corporate Dividends Paid to Stockholders

Spotlight

Source: U.S. Department of Commerce Bureau of Economic Analysiswebsite at www.bea.gov, accessed April 13, 2009.


Corporate Structure

Board of Directorstop governing body of corporation, members are elected by stockholders

Corporate Officerschairman of the board, president, executive vice- presidents, corporate secretary, treasurer, and other top executives appointed by board of directors


Advantages of Corporations

Limited Liability

Ease of Raising Capital

Ease of Transfer of Ownership

Perpetual Life

Specialized Management


Disadvantages of Corporations

Difficulty and Expense of Formation

Government Regulation and Increased Paperwork

Conflict within Corporation

Double Taxation

Lack of Secrecy


Table 4.3: Some Advantages and Disadvantages of a Sole Proprietorship, Partnership, and Corporation


S-Corporation

Corporation taxed as partnership 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-LiabilityCompany (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 4.4: Some Advantages and Disadvantages of a Regular Corporation, S-Corporation, and Limited-Liability

Company


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

Cooperativeassociation of individuals or firms organized to perform some business function for members

Joint Ventureagreement between 2 or more groups to form business entity to achieve specific goal or operate for specific period

Syndicatetemporary 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 Sell present products to

new geographic markets / groups of consumers

Growth from within has relatively little adverse

effect on firm.


Corporate GrowthThrough Mergers/Acquisitions

Merger purchase of one corporation by another

Hostile takeoverpurchase in which management and board of directors of firm targeted for acquisition disapprove of merger• Corporate raider• Tender offer• Proxy fight


Types of Mergers

Horizontalbetween firms that make and sell similar products/services in similar markets

Verticalbetween firms that operate at different levels in the production and marketing of a product

Conglomeratebetween firms in completely different industries


Figure 4.5: Three Typesof Growth by Merger


Biggest Mergers

Source: MSNBC, www.msnbc.msn.com/id/6880681, February 15, 2009.


Current Merger Trends

Takeover• Pro: makes company more profitable• Con: does not enhance profitability; only ones who benefit

are investment bankers, brokerage firms, takeover “artists”

21st Century• Cash-rich companies acquire businesses to enhance their

position in the marketplace• More foreign companies/investors

Leveraged Buyout (LBO)• purchase arrangement allowing firm’s managers,

employees, investors to purchase company, taking firm private


1. In the United States, the form of business ownership that generates the largest amount of sales revenues is the

a) sole proprietorship. b) partnership.c) corporation.d) limited-liability company.e) S-corporation.

Chapter Quiz


2. Which of the following is not an advantage of a sole proprietorship?

a) Flexibilityb) No special taxesc) Pride of ownershipd) Retention of all profitse) Unlimited liability

Chapter Quiz (cont.)


3. A business co-owned by one or more general partners who manage the business and limited partners who invest money in it is called a

a) not-for-profit partnership.b) limited partnership.c) general partnership.d) limited-liability company.e) S-partnership.



4. A corporation that received its corporate charter in California and is doing business in Oregon is called a(n) ____________corporation in Oregon.

a) alienb) domesticc) visitingd) internationale) foreign



5. A ____________ is a merger between firms that make and sell similar products or services in similar industries.

a) horizontal mergerb) vertical mergerc) conglomerate merger d) hostile takeovere) tender offer


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