Course Notes - Week 5 - Smart

Course Notes in “BUS 101 Introduction to Business” by Assist. Prof.
Tea KBILTSETSKHLASHVILI
Week 5 - Chapter 5: Building the Foundation: Forms of Business Ownership
Learning Objectives
List five advantages and four disadvantages of sole proprietorships
List five advantages and two disadvantages of partnerships
Explain the differences between common and preferred stock from a shareholder’s perspective
Highlight the advantages and disadvantages of public stock ownership
Cite four advantages and three disadvantages of corporations
Delineate the three groups that govern a corporation and describe the role of each
Identify the synergies that companies hope to achieve by combining their operations
Key Words: Corporation, partnership ownership, shareholders, subsidiary, mergers & acquisitions, joint
ventures.
In this chapter we will study what legal form should the company take, major types of
business ownership: sole proprietorships, partnerships and corporations. We will define also joint
ventures and strategic partnerships.
I. Choosing a Form of Business Ownership – one of the most important decisions is right
choice of starting business and selecting a form of business ownership. This decision is really
quite difficult and needs skills and experience. Starting a new business includes knowing a
person’s long – term goals and suggestions how you are going to achieve those goals You
should always remember that as you are creating a business form, than you are facing a risk. The
most common forms of business ownership, as I mentioned them before, are: sole
proprietorships, partnerships and corporations. Of course each of them has its own
characteristics.
A. Sole proprietorship – 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. Some examples of
sole proprietorships: farms, retails, establishments, and small service businesses. In this case
profits and losses flow directly to the owners and are taxed at individual rates. Owner of such
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Course Notes in “BUS 101 Introduction to Business” by Assist. Prof. Tea KBILTSETSKHLASHVILI
business has unlimited personal liability for business debts. It is easy to set up such business but
owner’s personal finances are at risk. Owner must generally sell the business to get his or her
investment out.
1. Advantages of sole proprietorships are:

a. Easier and less expensive to start
b. Satisfaction of working for self
c. Make own decisions (what hour sot work, whom to hire)
d. All profits kept by proprietor
e. Privacy (do not have to reveal performance or plans to anyone). You do not have to reveal
your performance or plans to anyone. You may need to provide financial information to a banker
if you need a loan, and you must provide certain financial information when you file tax returns,
but you do not have to prepare any reports for outsiders as you would if the company were a
public corporation.
2. Disadvantages of sole proprietorship are:

a. Unlimited liability (any legal debts incurred by the business are the owner’s responsibility). As
a sole proprietor you might have to sell personal assets, such as your home to satisfy a business
debt.
b. Success depends on talents of proprietor
c. Difficult to obtain substantial amounts of money
d. Limited life (the owner’s death may mean the demise of the business)
B. Partnership – a legal association of two or more people as co-owners of a business for

profit (least common form of business ownership).
1. Two basic types of partnerships:

a. General partnerships (all partners considered equal by law and are liable for the business’s
debt). Each partner is entitled to equal control unless agreement specifies otherwise. Profits and
losses flow directly to the partners and are taxed at individual rates. Partners share income and
losses equally unless the partnership agreement specifies otherwise. Personal assets are at risk

from business creditors. It is easy to set up such business, Partnership agreement is

recommended but not required and partners must sell their shares in the business to recoup their
investment.
b. Limited partnerships (one or more people run business, others invest passively). The
general partner controls the business and limited partners do not participate in the management
of the company. Limited partners are liable only for the amount of their investment.
 General partners: run the business
 Limited partners: passive investors (the amount of money they can lose is limited to the
amount of their capital contribution.
2. Advantages of partnerships are:

a. Easy to form partnerships
b. Tax advantages: profits are taxed at individual income-tax rates rather than at corporate rates
c. Easier to obtain funds (strength in numbers)
d. Diversity of skills (leads to innovation in products, services, and processes). The diversity of
skills that good partners bring to an organization leads to innovation in products, services and
processes that improves your chances of success.
e. Shared liability
f. Broadens the pool of capital
g. Increase chances that the organization will endure (new partners can be drawn into the
business to replace those who die or retire).
3. Disadvantages of partnerships are:

a. All general partners have unlimited liability. If one of the firm’s partners make a serious
mistake and is sued by the client, all general partners are financially accountable. General
partners are also responsible for any debts incurred by the partnership.
b. Shared debts
c. Interpersonal problems – difficulties can arise when each partner wants to be responsible for
managing the organization. Electing a managing partner for leading an organization may
diminish the conflicts but disagreements are still possible.
d. Disputes over profits

e. Lack of privacy (easy access to information)

f. Fierce competition
g. Unproductive partners – Partnership may have to face the question of what to do with
unproductive partners and in case the partner will leave the firm, conflicts can arise over claims
on the firm’s profits and on capital the partner invested in the firm.
4. Keeping It Together: The Partnership Agreement – a written document that states all the
terms of operating the partnership by spelling out the partner’s rights and responsibilities.
a. Law does not require a written partnership agreement
b. Partnership agreement should address the following
 Sources of conflict that could result in battles between partners
 Division of profits
 Decision-making authority
 Expected contributions
 Dispute resolution
 Buy-sell agreement (the steps a partner must take to sell his or her partnership interest or
what will happen if one of the partners dies).
C. Corporation – a legal entity with the power to own property and conduct business.
Corporations have unlimited number of shareholders, no limits on stock classes or voting
arrangements, ownership and management of the business are separate. Shareholders in public
corporations are not involved in daily management decisions just in private or closely held
corporations owners are participating in managing the business. Profits and losses of business are
taxed at corporate rates and if profits are distributed to the investors as dividends than they are
taxed at individual rates. Investor’s liability in this case is limited to the amount of his or her
investment. In a public corporation, shareholders may trade their shares on the open market. In a
private corporation shareholders must find a buyer for their shares to recoup their investment.
1. The law generally treats the corporation the same way it treats an individual person.
a. can receive, own and transfer property
b. make contracts
c. sue and be sued

d. legal status and obligations exist independently of its owners

2. Shares are sold to investors as a way to raise the large amounts of capital needed.
a. investors can vote on certain issues
b. not involved with the daily operations
3. Ownership
a. a corporation is owned by its shareholders
 Issued a stock certificate, which may be bequeathed or sold
 Thus, company ownership may change drastically over time
b. Common Stock – most stock issued by corporations
 Voting privileges, ability to elect board of directors
 Voting rights for major policies such as mergers
 Dividends (profits paid on shares of company profits, they are declared by the
board of directors but their payment is not mandatory)
 Cash dividend – dividend paid in the form of cash
 Stock dividend – dividend paid in the form of additional stock
 Risky investment because of the volatility of the stock market
c. Preferred stock
 Does not usually carry voting rights
 Allows stockholders right of first claim of corporation assets after
 Debts (important if a company folds)
 Dividends tend to be higher than with common stocks
 Less control but more safety
Question to Students: Explain the differences between common and preferred stock from a
shareholder’s perspective.
Answer: Common shareholders can vote and can share in the company’s profits through
discretionary dividends and adjustments in the market value of their stock. In other words, they
can profit from their investment if the value of the stock rises above the price they paid for it, or
they can lose money if the value of the stock falls below the price they paid for it. In contrast,
preferred shareholders cannot vote, but they can get a fixed return (dividend) on their investment

and a priority claim on assets after creditors.
d. Public Versus Private Ownership

- Private Corporations (also referred to as close corporations or closely held companies)
 By Withholding the stock from public sale the owners can:
 Retain control over operations
 Protect business from unwelcome takeover attempts; Example: Hallmark, Hyatt Hotels.
These companies finance their operating costs and growth from either company earnings
or other sources, such as bank loans. Very popular people like doctors, lowers and other
professionals often join such private corporations.
e. Public corporations – held by and available for sale to the general public
 Said to be publicly traded – meaning the shares of a public corporation may be
bequeathed or sold to someone else
 Typically, the more shareholders a company has, the less tangible the influence of
any single shareholder on the company
 Institutional investors
Such as pension funds, insurance companies and mutual fund
Have accumulated increasing numbers of shares
Have a powerful role in governing corporations
Advantages of public stock ownership
Increased liquidity
Enhanced visibility
The establishment of an independent market value for the company
Having a publicly traded stock gives companies flexibility to use such
stock to acquire other firms
- Disadvantages
 The cost of going public is high
 The filing requirements with the sec are burdensome
 Ownership control is lost

 Management must be ready to handle the administrative and legal

demands of heightened public exposure
 The value of the company’s stock becomes subject to external
forces beyond the company’s control
Question to Students: Cite four advantages and three disadvantages of corporations.

Answer: The four advantages of corporations are:
 Being a separate legal entity, which offers the shareholders protection from liability
 The power to raise large sums of capital
 Providing liquidity for investors
 Having an unlimited life span.
In exchange for these advantages, the disadvantages are:

1. The large fees needed to incorporate
2. Double taxation on the company profits; the corporations pay tax on profits and
individuals pay tax on dividends (distributed corporate profits)
3. That if publicly owned, corporations must adhere to strict government reporting
requirements.
Question to Students: Highlight the advantages and disadvantages of public stock

ownership.
Answer: Public stock ownership offers a company increased liquidity, enhanced visibility,
financial flexibility, and an independently established market value for the stock. The
disadvantages of public stock ownership are high costs, burdensome filing requirements, loss of
ownership control, heightened public exposure, and loss of direct control over the market value
of the company’s stock.
4. Advantages of corporations
a. Compilation of money, resources, talent
b. Diverse labor pool
c. Greater financing options

d. Expanded research and development capabilities

e. Limited liability
f. Liquidity (investors can easily convert their stock into cash by selling it on the open market) -
corporations that sell stock to the general public have the advantage of liquidity, which means
that investors can easily convert their stock into cash by selling it on the open market. This
option makes buying stock in a corporation attractive to many investors.
g. Shareholders of public corporation can easily transfer their shares and ownership by selling
their shares to someone else.
h. Ability to finance projects internally – As corporations grow they can benefit from the diverse
talents and experience of a large pool of employees and managers.
5. Disadvantages of corporations
a. Paperwork and costs associated with incorporation can be burdensome, especially if you are
going to sell stock to the public.
b. Double taxation – they must pay federal and state corporate income tax on the company’s
profits and individual shareholders must pay income taxes on their share of the company’s
profits received as dividends.
c. Public corporations are required by law to publicly disclose financial information
6. Special types of corporations: enjoy special privileges because they follow certain rules
a. S corporations (subchapter corporations) are made only for federal income tax purposes.
Corporations seeking “S” status must meet certain criteria: 1) They must have no more than 75
investors, none of whom may be nonresident aliens; 2) They must be a domestic corporation; 3)
They can issue only one class of common stock, which means that all stock must share the same
dividend and liquidation rights.
 Cross between corporation and partnership
 Small number of investors (75 or under)
 Must be a domestic corporation (u.s.)
 Can only issue one class of common stock: all stock must have the same dividend and
liquidation rights

b. Limited liability companies

 Tax advantage of partnership
 Personal liability protection of a corporation
 No limit on number of shareholders
 Members of LLCs adopt an operating agreement (like partnership agreement)
 Agreements can fit needs of owners (such as voting rights etc.)
c. Subsidiary corporations
 Partly owned by another corporation (parent company, which supervise
the operations of the subsidiary).
 Holding company – special type of parent company that owns other
companies for investment reasons & little operating control
d. Alien corporation – operates in the US but is incorporated in another country
e. 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
1. Corporate Governance – As general practice shows, corporations’ common shareholders

own a business, but they are rarely involved in managing it, instead, they elect a board of
directors to represent them; Directors, on their side, select the corporation’s top officers, who
actually run the company.
Shareholders Board of Officers Employees

Directors
Question to Students: Delineate the three groups that govern a corporation and describe the role
of each.
Answer: Shareholders are the basis of the corporate structure. They elect the board of directors,
who in turn elect the officers of the corporation. The corporate officers carry out the policies and
decisions of the board. In practice, the shareholders and board members have often followed the

lead of the chief executive officer. However, some board members are more active than others.
This is especially true of young dot-com corporations that appoint directors for their
management expertise and industry connections.
a. Chief Executive Officer (CEO)

 The center of power in a corporation
 Responsible for establishing company policies
 Responsible for managing corporate direction
 Responsible for making the big decisions that will affect the company’s growth and
competitive position
b. Shareholders
 Can be individuals, other companies, nonprofit organizations, pension funds and
mutual funds
 Can attend an annual meeting
- during which the previous year’s record is reviewed and upcoming plans are described
- if unable to attend can vote by proxy – document authorizing another person to vote on
behalf of a shareholder in a corporation.
 institutional investors now own half of all U.S. stock and have considerable influence
over management
c. Board 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
d. Current issues being wrestled with regarding boards:

 Composition
 Ideally want a balanced group of seasoned executives who each
bring something unique to the board
 The ratio of insiders (executives) and outsiders (independent
directors) is another concern
 Sarbanes-Oxley requires that the majority of directors be
independent so an objective viewpoint is brought forward
 However, outsiders must have enough knowledge about the inner
workings of the company to make informed decisions
 Education
 The complexity of overseeing a corporate is immense
 Being well versed in financial understanding is mandatory, so many companies are
starting educational programs to get board members up to speed
 Liability
 Directors can potentially be held legally and financially responsible for misdeeds of the
company
 Recruiting Challenges
 Good candidates may start to think twice about accepting directorships.
II. Business Combinations - Companies have been combining in various configurations since
the early days of business. Joining two companies in a complex process because eit involves
every aspect of both organizations. Let’ s say executives should agree on how the combination
will be financed and how the power will be transferred and shared. For Example, marketing
departments need to find out how to blend advertising campaign and sales forces. Companies
must often think about changes in job titles, work assignments, keep eye on customer service,
accounting and more important functions.

A. Mergers and Acquisitions (M & A)

1. Merger – two companies join to form a single entity. Companies can merge either by pooling
their resources or by one company purchasing the assets of the other.
a. One company buys another (or parts of another) and emerges as controlling corporation
b. The controlling corporation assumes all debts and contractual obligations of the company it
acquires, which then ceases to exist
2. Consolidation
a. An entirely new firm is created by two or more companies that pool their interests
b. Both firms terminate their precious legal existence and become part of the new firm
3. Acquisition
a. purchasing another company’s voting stock in exchange for cash, stock, security
b. most often parties agree to sell
c. however, sometimes a buyer attempts to acquire a company against management’s wishes –
hostile takeover – the buyer tries to convince enough shareholders to go against management and
vote to sell
d. Leveraged Buyouts (LBO)
 Occurs when one or more individuals purchase a company’s publicly traded stock by
using borrowed funds
 The debt is expected to be repaid with fund generated by the company’s operations and
often sale of some assets
4. Combinations can take one of several forms, including:

a. Vertical Merger – when a company purchases a complementary company at a different level in
the “value chain”
b. Horizontal Merger
 involves two similar companies at the same level
 because they are often between competitors, regulators review these combinations
carefully to avoid creating monopolies
c. Conglomerate Merger
o two firms offer dissimilar products or services, often in widely different industries

o new twist in recent years – a company that is good in one particular area acquires
underperforming companies that can benefit from that skill set
d. Market Extension Merger – combines firms that offer similar products and services in
different geographic locations
e. Product Extension Merger – used when a company needs to round out a product line
Question to Students: Identify six main synergies companies hope to achieve by combining
their operation.
Answer: By combining their operations, companies hope to:
1. eliminate redundant costs
2. increase their buying power
3. increase their revenue
4. improve their market share
5. eliminate manufacturing overcapacity
6. gain access to new expertise and personnel.
5. Advantages of Mergers and Acquisitions

 All advantages are grouped under umbrellas terms such as economies of scale,
efficiencies, synergies such as the benefits of working will be greater than is each
company continued to operate independently
 Eliminate expenditures from combined resources
 Increase buying power
 Increase revenue by cross-selling each other’s products
 Increase market share by combining product lines to provide more comprehensive
offering
 Eliminate manufacturing overcapacity
 Gain access to new expertise, systems and teams of employees who already know how to
work together

6. Disadvantages of Mergers and Acquisitions

a. Companies often borrow immense sums of money to acquire a firm, leaving them cash poor in
terms of running the company
b. Managers must help combine the operations and are taken from daily responsibilities
c. Culture clash (different belief systems and acceptable ways of behaving within company
structure)
7. Current Trends in Mergers and Acquisitions

a. From 1992-2000, there were larger mergers (mega-mergers)
b. Now, some of the largest U.S. companies are shedding their unprofitable acquisitions and
focusing on generating internal growth from their core businesses. Factors contributing to this
trend reversal include:
 Economic slowdown
 Increased political uncertainty
 Global market saturation
 Pressure from shareholders to generate profits
8. Merger and Acquisition Defenses

a. Hostile takeovers: when one party fights to gain control over another company against the
wishes of existing management
b. All companies who sell stock to public are vulnerable to takeovers
c. A hostile takeover can be launched in one of two ways:
 Tender offer: raider offers to buy a certain number of stocks in the corporation at a
specific price (usually more than current price for stock, so stockholders motivated to
sell)
 Proxy fight: raider launches a public relations battle for shareholder votes hoping to enlist
enough votes to oust board and management
d. Steps companies take to protect themselves
 Poison pill: deliberately making the company less valuable to the raider
 Shark repellent: Requires stockholders representing a large majority of shares to
approve any takeover attempt.

 White knight: friendly buyer takes over company before a raider, usually allows
current management to remain in place
B. Strategic alliances and joint ventures: alternative to mergers, consolidations, and

acquisitions
1. Strategic Alliance: long-term partnership between companies to jointly develop, produce, or
sell products
a. Advantages of strategic alliances:
 Can accomplish many of the same goals as mergers, consolidations, and acquisitions
 without requiring a painstaking process of integration
 Can help a company gain credibility in a new field
 Can help a company expand its market presence
 Can help a company gain access to technology
 Can help a company diversify offering
 Share best practices without forcing the partners to become fast friend for life
 Ease of dissolve
2. Joint venture – special type of strategic alliance in which two or more firms jointly create a
new business entity that is legally separate and distinct from its parents
a. Advantages of joint ventures:
 Allow companies to use each other’s complementary strengths that might otherwise take
too long to develop on their own
 Allow companies to share what may be the substantial costs and risk of starting a new
operation

More Suggestions about the topic:
1. It may be necessary to reemphasize the difference between private and public corporations,
outlining the major differences between the two. To initiate discussion, the following questions
could be posed:
Why might a closely held corporation choose to remain private?
As a means of retaining control over the firm and protect their businesses from unwelcome
takeover attempts.
Why might a closely held corporation choose to become a publicly traded corporation?
Increased liquidity; Establishment of an independent market value for the company; Enhanced
visibility
2. To emphasize the importance of legal contracts to form partnerships and alliances, you may
want to pose the following question:
What are the ramifications of not having a legally binding agreement in the creation of a
partnership or an alliance?
Legal contracts are advisable in business dealings to avoid misunderstandings and ensure that
both parties complete the agreement. In most business dealings, there is a lot of money and time
on the line. The risk of losing this is far too great; therefore, a legally binding agreement is
necessary (even if it is not required).

FedEx Kinko’s: What’s Next?
Critical Thinking Questions
1. Why did Kinko’s change its structure from individual partnership to a single corporation
entity?
Kinkos changed its structure because the managerial demands of the business had grown beyond
the skills of the founding entrepreneur. In addition, bringing together FedEx and Kinkos better
served both of their customers by expanding beyond their original businesses into supply chain
management, thus, helping customers organize the sourcing and delivery of their products.
2. Why is it important for all FedEx Kinko’s stores to have the same equipment and offer
the same services?
All FedEx Kinko’s stores need to have the same equipment and offer the same services because
customers expect to find replicable opportunities within each store regardless of location. This
replication also allows for better management of each store since upper-level managers can
supervise a number of stores and simply duplicate expectations within each location.
3. What are the potential advantages and disadvantages of being purchased by FedEx?
The advantages to Kinko’s of being purchased by FedEx is the increased name recognition as
they join forces with an internationally recognized company. There are also increased
opportunities for expanding market share.
The major disadvantage is the potential for Kinko’s to lose their original focus of providing
printing and duplicating service to customers. There is also the potential of culture clashes as the
two companies come together.

Answers to End-of-Chapter Questions
Test Your Knowledge
Questions for Review

1. What are the three basic forms of business ownership?
The three basic forms are sole proprietorships, partnerships, and corporations.
2. What is the difference between a general and a limited partnership?

A general partnership is owned by general partners who are equally liable for the business’s
debts. A limited partnership is owned by at least one general partner who runs the business, and
limited partners who are passive investors and are generally liable for no more than the amount
of their investment.
3. What is a closely held corporation, and why do some companies choose this form of
ownership?
Closely held corporations, also known as private or closed corporations, do not sell stock to the
general public. By withholding their stock from public sale, the owners retain complete control
over their operations and protect their businesses from unwelcome takeover attempts.
4. What is the role of a company’s board of directors?

Representing the shareholders, the board of directors is responsible for guiding corporate affairs
and selecting corporate officers. Increasingly, boards are becoming involved in corporate
strategy, management succession, evaluation of executives, and other crucial issues. To
accomplish this, many companies seek outside directors who own large shares in the company.
Evidence shows that companies with directors who own large shares and take active roles
usually outperform companies with more passive boards.
5. What is culture clash? Different belief systems and acceptable ways of behaving within one
company structure come into conflict with the belief systems and acceptable behaviors of the
other company system when brought together in a merger or acquisition.

Questions for Analysis
6. Why is it advisable for partners to enter into a formal partnership arrangement?

A formal partnership arrangement spells out the partners’ rights and responsibilities, and also
defines what will happen if one of the partners dies. Without the safeguards provided by such
arrangements, partners leave themselves open to conflicts and legal difficulties down the road.
To further protect the company’s interests, many partnerships also require their partners to sign
covenants that make it difficult for them to join a competitor should they leave.
7. To what extent do shareholders control the activities of a corporation?

The shareholders are owners of a corporation so, in theory, they are the ultimate governing body
of the organization. However, in practice, they have very little control over the day-to-day
activities of the firm—these activities rest with the management. Shareholders are able to
influence the firm by electing directors. However, unless an individual owns a large number of
common shares, or unless the corporation allows cumulative voting, no single shareholder carries
much influence in an election.
8. How might a company benefit from having a diverse board of directors that includes
representatives of several industries, countries, and cultures?
A diverse board of directors can bring unique and global perspectives to the company, which can
lead to new products, new market opportunities, improved performance, and better overall
business strategies.
9. Why do so many mergers fail?

According to recent studies, underestimating the power of culture clash was the major factor in
failed mergers. In many mergers, the acquiring companies impose their values and systems on
the acquired companies without any regard to what had been working well there previously. In
addition, mergers can create immense burdens of high-risk corporate debt, can divert investment
from productive assets, and can distract managers’ attention from day-to-day operations.

10. Ethical Considerations: Your father sits on the board of directors of a large, well-admired
public company. Yesterday, while looking for an envelope in his home office, you stumbled on a
confidential memorandum. Unable to resist the temptation to read the memo, you discovered
that your father’s company is talking to another publicly traded company about the possibility of
a merger, with Dad’s company being the survivor. Dollar signs flashed in your mind. Should
the merger occur, the value of the other company’s stock is likely to soar. You’re tempted to log
on to your E*trade account in the morning and place an order for 1,000 shares of that
company’s stock. Better still, maybe you’ll give a hot tip to your best friend in exchange for the
four Dave Matthews Band tickets he’s been flashing in your face all week. Would either of these
actions be unethical? Explain your answer.
When exploring the question of whether any of these actions are unethical, students might
benefit from going back to the discussions in Chapter 2, including the checklist in Exhibit 2.1. In
addition, the question of illegality—i.e., insider trading—should also be addressed. (Insider
trading involves buying and selling shares of stock or other securities based on special
knowledge not available to others.)
Questions for Application
11. Suppose you and some friends want to start a business to take tourists on wilderness
backpacking expeditions. None of you has much extra money, so your plan is to start small.
However, if you are successful, you would like to expand into other types of outdoor tours and
perhaps even open up branches in other locations. What form of ownership should your new
enterprise take, and why?
Because there are multiple owners, a sole proprietorship is out of the question. Because of the
potential danger inherent to wilderness expeditions, a partnership could expose the owners to too
much financial risk (i.e., a client might sue for injuries sustained on an expedition). Due to the
limited financial resources of all of the owners, and the fact that all will probably be leading
expeditions, a limited partnership is not a viable option either. If the owners didn’t anticipate
remaining in the business for a long time, a limited liability company might be the best option, as
it would allow them to pay taxes as though they were partners while limiting their liability to
their investment in the company. However, because the owners have goals to expand the

company, the best form of ownership would be a corporation. This will limit their liability and
enable them to raise expansion capital by selling shares. Depending on their personal income tax
rate, their anticipated need for capital to finance growth, and the expected future earnings of their
company, the owners may want to establish a C corporation.
12. Selling antiques on the Internet has become more successful than you imagined. Overnight
your website has grown into a full-fledged business-now generating some $200,000 in annual
revenue. It’s time to think about the future. Several competing online antique dealers have
approached you with a proposal to merge their website with yours to create the premier online
antique store. The money sounds good, but you have some concerns about joining forces. What
might they be? What other growth options should you consider before joining forces with
another business?
Students’ answers will vary. Combined entities hope to eliminate expenditures for redundant
resources; increase their buying power as a result of larger size; increase revenue by cross-selling
products to each other’s customers; increase market share by combining product lines to provide
more comprehensive offerings; and gain access to new expertise, systems, and teams of
employees who may already know how to work together. Part of the problem with mergers is
that companies often borrow immense amounts of money to fund the merged entity; another
obstacle that companies face when combining forces is culture clash.
Other growth options might: (1) public stock ownership; that will offer increased liquidity,
enhanced visibility financial flexibility and an independently established market value for the
stock, and (2) a partnership with one other online antique dealer to investigate the possibility of a
larger merger of dealers.
13. Integrated: Chapter 3 discussed international strategic alliances and joint ventures. Why
might a U.S. company want to enter into those types of arrangements instead of merging with a
foreign concern?
Two competing companies might establish a joint venture to make them both more competitive
through the sharing of technology, finances, and human resources. By pooling resources, both
companies can accomplish goals that would be more difficult to accomplish alone. In a merger,

the participating companies completely combine their operations into a single company. Joint
ventures, on the other hand, allow the participating companies to keep their autonomy, even
though they may work together on a project or even create a new, separate company.
14. Integrated. You’ve developed considerable expertise in setting up new manufacturing plants,
and now you’d like to strike out on your own as a consultant who advises other companies.
However, you realize that manufacturing activity tends to expand and contract at various times
during the business cycle (see Chapter 1). Do you think a single-consultant sole proprietorship
or a small corporation with half dozen or more consultants would be better able to ride out
tough times at the bottom of a business cycle?
There would be benefits and drawbacks to each approach. The major benefit would be that
different consultants could be working with different organizations at varying times of their
business cycle. Thus, the increased earnings from one consultant could offset the drop in
earnings of another consultant who is working with a client during their down times in their
business cycle. However, with more than one employee, the owner is responsible for
maintaining the salary and benefits of those employees regardless of the business cycles of their
clients.
Practice Your Knowledge
Handling Difficult Situations on the Job: Determining Accountability in a Crisis
Responses to “Your Task”

In this case, students are asked to serve in the role of board members for the Westlake
Therapy and Rehabilitation Center. The board had agreed with management’s proposal to
install an “Endless Pool, which would allow for indoor, year-round therapy. At the grand
opening, with press present the pool, due to installation errors, malfunctioned. Although
the Rehab Center management had been told professionals were not required for
installation of the pool, professional pool-installers were hired. The press is coming back
tomorrow for a follow-up interview.

The students, as board members, must help to decide how to handle this much-publicized
fiasco. What actions should the board take, and what should it leave to management’s
discretion? Consider the impact on company image, profitability, liability, and daily
operations. Who will you hold accountable? How?
Students should be encouraged to review the responsibilities of board members outlined in the
text. These responsibilities include:
 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 rubber stamps
 Directors involved in corporate strategy, evaluation of executives, etc.
 Directors are often compensated with stock to give them a stake in their decisions
Students should be encouraged to discuss the role of the board with the Center’s Management,
with the press and with the installation and manufacturing companies.
Building Your Team Skills
In this exercise students are asked to serve as the board of directors for their college or
university. As the board they are asked to assume the responsibility for hiring the new
college president who has announced his or her retirement for the next term.
Students are to consider the qualities and qualifications the new president should posses,
the stakeholders that need to be considered and the questions that should be posed to

determine if candidates meet the requirements.
Students will be able to learn more about the specific positions qualifications by visiting the
Occupational Outlook Handbook at: http://www.bls.gov/oco/ and entering “Top Executives.”
They could also check the American Council on Educations’ Center for Policy Analysis report
on “The American College President: Executive Summary,” which can be found at:
http://www.acenet.edu/programs/policy/president-study/index.cfm. In this study they will be
able to read about duties of the college president and statistics about typical length in the
position, etc.
The stakeholders the students consider should include:

 Students
 Faculty
 Administrators
 Funders
 Alumni
 Employers
 State legislators – if a public school
 Potential students
 Parents
 The community
Exploring the Best of the Web
URLs for all Internet exercises are provided at the website for this book,
www.prenhall.com/bovee. When you log on to this text’s website, select Chapter 6, then select
“Student Resources,” click on the name of the featured website, and follow the detailed
navigational directions to complete Internet exercises.

Explore these chapter-related websites, review their content, and answer the following questions
for each website you visit:
1. What is the purpose of this website?
2. What kinds of information does this website contain? Please be specific.
3. How is the information provided at this website useful for businesspeople? Consumers?
4. How did you expand your knowledge of forms of business ownerships and business
combinations by reviewing the material at this website? What new things did you learn about
this topic?
Choose a Form of Ownership

Which legal form of ownership is best suited for a new business? Answering this question can be
a challenge-especially if you’re not familiar with the attributes of sole proprietorships,
partnerships, and corporations. That’s where Nolo Self-Help Centers can help. Because there’s
no right or wrong choice for everyone, your job is to understand how each legal structure works
and then pick the one that best meets your needs. Start your research by browsing the small
business law center at Nolo. Be sure to check out the FAQs and Legal Encyclopedia.
www.nolo.com
To provide a small business law center for potential and current business owners to understand
the legal structure of each of the forms of business ownership. This will assist these potential
business owners in choosing the most appropriate from of business ownership for them. This
website provides small business information for starting a business, choosing a business
structure, and writing a business plan.

Student answers may vary, but may include any of the following:
This website provides information about the following: evaluating your business idea, writing a
business plan, choosing a business name; finding and renting space for your business; legal
structures of small business; employing workers; business financing; bookkeeping and
accounting; business taxes; marketing and advertising; small business legal concerns; home
businesses; doing business online; protecting your business’ intellectual property, etc. This

website also provides a law library as a resource for potential or current small business owners.
3. How is the information provided at this website useful for businesspeople?

Consumers?
It is useful for businesspeople as a resource to obtain information on what is listed in the above
answer. The website serves as a valuable resource for businesspeople.
Consumers may find this site useful because it provides information concerning wills and estate
planning as well as information on retirement planning. It also includes information on
traveling, financial preparation for college, etc.
combinations by reviewing the material at this website? What new things did you learn
about this topic?
Students’ responses will depend, in large part, on the material currently posted on the website.
Follow the Fortunes of the Fortune 500

Quick! Name the largest corporation in the United States, as measured by annual revenues. Give
up? Just check Fortune magazine’s yearly ranking of the 500 largest U.S. companies. For years,
General Motors has topped the list with its $170 billion-plus in annual revenues, but now Wal-
Mart has taken over with over $200 billion in annual revenues. The Fortune 500 not only ranks
corporations by size but also offers brief company descriptions along with industry statistics and
additional measures of corporate performance. You can search the list by ranking, by industry,
by company name, or by CEO. And to help you identify the largest international corporations,
there’s a special Global 500 list as well.
www.fortune.com
This website exists to provide rankings on corporations and to also offer brief company

descriptions along with industry statistics and additional measures of corporate performance.
This website also provides rankings and information on the following: best companies to work
for, most admired companies (domestic and global), top small businesses, etc.

Student answers may vary, but may indicate that this website contains information on the
following:
 Investments
 Careers
 Companies
 Company profiles
 Rankings in regards to best companies to work for
 Most admired companies (domestic and global)
 Fastest growing companies
 Small business
 Best companies for minorities
 CEOs
 Articles pertaining to technology
3. How is the information provided at this website useful for businesspeople? Consumers?
Businesspeople may be able to search through the company profiles to see how the most
successful companies are operating. To enhance their business operations, businesspeople may
emulate some business practices of these most successful firms.
Individuals may find this website helping when looking for a company that best fits their
personality and profile. It also lists the best companies to work for so that consumers are aware
of the business practices of these companies. It also offers a wide range of articles that pertain to
possible solutions to work problems. Information on investments is also provided.

about this topic?
Build a Great Board

Want a great board of directors? This inc.com guide contains the best resources for entrepreneurs
who are ready to recruit outside directors for their boards. Find out how to recruit board
members and how to persuade top-notch people to come on board. Once you’ve selected your
members, learn how to maximize your board’s impact and resolve conflicts among board
members. Check out one expert’s five practical tips for good nuts-and-bolts boardsmanship.
www.inc.com/guides/growth/20672.html
Student answers may include any of the following:
This inc.com guide contains the best resources for entrepreneurs who are ready to recruit outside
directors for their boards. This website offers advice on how to maximize your board’s impact
and resolve conflicts among board members. It offers guideline to help you build and use your
board.

This website provides information concerning the following: building the board; persuading top-
notch people to join your advisory board; finding diverse candidates for your board; board
conflict resolution; board evaluation problems and solutions; tips for first-time board members.
3. How is the information provided at this website useful for businesspeople?

Consumers?
This information is useful for businesspeople who are building a board of directors. (Refer to
answer for question #2)

Consumers can learn more about how companies build their boards.
about this topic?
A Case for Critical Thinking
AOL Time Warner: Deal of the Century Turns into Disaster of a Lifetime
Critical Thinking Questions

1. Why did the media refer to the merger as the deal of the century?
The merger between AOL and Time Warner was originally called the “Deal of the Century”
because it was the largest merger in U.S. history on the date it was finalized – January 11, 2001.
The merger cost $160 million.
2. Why was Time Warner eager to merge with AOL?

Time Warner was eager to merge with AOL because they were lacking in terms of development
in the digital age and say AOL as an excellent pathway into this area for them.
3. What challenges did AOL Time Warner face as a merged company?

The biggest challenge facing the AOL Time Warner merger was that of combining two very
distinct, yet very profitable cultures. Additionally, the economic slump, which drove advertising
to an all-time worse level of spending, had an enormous impact on AOL’s ability to generate
revenue, thus dropping their stock prices down. Most Time Warner’s shareholders were being
paid in AOL stock, thus making the situation worse.
4. Visit the AOL Time Warner website. Review the site to get the latest news about the
fate of the merger. How is the company doing financially? How much turnover has

occurred among high-level executives? If any parts of the business have been sold off, what
has the acquiring company said about future prospects?
The AOL Time Warner address is: http://www.aoltw.com/. Here students can click on links for:
 Corporate information
 Corporate citizenship
 Companies
 International
 Investors
 New
 Features
 Careers
By clicking on “Investors” students will find additional links to:

 Quarterly Earnings
 Trending Schedules
 Annual Reports
 Annual Meeting Materials
 Archival Materials
 SEC Filings
 General Filings
 Section 16 Filings
 Stock
 Historical Stock Prices
 Stock Split & Dividend History
 Fixed Income Securities
 Events & Analysis
 Events & Presentations
 Analyst Coverage
 Shareholder Services
 Frequently Asked Questions

 Order Investor Materials

 Receive Materials Online
 Contact Investor Relations
4. As a new business owner, you will be communicating with people who speak many
different languages. Log on to this text’s website, Chapter 6—Mastering Global and
Geographical Skills, for a current link to the AltaVista Translation Service. Use this
resource to answer these questions: How do you say, “inventory” in Italian? Portuguese?
German? French?
Italian: inventario
Portuguese: inventário
German: inhalt
French: inventaire
Key Terms
Acquisition
Board of Directors
Chief Executive Officer
Common Stock
Consolidation
Corporation
Dividends
General Partnership
Limited Liability Companies
Limited Partnership
Merger
Parent Company
Partnership
Private Corporation

Preferred Stock
Public Corporation
S Corporation
Shareholders
Sole Proprietorship
Subsidiary Corporations
Unlimited Liability
Glossary
Acquisition – Form of business combination in which one company buys another company’s voting
stock.
Board of Directors – Group of people, elected by the shareholders, who have the ultimate authority
in guiding the affairs of a corporation.
Chief Executive Officer (CEO) – Person appointed by a corporation’s board of directors to carry
out the board’s policies and supervise the activities of the corporation.
Common Stock – Shares whose owners have voting rights and have the last claim on distributed
profits and assets.
Consolidation – Combination of two or more companies in which he old companies cease to exist
and a new enterprise is created.
Corporation – Legally chartered enterprise having most of the legal rights of a person, including the
right to conduct business, to own and sell property, to borrow money, and to sue nor be sued.
Dividends – Distributions of corporate assets to shareholders in the form of cash or other assets.
General Partnership – Partnership in which all partners have the right to participate as co – owners
and are individually liable for the business’s debts.
Limited Liability Companies (LLCs) – Organizations that combine the benefits of S corporations
and limited partnerships without the drawbacks of either.
Limited Partnership – Partnership composed of one or more general partners and one or more
partners whose liability is usually limited to the amount of their capital investment.
Merger – Combination of two companies in which one company purchases the other and assumes

control of its property and liabilities.

Parent Company – Company that owns most, if not all, of another company’s stock and that takes
an active part in managing that other company.
Partnership – Unincorporated business owned and operated by two or more persons under a
voluntary legal association.
Public Corporation – Corporation that actively sells stock on the open market.
S Corporation – Corporation with no more than 75 shareholders that may be taxed as a partnership.
Shareholders – Owners of a corporation.
Sole Proprietorship – Business owned by a single individual.
Subsidiary Corporations – Corporations whose stock is owned entirely or almost entirely by
another corporation.
Unlimited Liability – Legal condition under which any damages or debts attributable to business
can also be attached to the owner because the two have no separate legal existence.

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Course Notes in “BUS 101 Introduction to Business” by Assist. Prof.

Week 5 - Chapter 5: Building the Foundation: Forms of Business Ownership

International Black Sea University 1

1. Advantages of sole proprietorships are:

2. Disadvantages of sole proprietorship are:

B. Partnership – a legal association of two or more people as co-owners of a business for

1. Two basic types of partnerships:

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from business creditors. It is easy to set up such business, Partnership agreement is

2. Advantages of partnerships are:

3. Disadvantages of partnerships are:

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e. Lack of privacy (easy access to information)

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d. legal status and obligations exist independently of its owners

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and a priority claim on assets after creditors.

d. Public Versus Private Ownership

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 Management must be ready to handle the administrative and legal

Question to Students: Cite four advantages and three disadvantages of corporations.

In exchange for these advantages, the disadvantages are:

Question to Students: Highlight the advantages and disadvantages of public stock

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d. Expanded research and development capabilities

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b. Limited liability companies

1. Corporate Governance – As general practice shows, corporations’ common shareholders

Shareholders Board of Officers Employees

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a. Chief Executive Officer (CEO)

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

d. Current issues being wrestled with regarding boards:

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A. Mergers and Acquisitions (M & A)

4. Combinations can take one of several forms, including:

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5. Advantages of Mergers and Acquisitions

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6. Disadvantages of Mergers and Acquisitions

7. Current Trends in Mergers and Acquisitions

8. Merger and Acquisition Defenses

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B. Strategic alliances and joint ventures: alternative to mergers, consolidations, and

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More Suggestions about the topic:

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FedEx Kinko’s: What’s Next?

Critical Thinking Questions

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Answers to End-of-Chapter Questions

Test Your Knowledge

Questions for Review

2. What is the difference between a general and a limited partnership?

4. What is the role of a company’s board of directors?

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Questions for Analysis

6. Why is it advisable for partners to enter into a formal partnership arrangement?

7. To what extent do shareholders control the activities of a corporation?

9. Why do so many mergers fail?

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