Professional Documents
Culture Documents
Chapter 4
Chapter 4
Choosing a Form of
Business Ownership
1
Chapter Learning Goals
What are the three main forms of business
organization, and what factors should a company’s
owners consider when selecting a form?
Subchapter S
Limited Partnership Corporation
(S-Corporation)
Master Limited
Partnership
4
Business Ownership Options: The Big
Three
Sole Proprietorship – the business is owned
by a single individual
5
Class Exercise
You want to own and manage your own business. To help you
evaluate your chances of success, answer these questions.
◦ Do you have any experience in a business like the one you want
to start?
◦ Have you worked for someone else as a supervisor or manager?
◦ Have you saved any money? How much?
◦ Do you know how much money you will need to get your
business started?
◦ Do you know how much credit you can get from your suppliers
and bankers?
◦ Do you know the good and bad points about going it alone,
having a partner, and incorporating your business?
◦ What do you know about your potential customer?
Business Ownership Options: The
Big Four
7
Comparisons of Forms of Business
Organization
Sole proprietorships
Partnerships
Corporations 8
Business Ownership Statistics
Reasons People Go into
Business for Themselves
4 | 10
Relative Percentages of Sole Proprietorships,
Partnerships, and Corporations in the U.S.
Sole proprietorships are most common in retailing, the service industries, and
agriculture .
Sole Proprietorship
Advantages Disadvantages
12
maintain talented employees
Business Partnerships
General Partnerships Limited Partnerships
Equal
Equal Unequal
Unequal
Partners
Partners Partners
Partners
Share
Share Unlimited
Unlimited Passive
Passive Limited
Limited
Ownership
Ownership Liability
Liability Investors
Investors Liability
Liability
13
Partnerships: General vs.
Limited
General Partnerships
All partners have the right to participate in
the management of the firm and share in any
profits/losses.
Limited Partnerships
All partners contribute financially and share
in the profits but the limited partner(s) cannot
actively participate in management.
14
Partnership Advantages
15
16
Partnership Disadvantages
Unlimited Interpersonal
Liability Problems
Managing Unproductive
Debts Law Suits
Partner Partners
17
Partnership Agreement
Division Dispute
of Profits Resolution
Decision-Making Expected
Authority Contributions
18
Steps of Forming a Corporation
1. Select company’s name
2. Write and file Articles of
Incorporation paperwork
3. Pay fees and taxes
4. Hold organizational meeting
5. Adopt bylaws, elect directors,
pass operating resolutions
19
Forming a Corporation
Consulta lawyer
Decide where to incorporate
• Cost of incorporating
• Advantages/disadvantages of each state’s corporate laws and tax
structure
Choose corporate location
• Domestic corporation ─ in state in which it is incorporated
• Foreign corporation ─ in any state in which it does business
except the one in which it is incorporated
• Alien corporation ─ chartered by a foreign government and
conducting business in the U.S.
Hold organizational meeting
20
10 Aspects of Business
That May Require Legal Help
21
Organizational Structure of Corporations
Stockholders
elect
Directors
elect
Officers (Top
Management)
22
Corporate Structure
Board of Directors
top governing body of corporation, members are
elected by stockholders
Corporate Officers
chairman of the board, president, executive vice-
presidents, corporate secretary, treasurer, and other
top executives appointed by board of directors
23
Stockholders’ Rights
Common Stock
owned by individuals who vote on corporate matters and
whose claims on profit/assets are subordinate to others
Preferred Stock
owned by individuals/firms who do not have voting rights,
whose claims on dividends are paid before those of common-
stock owners
Dividend
a distribution of earnings to stockholders
Proxy
legal form listing issues to be decided at stockholders’
meeting and enabling stockholders to transfer voting rights
to other individual(s)
24
Corporations
Enter Into Contracts
25
The Seven Largest U.S.
Industrial Corporations
27
Organizational Chart
Owners/
Stockholders/
Shareholders
Chief Executive
Officer (CEO)
Board of Directors
President
Senior
Vice President
Shareholders Shareholders
Shareholders Shareholders
29
Public Versus Private Ownership
Public Private
Corporation Corporation
30
Advantages
of “Going Public”
Ready supply of capital
Increased liquidity
Enhanced visibility
Independent market value
Increased flexibility
31
Disadvantages
of “Going Public”
High cost
SEC filing requirements
Reduced ownership control
Demands of public exposure
Pressure for quarterly results
32
Corporations
Advantages Disadvantages
33
World’s Largest
Corporations
1. Citigroup 11. UBS
2. General Electric 12. Wal-Mart Stores
3. American Intl Group 13. Royal Bank of Scotland
4. Bank of America 14. JP Morgan Chase
5. HSBC Group 15. Berkshire Hathaway
6. ExxonMobil 16. BNP Paribas
7. Royal Dutch/Shell 17. IBM
8. BP 18. Total
9. ING Group 18. Verizon Communication
10. Toyota Motor 20. Chevron Texaco
5-34
Types of Corporations
Subchapter S
Corporation
Limited
Liability Company
Subsidiary
Corporation
35
S-Corporation
Corporation taxed as partnership
Criteria:
• No more than 100 stockholders
• Stockholders must be individuals, estates, or exempt
organizations
• Only 1 class of stock
• Must be domestic corporation
• No nonresident-alien stockholders
• All stockholders must agree to S-corporation
36
Corporations: Characteristics
TYPE KEY ADVANTAGE LIMITATIONS
S Corp. • IRS does not tax earnings • No more than 100 stockholders
separately • Stockholders must be U.S.
• Stockholders have limited liability citizens or permanent residents
Nonprofit • Earnings are exempt from federal • May have dues paying members
Corp. and state income taxes but no stockholders
• Members/directors have limited • Can’t distribute dividends
liability • Can’t make political donations
• Contributions
© 2009 South-Western, made
a division of Cengage by individuals
Learning • Must keep37 accurate records to
are tax-deductible document tax-exemption
37
Limited-Liability
Company (LLC)
Provides limited liability protection, taxed
like a partnership
Advantages:
• With 2 or more members = taxed as partnership
avoiding double taxation,1 member = taxed as sole
proprietorship
• Extends protection of personal assets
• More management flexibility when compared to
corporations
38
Some Advantages and Disadvantages of a Regular
Corporation, S-Corporation, and Limited-Liability Company
39
Corporate Governance
40
Business Combinations
Mergers
Mergers Consolidations
Consolidations
Acquisitions
Acquisitions Cooperatives
Cooperatives
41
Corporate Restructuring: Mergers &
Acquisitions
Mergers – two Acquisitions – when
companies agree to a one firm buys another
combination of equals
Corporations look for:
• Growth opportunities
• Operational efficiencies
• Competitive advantages
42
Types of Mergers
Horizontal
between firms that make and sell similar
products/services in similar markets
Vertical
between firms that operate at different levels in the
production and marketing of a product
Conglomerate
between firms in completely different industries
43
Types of Mergers
1. Horizontal mergers
◦ same industry, same stage of production
2. Vertical mergers
◦ same industry, different stages of production
3. Conglomerate mergers
◦ different industries
4. Leveraged buyouts
◦ corporate takeovers with borrowed money
44
Types of Mergers
Horizontal
Vertical
Conglomerate No
Relationship
between
companies
5-45
Types of Mergers &
Acquisitions
Type of Definition Objective Example
Merger
Reduced: Increased:
costs purchasing power
overlapin market share
operations
competition
47
Franchising
Franchise
◦ License to operate an individually owned
business as though it were part of a chain of
outlets or stores
◦ The business itself
Franchising
◦ Actual granting of a franchise
48
Franchising
Franchisor
◦ Supplies a known & advertised business name
◦ Supplies management skills
◦ Supplies training & materials
◦ Supplies method of doing business
Franchisee:
◦ Supplies labor & capital
◦ Operates the franchised business
◦ Agrees to abide by the franchise agreement
49
Franchise Contract
Franchisor, Inc.
Branded
Product/Service
Performance
Monitoring
$$$$$
Franchisee
5-50
Franchisor
Provides
Assigns Territory
Training/Support
May Provide Financial BusinessExpansion
Aid/Advice
Using O.P.M.
OffersMerchandise/
Supplies at Competitive
Price
5-51
Franchisee
Pays Up-Front Costs
Makes Monthly Payment to
Franchisor
Runs Business by Franchisor’s
Rules/Procedures
Buys Materials from Franchisor/
Approved Supplier
5-52
Franchises
Advantages Disadvantages
Management & marketing High start-up costs
assistance Shared Profit
Personal ownership Management regulation
Recognized name Coattail effects
Restrictions on selling
Financial advice &
Fraudulent franchisors
assistance
Lower failure rate
5-53
Franchising Advantages
Franchisor
◦ Fast, Selective Distribution
◦ Motivated Franchisee
Franchisee
◦ Opportunity to start a business
◦ Business Experience of others
◦ Nationally recognized name
◦ National promotional campaigns
54
Well Known Franchises
McDonald’s
ThriftyRent-a-Car System
Mail Boxes Etc.
Dairy Queen
Super 8 Motels Inc.
TGI Fridays
Pearle Vision Inc.
Baskin-Robbins
55
Franchising in Today’s Economy
56
Trends in Mergers and Acquisitions
57
Strategic Alliances
and Joint Ventures
Gain Credibility/expectancy
Expand Markets
Access Technology
Diversity Offerings
58
Double Taxation in Corporations
59
Looking Back
What are the four basic forms of business and their
characteristics?
What are the advantages and disadvantages of a sole
proprietorship?
What are the pros and cons of partnerships?
Why have corporations become the dominant form of
business ownership?
Why are limited liability companies becoming increasingly
popular?
What are the advantages and disadvantages of
franchising?
60 60
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