1

CHOOSING A FORM OF BUSINESS OWNERSHIPCHAPTER-04

Dr. Gehan Shanmuganathan, (DBA)

2

1866 Henri Nestlé's searched for a healthy, economical alternative to breastfeeding for mothers who could not feed their infants at the best.

He called the new product Farine Lactee Henri Nestlé. Henri Nestlé also showed early understanding of the

power of branding. Anglo-Swiss Condensed Milk Company and Nestlé's

merged in 1905. By 2002, the company made two major acquisitions

leading the dairy industry in the world

3

Acquisitions

Joint

venture Limited liability

company

Sole proprietor

4

LEARNING OBJECTIVES

5

LEARNING OBJECTIVES Describe the advantages and disadvantages of sole

proprietorships. Explain the different types of partners and the importance of

partnership agreements. Describe the advantages and disadvantages of partnerships. Summarize how a corporation is formed. Describe the advantages and disadvantages of a corporation. Examine special types of corporations, including

S-corporations, limited-liability companies, government-owned corporations, and not-for-profit corporations. Cont……

6

LEARNING OBJECTIVES –CONT……… Discuss the purpose of a cooperative, joint

venture, and syndicate. Explain how growth from within and growth

through mergers can enable a business to expand.

7

SOLE PROPRIETORSHIPS

SOLE PROPRIETORSHIPS A business that is owned (and usually operated)

by one person The simplest form of business ownership and the

easiest to start Many large businesses began as a small struggling

sole proprietorships. E.g- Ford Motors, H.J.Heinz Company, and Proctor & Gamble Company

The most widespread form of business ownership and common in retailing, services, and agriculture

9

SOLE PROPRIETORSHIPS

Sole proprietorships are most common in

retailing, agriculture, and the service

industries

RELATIVE PERCENTAGES OF SOLE PROPRIETORSHIPS, PARTNERSHIPS, AND CORPORATIONS IN THE U.S.

ADVANTAGES AND DISADVANTAGES OF SOLE PROPRIETORSHIPS

ADVANTAGESEase of start-up (and

shut down)Pride of ownershipRetention of profitsFlexibility of being

your own bossNo special

taxes (personal income tax)

DISADVANTAGESUnlimited liability

A legal concept that holds a business owner personally responsible for all the debts of the business

Lack of continuity In the event of a death,

retirement, legally incompetent

Lack of money (limited ability to borrow)

Limited management skillsDifficulty in hiring

employees (room for advancement)

12

PARTNERSHIPS

PARTNERSHIPS

A voluntary association of two or more persons to act as co-owners of business for profit

Less common form of ownership than sole proprietorship or corporation

No legal limit on the maximum number of partners; most have only two

Large accounting, law, and advertising partnerships have multiple partners

Partnerships are usually a pooling of special talents or the result of a sole proprietor taking on a partner

14

TYPES OF PARTNERS

TYPES OF PARTNERS General partner

A person who assumes full or shared responsibility for operating a business

General partnership: a business co-owned by two or more general partners who are liable for everything the business does

16

TYPES OF PARTNERS Limited partner

A person who contributes capital to a business but has no management responsibility or liability for losses beyond the amount he or she invested in the partnership

Limited partnership: a business co-owned by one or more general partners who manage the business and limited partners who invest money in it

Master limited partnership (MLP): a business partnership that is owned and managed like a corporation but taxed like a partnership, could sell the units of ownership for investors (also called publicly traded partnership)

THE PARTNERSHIP AGREEMENT Articles of partnership

An agreement listing and explaining the terms of the partnership

Agreement should state Who will make final decisions What each partner’s duties will be How much each partner will invest How much profit or loss each partner receives or is

responsible for How the partnership can be dissolved

ADVANTAGES AND DISADVANTAGES OF PARTNERSHIPS

ADVANTAGES Ease of start-upAvailability of capital

and creditPersonal interestCombined business

skills and knowledgeRetention of profits No special taxes

DISADVANTAGESUnlimited liabilityLack of continuityManagement

disagreementsFrozen investment if

other partner(s) does not like to buy the shares

19

CORPORATIONS

CORPORATIONS 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

There are approximately 6 million corporations in the U.S.

They comprise about 20% of all businesses, but they account for 84.4 % of sales revenues(Pareto principle or law of the vital few)

Insert Table 5.1, 9e, p. 158 with title and source

SEVEN LARGEST U.S. CORPORATIONS

CORPORATIONS (CONT’D) Corporate ownership

Stock The shares of ownership of a corporation

Stockholder or Shareholder A 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. E.g- Reader’s Digest Association was a closed corporation until 1990

Open corporation A corporation whose stock is bought and sold on security

exchanges and can be purchased by any individual

FORMING A CORPORATION

Incorporation The process of forming a corporation

Most experts recommend consulting a lawyer

Insert table 5.2, p.159, with title

WHEN LEGAL HELP IS REQUIRED

FORMING A CORPORATION (CONT’D)

Where to incorporate Businesses can incorporate in any state they choose Some states offer fewer restrictions, lower taxes, and

other benefits to attract new firms Domestic corporation

A corporation in the state in which it is incorporated Foreign corporation

A corporation is that incorporated in one state and operates its business in a different state

Alien corporation A corporation chartered by a foreign government and

conducting business in the U.S.

FORMING A CORPORATION (CONT’D) Corporate charter

A contract (submitted as articles of incorporation) between the corporation and the state in which the state recognizes the formation of the artificial person that is the corporation

Charter includes Firm’s name and address Incorporators’ names and addresses Purpose of the corporation Maximum amount of stock and types of stock to be issued Rights and privileges of stockholders Length of time the corporation is to exist

FORMING A CORPORATION (CONT’D) Stockholders’ rights

Common stock Stock owned by individuals or firms who may vote on

corporate matters but whose claims on profit and assets are subordinate to the claims of others

Preferred stock Stock owned by individuals or firms who usually do not

have voting rights but whose claims on dividends are paid before those of common-stock holders

Dividend A distribution of earnings to the stockholders of a

corporation Proxy

A legal form listing issues to be decided at a stockholders’ meeting and enabling stockholders to transfer their voting rights to some other individual or individuals

FORMING A CORPORATION (CONT’D)

Organizational meeting The last step in forming a corporation

The incorporators and original stockholders meet to elect their first board of directors

Board members are directly responsible to stockholders for how they operate the firm

29

CORPORATE STRUCTURE

CORPORATE STRUCTURE Board of directors

The top governing body of a corporation, the members of which are elected by the stockholders

Responsible for setting corporate goals, developing strategic plans to meet those goals, and the firm’s overall operation

Outside directors: experienced managers or entrepreneurs from outside the corporation who have specific talents

Inside directors: top managers from within the corporation

CORPORATE STRUCTURE (CONT’D) Corporate officers

The chairman of the board, president, executive vice presidents, corporate secretary, treasurer, or any other top executive appointed by the board

Implement the chosen strategy and direct the work of the corporation, periodically reporting results to the board

HIERARCHY OF CORPORATE STRUCTURE

Stockholders exercise a great deal of influence

through their right to elect the board of

directors

ADVANTAGES AND DISADVANTAGES OF CORPORATIONS

ADVANTAGES Limited liability

Each owner’s financial liability is limited to the amount of money that he or she has paid for the corporation’s stock

Ease of raising capitalEase of transfer of

ownershipPerpetual lifeSpecialized management

DISADVANTAGESDifficulty and expense

of formationGovernment regulation

and increased paperwork

Double taxation (turnover tax and personal income tax)

Lack of secrecy

Insert Table 5.3, 9e, p. 162

ADVANTAGES AND DISADVANTAGES

35

SPECIAL TYPES OF BUSINESS OWNERSHIPS

36

S-CORPORATIONS

SPECIAL TYPES OF BUSINESS OWNERSHIP S-corporations

A corporation that is taxed as though it were a partnership (income is taxed only as the personal income of stockholders)

Advantages Avoids double taxation of a corporation Retains the corporation’s legal benefit of limited liability

S-corporation criteria No more than 100 stockholders allowed Stockholders must be individuals, estates, or exempt

organizations There can be only one class of outstanding stock The firm must be a domestic corporation There can be no nonresident-alien stockholders All stockholders must agree to the decision to form an S-

corporation E.g- ESCA Employee-Owned S-Corporations in USA

38

LIMITED-LIABILITY COMPANY (LLC)

SPECIAL TYPES OF BUSINESS OWNERSHIP (CONT’D)

Limited-liability company (LLC) A form of business ownership that provides

limited-liability protection and is taxed like a partnership

Advantages Avoids double taxation of a corporation Retains the corporation’s legal benefit of limited

liability Difference between LLC and S-corporation

LLCs not restricted to 100 stockholders LLCs have fewer restrictions on who can be a

stockholder

Insert Table 5.4, 9e, p. 165

ADVANTAGES AND DISADVANTAGES

41

GOVERNMENT-OWNED CORPORATIONS

SPECIAL TYPES OF BUSINESS OWNERSHIP (CONT’D)

Government-owned corporations A corporation owned and operated by a local, state, or

federal government Purpose

To ensure that a public service is available Examples

Tennessee Valley Authority (TVA), the National Aeronautics and Space Administration (NASA), and the Federal Deposit Insurance Corporation (FDIC)

43

NOT-FOR-PROFIT CORPORATIONS

SPECIAL TYPES OF BUSINESS OWNERSHIP (CONT’D)

Not-for-profit corporations Corporations organized to provide social,

educational, religious, or other services, rather than to earn a profit

Charities, museums, private schools, and colleges are organized as not-for-profits primarily to ensure limited liability

45

COOPERATIVES, JOINT VENTURES, SYNDICATES

COOPERATIVES, JOINT VENTURES, SYNDICATES Cooperatives

Association of individuals or firms whose purpose is to perform some business function for its members

Members benefit from the efficiencies of the cooperatives’ activities, such as reducing unit costs by making bulk purchases and coordinating services such as transportation, processing, and marketing products

COOPERATIVES, JOINT VENTURES, SYNDICATES (CONT’D)

Joint ventures Agreements between two or more groups to form a business

entity in order to achieve a specific goal or to operate for a specific period of time (strategic advantage)

Example: Disney & Pixar Syndicates

Temporary associations of individuals or firms organized to perform a specific task that requires a large amount of capital

Most commonly used to underwrite large insurance policies, loans, and investments

E.g- Bank of America, JP Morgan Chase, and Goldman Sachs

CORPORATE GROWTH Growth from within

Introducing new products Entering new markets

Growth through mergers and acquisitions Merger: the purchase of one corporation by

another; essentially the same as an acquisition Hostile takeover: a situation in which the

management and board of directors of the firm targeted for acquisition disapprove of the merger

Tender offer: an offer to purchase the stock of a firm targeted for acquisition at a price just high enough to tempt stockholders to sell their shares

Proxy fight: a technique used to gather enough stockholder votes to control the targeted company

THREE TYPES OF GROWTH BY MERGER

CORPORATE GROWTH (CONT’D)

Current merger trends Takeover advocates say

Companies that are taken over are made more profitable and productive

Takeover opponents say Takeover threats force managers to spend time on

defense rather than vital business activities The only people who benefit from takeovers are

investment bankers, brokerage firms, and takeover artists

CORPORATE GROWTH (CONT’D) Current merger trends

Mergers during the first part of the 21st century will be the result of cash-rich companies looking to enhance their position in the marketplace

There will be more mergers involving companies or investors from other countries

Future mergers and acquisitions will be driven by solid business logic, desire to compete internationally, and information technology

There will be more leveraged buyouts (LBO) A purchase arrangement that allows a firm’s

managers and employees or a group of investors to purchase the company

52

WHAT WE LEARNED Describe the advantages and disadvantages of sole

proprietorships. Explain the different types of partners and the importance of

partnership agreements. Describe the advantages and disadvantages of partnerships. Summarize how a corporation is formed. Describe the advantages and disadvantages of a corporation. Examine special types of corporations, including S-corporations,

limited-liability companies, government-owned corporations, and not-for-profit corporations. Cont……

53

WHAT WE LEARNED –CONT……… Discuss the purpose of a cooperative, joint

venture, and syndicate. Explain how growth from within and growth

through mergers can enable a business to expand.

54

WEEKLY ASSIGNMENT- WEEK 04 If you were to start a business, which

ownership form would you choose? What factors might affect your choice? Discuss.

55

QUESTIONS……..