c hoosing a f orm of b usiness o wnership c hapter -04 dr. gehan shanmuganathan, (dba) 1
TRANSCRIPT
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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
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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……
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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.
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
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SOLE PROPRIETORSHIPS
Sole proprietorships are most common in
retailing, agriculture, and the service
industries
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)
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
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
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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-up
Availability of capital
and credit
Personal interest
Combined business
skills and knowledge
Retention of profits
No special taxes
DISADVANTAGES
Unlimited liability
Lack of continuity
Management
disagreements
Frozen investment if
other partner(s) does
not like to buy the
shares
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)
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
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
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 capital
Ease of transfer of
ownership
Perpetual life
Specialized management
DISADVANTAGES
Difficulty and expense
of formation
Government
regulation and
increased paperwork
Double taxation
(turnover tax and
personal income tax)
Lack of secrecy
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
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
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)
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
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
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
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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.