Selecting the Proper Form of Business

Ownership and Exploring Mergers and

Acquisitions

Chapter 4

Sole Proprietorships

Partnerships

Corporations

Sole Proprietorship:Business owned by a single individual

Unlimited Liability: Legal condition under which any business damages

or debts can also be attached to the owner because the two have no separate legal identity

Advantages Easy to establish

Owner has control & independence

Owner reaps all profits

Income is taxed at individual rates

Company plans & financial performace remain private

Disadvantages Limited financial

resources

Owner may lack managerial skills

Owner is liable for business debts & damages

Business may cease with death of owner

Partnership:Unincorporated business owned and operated by two or

more persons under a voluntary legal association

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 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

Advantages Easy to establish

Owners have control & independence

Owners reap all profits

Income is taxed at lower individual rates

Strength in numbers

Disadvantages Owners are liable for

business debts & damages

Potential interpersonal problems

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 or be sued-owners of the corporation enjoy limited liability

Shareholders: Owners of a corporation

Stock: Shares of ownership in a corporation

Stock Certificate: Document that proves stock ownership

Common Stock: Shares whose owners have voting rights and

have the last claim on distributed profits and assets

Preferred Stock: Shares that give their owners first claim on a

company's dividends and assets after paying all debts; usually pays fixed dividends

Dividends: Distributions of corporate assets to shareholders

in the form of cash or other assets

Ele

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AppointsAppoints

ShareholdersOwners can be: Individuals Other Companies Not-for-Profit

Organizations Pension Funds

Mutual Funds

Board of DirectorsGroup of people elected by the shareholders who have the ultimate authority in guiding the affairs of a corporation

Proxy:Proxy:Document authorizing Document authorizing another person to vote on another person to vote on behalf of a shareholder in a behalf of a shareholder in a corporationcorporation

OfficersChief Executive Officer (CEO)

Chief Financial Officer (CFO)

Chief Operating Officer (COO)Persons appointed by the board of directors to carry out the board's policies and supervise the activities of the corporation

Merger: Combination of two companies in which one company purchases the other and assumes control of its property and liabilities

Consolidation:Combination of two or more companies in which the old companies cease to exist and a new enterprise is created

Advantages Economies of scale

Efficiencies

Synergies: sum is greater than individual parts

Disadvantages Culture clashes

Create a burden of high-risk corporate debt

Distract managers from day-to-day operations

Trusts: Monopolistic arrangements established when one company

buys a controlling share of the stock of competing companies in the same industry

Horizontal Mergers: Combinations of companies that compete directly in the

same industry

Vertical Mergers: Combinations of companies that participate in different

phases of the same industry (i.ematerials. production. distribution

Conglomerate Mergers: Combinations of companies that are in unrelated

businesses. Designed to augment a company's growth and diversify risk

Leveraged Buyouts (LBOs): Situation in which individuals or groups of investors

purchase companies primarily with debt secured by the company's assets

Hostile Takeovers: Situations in which an outside party buys enough stock in a

corporation to take control against the wishes of the board of directors and corporate officers

A hostile takeover can be launched in two ways:A hostile takeover can be launched in two ways:Tender Offer:

Invitation made directly to shareholders by an outside party who wishes to buy a company's stock at a price above the current market price

Proxy Fight: Attempt to gain control of a takeover target by

urging shareholders to vote for directors favored by the acquiring party

Schemes to avoid hostile takeovers:Schemes to avoid hostile takeovers:

PoisonPill

Golden Parachute

Shark Repellant

White Knight

Poison pill-showing the company less valuable . Special sale of newly issued stock tocurrent

stockholders at prices below the market price İncreases the number of shareholders and

makes the company more expensive to overtake.

The golden parachute-benefit the company’s top execurives by guaranteeing them generous compensation packages if they ever leave or forced out after a takeover .

The shark repellent-stokeholders must approve the takeover.

The white knight –uses a friendly buyer to take over the company before a raider does.

White knights agree to leave the current management tean inplace and let the company operate in an independent fashion.