Bovee Bia8 Inppt 05

Business in Action
Eighth Edition
Chapter 5
Forms of Ownership
Copyright © 2017, 2015, 2013 Pearson Education, Inc. All Rights Reserved
Learning Objectives (1 of 2)
5.1 Define sole proprietorship, and explain the six
advantages and six disadvantages of this ownership model.
5.2 Define partnership, and explain the six advantages and
three disadvantages of this ownership model.
5.3 Define corporation, and explain the four advantages
and six disadvantages of this ownership model.
Learning Objectives (2 of 2)
5.4 Explain the concept of corporate governance, and
identify the three groups responsible for ensuring good
governance.
5.5 Identify the potential advantages of pursuing mergers
and acquisitions as a growth strategy, along with the
potential difficulties and risks.
5.6 Define strategic alliance and joint venture, and explain
why a company would choose these options over a merger
or an acquisition.
Exhibit 5.1 Forms of Business Ownership (1 of 2)
Ease of
Structure Control Profits and Taxation Liability Exposure
Establishment
Sole proprietorship One owner has Profits and losses Owner has unlimited Easy to set up;
complete control flow directly to the personal liability for typically requires just
owners and are the business’s a business license
taxed at individual financial and a form to
rates obligations register the company
Name
General partnership Two or more owners; Profits and losses All partners have Easy to set up;
each partner flow directly to the unlimited liability, partnership
is entitled to equal partners and are meaning their agreement
control unless taxed at individual personal assets are not required but
agreement specifies rates; partners share at risk to mistakes strongly
otherwise income and losses made by others recommended
equally unless the partners
partnership
agreement specifies
otherwise
Exhibit 5.1 Forms of Business Ownership (2 of 2)
Ease of
Structure Control Profits and Taxation Liability Exposure
Establishment
Limited Two or more owners; one or Same as for general Limited partners Same as for general
partnership more general partners partnership have limited liability partnership
manage the business; limited (making them liable
partners don’t only for the amount
participate in the of their investment);
management general partners
have unlimited
liability
Corporation Unlimited number of Profits are taxed at Investor’s liability is More complicated
shareholders; no limits on corporate rates; limited to the amount and expensive to
stock classes or voting profits are taxed of his or her establish than a
arrangements; ownership and again at individual investment sole proprietorship;
management of the business rates when (or requirements vary
are separate (shareholders in if) they are from state to state
public corporations are not distributed to
involved in management investors as
decisions; in private dividends
or closely held corporations,
owners are more likely to
participate in managing the
business)
Sole Proprietorships
• Sole proprietorship
– A business owned by a single person
• Unlimited liability
– A legal condition under which any damages or debts
incurred by a business are the owner’s personal
responsibility
Advantages of Sole Proprietorships
• Simplicity
• Single layer of taxation
• Privacy
• Flexibility and control
• Fewer limitations on personal income
• Personal satisfaction
Disadvantages of Sole Proprietorships
• Financial liability
• Demands on the owner
• Limited managerial perspective
• Resource limitations
• No employee benefits for the owner
• Finite life span
Partnerships (1 of 4)
• Partnership
– An unincorporated company owned by two or more
people
• Limited liability
– A legal condition in which the maximum amount each
owner is liable for is equal to whatever amount each
invested in the business
• General partnership
– A partnership in which all partners have joint authority
to make decisions for the firm and joint liability for the
firm’s financial obligations
• Limited partnership
– A partnership in which one or more persons act as
general partners, run the business, and have the
same unlimited liability as sole proprietors
• Master limited partnership (MLP)
– A partnership that is allowed to raise money by selling
units of ownership to general public partnerships and
can bring together business professionals with diverse
skill sets and perspectives
• Limited liability partnership (LLP)
– A partnership in which each partner has unlimited
liability only for his or her own actions and at least
some degree of limited liability for the partnership
as a whole
Advantages of Partnerships
• Simplicity
• Single layer of taxation
• More resources
• Cost sharing
• Broader skill and experience base
• Longevity
Disadvantages of Partnerships
• Unlimited liability
• Potential for conflict
• Expansion, succession, and termination issues
The Partnership Agreement
• A partnership agreement should address investment
percentages, profit-sharing percentages, management
responsibilities and other expectations of each owner,
decision-making strategies, succession and exit strategies,
criteria for admitting new partners, and dispute-resolution
procedures.
Corporations (1 of 2)
• Corporation
– A legal entity, distinct from any individual persons, that
has the power to own property and conduct business
• Shareholders
– Investors who purchase shares of stock in a
corporation
Corporations (2 of 2)
• Private corporation
– A corporation in which all the stock is owned by
only a few individuals or companies and is not
made available for purchase by the public
• Public corporation
– A corporation in which stock is sold to anyone
who has the means to buy it
Advantages of Corporations
• Ability to raise capital
• Liquidity
– A measure of how easily and quickly an asset such as
corporate stock can be converted into cash by selling it
• Longevity
• Limited liability
Disadvantages of Corporations
• Cost and complexity
• Reporting requirements
• Managerial demands
• Possible loss of control
• Double taxation
• Short-term orientation of the stock market
Special Types of Corporations (1 of 3)
• S corporation
– A type of corporation that combines the capital-raising
options and limited liability of a corporation with the
federal taxation advantages of a partnership
• Limited liability company (LLC)
– A structure that combines limited liability with the
pass-through taxation benefits of a partnership
– The number of shareholders is not restricted, nor
is members’ participation in management
• Benefit corporation
– A profit-seeking corporation whose charter specifies
a social or environmental goal that the company
must pursue in addition to profit
Exhibit 5.2 Corporate Structures (1 of 2)
Structure Characteristics
Public corporation (also known as Corporation whose stock is sold to the general
publicly held or publicly traded) public
Private corporation (also known as Corporation whose stock is held by a small
closely held) number of owners and is not available for sale to
the public
S corporation (also known as Corporation allowed to sell stock to a limited
subchapter S corporation) number of investors while enjoying the pass-
through taxation of a partnership
Limited liability company (LLC) Corporate structure with benefits similar to those
of an S corporation, without the limitation on the
number of investors
Benefit corporation Profit-seeking corporation whose charter also
requires it to pursue a stated social or
environmental goal
Exhibit 5.2 Corporate Structures (2 of 2)
Structure Characteristics
Subsidiary Corporation primarily or wholly owned by another company
Parent company Corporation that owns one or more subsidiaries
Holding company Special type of parent company that owns other companies
for investment reasons and usually exercises little operating
control over those subsidiaries
Alien corporation Corporation that operates in the United States but is
incorporated in another country
Foreign corporation Company that is incorporated in one state (frequently the
(sometimes called an state of Delaware, where incorporation laws are more lenient)
out-of-state corporation) but that does business in several other states where it is
Registered
Domestic corporation Corporation that does business only in the state where it is
chartered (incorporated)
Corporate Governance (1 of 3)
• Board of directors
– A group of professionals elected by shareholders as
their representatives, with responsibility for the overall
direction of the company and the selection of top
executives
Corporate Governance (2 of 3)
• Corporate governance
– Describes all the policies, procedures, relationships,
and systems in place to oversee the successful and
legal operation of the enterprise
– Also refers to the responsibilities and performance
of the board of directors specifically
Exhibit 5.3 Corporate Governance (3 of 3)
Shareholders
• Proxy
– A document that authorizes another person to vote
on behalf of a shareholder in a corporation
• Shareholder activism
– Activities undertaken by shareholders to influence
executive decision making in areas ranging from
strategic planning to social responsibility
Corporate Officers
• Corporate officers
– The top executives who run a corporation
• Chief executive officer (CEO)
– The highest-ranking officer of a corporation
Mergers and Acquisitions (1 of 2)
• Merger
– An action taken by two companies to combine and
perform as a single entity
• Acquisition
– An action taken by one company to buy a controlling
interest in the voting stock of another company
Mergers and Acquisitions (2 of 2)
• Hostile takeover
– Acquisition of another company against the wishes of
management
• Leveraged buyout (LBO)
– Acquisition of a company’s publicly traded stock, using
funds that are primarily borrowed, usually with the
intent of using some of the acquired assets to pay back
the loans used to acquire the company
Advantages of Mergers and Acquisitions
• Increase their buying power as a result of their larger size
• Increase revenue by cross-selling products to each other’s
customers
• Increase market share by combining product lines
• Gain access to new expertise, systems, and teams of
employees
Disadvantages of Mergers and Acquisitions
• Executives have to agree on how the merger will be
financed.
• Managers need to decide who will be in charge after
they join forces.
• Marketing departments need to figure out how to blend
product lines, branding strategies, and advertising and
sales efforts.
• Companies must often deal with layoffs.
Exhibit 5.4 Types of Mergers
Strategic Alliances and Joint Ventures
• Strategic alliance
– A long-term partnership between companies to jointly
develop, produce, or sell products
• Joint venture
– A separate legal entity established by two or more
companies to pursue shared business objectives
Exhibit 5.5 Options for Joining Forces (1 of 3)
Applying What You’ve Learned (1 of 2)
1. Define sole proprietorship, and explain the six
advantages and six disadvantages of this ownership
model.
2. Define partnership, and explain the six advantages
and three disadvantages of this ownership model.
3. Define corporation, and explain the four advantages
and six disadvantages of this ownership model.
Applying What You’ve Learned (2 of 2)
4. Explain the concept of corporate governance, and
identify the three groups responsible for ensuring good
governance.
5. Identify the potential advantages of pursuing mergers and
acquisitions as a growth strategy, along with the potential
difficulties and risks.
6. Define strategic alliance and joint venture, and explain
why a company would choose these options over a
merger or an acquisition.
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