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Organizing a
Business

Chapter 4

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 Learning Objectives
4-1 Define and examine the advantages and disadvantages of the
sole proprietorship form of organization.
4-2 Identify two types of partnership and evaluate the advantages
and disadvantages of the partnership form of organization.
4-3 Describe the corporate form of organization and cite the
advantages and disadvantages of corporations.
4-4 Define and debate the advantages and disadvantages of
mergers, acquisitions, and leveraged buyouts.
4-5 Propose an appropriate organizational form for a startup
business.

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 Figure 4.1 Comparison of Sole Proprietorships,
Partnerships/S Corporations, and C Corporations

Source: Scott Greenberg, “Pass-Through Businesses: Data and Policy,” Tax Foundation, January 17, 2017,
https://taxfoundation.org/pass-through-businesses-data-and-policy/ (accessed April 10, 2018)

Access the text alternative for these images.

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 Table 4.1 Various Forms of Business Ownership

Structure Ownership Taxation Liability Use

Owned by a single
Sole Individual
One owner Unlimited individual/easiest way to
Proprietorship income taxed
conduct business

Individual
Two or more Somewhat Easy way for two individuals
Partnership owners’
owners limited to conduct business
income taxed

Corporate
Legal entity with
Any number of and
Corporation Limited shareholders or
shareholders shareholder
stockholders
taxed
Legal entity with tax
Up to 100 Taxed as a
S Corporation Limited advantages for restricted
shareholders partnership
number of shareholders
Unlimited
Limited Liability Taxed as a
number of Limited Avoid personal lawsuits
Company partnership
shareholders

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 Sole Proprietorships 1
Businesses owned and operated by one individual
• Most common form of business organization in the
United States
• Typically employ fewer than 50 people
• Comprise nearly three-quarters of all U.S. businesses

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 Sole Proprietorships 2
Advantages of Sole Proprietorships
• Ease and cost of formation
• Secrecy
• Distribution and use of profits
• Flexibility and control of the business
• Government regulation
• Taxation
• Closing the business

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 Sole Proprietorships 3
Disadvantages of Sole Proprietorships
• Unlimited liability
• Limited sources of funds
• Limited skills
• Lack of continuity
• Lack of qualified employees
• Taxation

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 POLLING QUESTION Colleen wants to start a crafting business as a
side job and is considering forming it as a Sole
Proprietorship. In your opinion, what
disadvantages should she be most concerned
about?
A. Unlimited liability
B. Limited sources of funds
C. Lack of continuity
D. Lack of qualified employees

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 Partnerships 1
A form of business organization defined by the
Uniform Partnership Act as “an association of two
or more persons who carry on as co-owners of a
business for profit”
• Least used form of business
• Typically larger than sole proprietorships but smaller
than corporations

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 Partnerships 2
Types of Partnership
• General partnership
• Limited partnership
• Master limited partnership (MLP)

Articles of Partnership

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 Partnerships 3
Advantages of Partnerships
• Ease of organization
• Availability of capital and credit
• Combined knowledge and skills
• Decision making
• Regulatory controls

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 Partnerships 4
Disadvantages of Partnerships
• Unlimited liability
• Business responsibility
• Life of the partnership
• Distribution of profits
• Limited sources of funds
Taxation of Partnerships
• Quasi-taxable organizations

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 POLLING QUESTION Which of the following is NOT an advantage of
a Partnership?

A. Combined knowledge and skills

B. Distribution of profits
C. Availability of capital and credit
D. Ease of organization

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 Corporations 1
A legal entity, created by the state, whose assets
and liabilities are separate from its owners
• Has many of the rights, duties, and powers of a
person
• Can own and transfer property
• Can enter into contracts
• Can sue and be sued in court

• Stock
• Dividends

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 Corporations 2
Creating a Corporation
• Incorporators create corporation
• Each state has a specific procedure called chartering
the corporation
• Incorporators file articles of incorporation
• State issues a corporate charter to the company
• Owners establish bylaws and elect a board of
directors

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 Corporations 3
Types of Corporations
• Domestic corporation
• Conducts business in the state in which it is chartered

• Foreign corporation
• Conducts business outside the state in which it is chartered

• Alien corporation
• Conducts business outside the nation in which it is
incorporated

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 Corporations 4
Types of Corporations continued
• Private corporation
• Owned by just one or a few people closely involved in
managing the business
• No stock is sold to public
• Not required to disclose financial information publicly
• May become public via initial public offering (IPO)

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 Table 4.5 America’s Largest Private Companies

Revenue
Company Industry (in billions) Employees
1. Cargill Food, drink, and tobacco $109.7 150,000
2. Koch Industries Multicompany $100 100,000
3. Albertsons Food markets $59.7 273,000
4. Deloitte Business services and supplies $36.8 244,400
5. PricewaterhouseCoopers Business services and supplies $35.9 223,000
6. Mars Food, drink, and tobacco $35 80,000
7. Publix Super Markets Food markets $34 191,000
8. Bechtel Construction $32.9 55,000
9. Ernst & Young Business services and supplies $29.6 231,000
10. C&S Wholesale Grocers Food, drink, and tobacco $28.1 17,500

Source: “America’s Largest Private Companies,” Forbes,

https://www.forbes.com/largest-private-companies/list/#tab:rank (accessed April 8, 2018).

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 Corporations 5
Types of Corporations continued
• Public corporation
• A corporation whose stock anyone may buy, sell, or trade
• May be taken private when all firm’s stock is purchased and
can no longer be sold publicly
• Two types of public corporations:
• Quasi-public
• Nonprofit

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 Corporations 6
Elements of a Corporation
• The board of directors
• Elected by stockholders
• Sets long-range objectives of the corporation
• Ensures objectives are met on schedule
• Hires corporate officers

• Outside directors
• Inside directors

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 Corporations 7
Elements of a Corporation continued
• Stock ownership
• Preferred stock
• Do not have say in running the company but have a claim to profits
before other stockholders

• Common stock
• Do not get preferential treatment regarding dividends but have
voting rights
• May vote by proxy
• Have preemptive rights

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 Corporations 8
Advantages of Corporations
• Limited liability
• Ease of transfer of ownership
• Perpetual life
• External sources of funds
• Expansion potential

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 Corporations 9
Disadvantages of Corporations
• Double taxation
• Forming a corporation
• Disclosure of information
• Employee-owner separation

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 POLLING QUESTION At 10 years old, Penny has accrued $751 in
revenue from her candy sales. She is
considering teaming up with her next-door
neighbor, Johnny, to form a legal candy
business. In your opinion, what type of
partnership is best and why?
A. Partnership – She is too young to go it alone and
should partner with her neighbor.
B. Partnership – She only has $751 in funds and will
need more financing.
C. Sole proprietorship – Unlimited liability isn’t too
worrisome because she’s young.
D. Sole proprietorship – She operates from her parents’
house so her fixed and operating costs are low.
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 Other Types of Ownership 1
Joint Ventures
• A partnership established for a specific project or for a
limited time
S Corporations
• Corporation taxed as though it were a partnership with
restrictions on shareholders

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 Other Types of Ownership 2
Limited Liability Companies (LLCs)
• Form of ownership that provides limited liability and
taxation like a partnership but places fewer restrictions
on members
Cooperatives (co-ops)
• Organizations composed of individuals or small
businesses that band together to reap the benefits of
belonging to a larger organization

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 Limited Liability Company

Fiat Chrysler Automobiles (FCA) US LLC is the automaker that

designs, manufactures, sells, and distributes brands like Jeep, Dodge,
and Ram. FCA US is an example of a limited liability company.

©McGraw-Hill Education. ©Steve Lagreca/Shutterstock

 Trends in Business Ownership: Mergers
and Acquisitions 1
Mergers
• Horizontal merger
• Vertical merger
• Conglomerate merger
Acquisitions

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 Table 4.7 The Largest Mergers of All Time

Transaction Value
Rank Acquirer Target (in billions)
1 Vodafone Mannesmann $180
2 Time Warner America Online (AOL) $165
3 Verizon Vodafone $129
Communications
4 RFS Holdings ABN Amro $98
5 AB InBev SABMiller $90
6 Pfizer Warner-Lambert $89
7 AT&T BellSouth $86

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 Trends in Business Ownership: Mergers
and Acquisitions 2
Corporate raider
• Tender offer
Techniques to head off hostile takeover
• Poison pill
• Shark repellant
• White knight
Leveraged buyout (LBO)

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 POLLING QUESTION Which technique(s) for heading off a hostile
takeover can diminish shareholder value?

A. White knight
B. White knight and poison pill
C. Shark repellant and poison pill
D. Shark repellant

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 Solve the Dilemma
To Incorporate or Not to Incorporate 1

Thomas O’Grady and Bryan Rossisky start a small

business buying flowers, shrubs, and trees
wholesale and reselling them to the general public
• Each contribute $5,000 in startup capital
• Plans to lease a 2.5 acre tract of land with a small,
portable sales office

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 Solve the Dilemma
To Incorporate or Not to Incorporate 2

What form of organization is appropriate?

• Bryan thinks it should be a corporation
• Limited liability
• Image of a large organization

• Thomas thinks it should be a partnership

• Easier to start
• Can use the combination of their talents
• Less reports and regulatory controls

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 Solve the Dilemma
To Incorporate or Not to Incorporate 3
Critical Thinking Questions
1. What are some of the advantages and disadvantages of
Thomas and Bryan forming a corporation?
2. What are the advantages and disadvantages of their
forming a partnership?
3. Which organizational form do you think would be best
for Thomas and Bryan’s company and why?

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