2 3 Main Forms of Ownership Sole ProprietorshipPartnershipCorporation
3 Sole ProprietorshipsA business that is owned (and usually operated) by one personThe simplest form of business ownership and the easiest to startThe most popular form of business ownership
4 Relative Percentages of Sole Proprietorships, Partnerships, and Corporations in the U.S. Source: U.S. Bureau of the Census, Statistical Abstract of the United States, Washington, D.C., 2010, Table 729 (www.census.gov).
6 Advantages and Disadvantages of Sole Proprietorships Ease of start-up and closurePride of ownershipRetention of all profitsNo special taxesFlexibility of being your own bossDISADVANTAGESUnlimited liabilityThe business owner is personally responsible for all the debts of the businessLack of continuityLack of money to put into the businessLimited management skillsDifficulty in hiring employees
7 Class ExerciseYou 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?
8 PartnershipsA voluntary association of two or more persons to act as co-owners of a business for profitLess common form of ownership than sole proprietorship or corporationNo limit on the maximum number of partners; most have only two
9 Types of Partners General partner Limited partner A person who assumes full or shared responsibility for operating a businessGeneral partnership: a business co-owned by two or more general partners who are liable for everything the business doesLimited partnerA 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 partnershipLimited partnership: a business co-owned by one or more general partners who manage the business and limited partners who invest money in it
10 The Partnership Agreement Articles of partnershipAn agreement in writing explaining the terms of the partnershipAgreement should stateWho will make final decisionsWhat each partner’s duties will beHow much each partner will investHow much profit or loss each partner receives or is responsible forHow the partnership can be dissolved
13 Advantages and Disadvantages of Partnerships Ease of start-upAvailability of capital and creditPersonal interestCombined business skills and knowledgeRetention of profitsNo special taxesDISADVANTAGESUnlimited liabilityManagement disagreementsLack of continuityFrozen investment-easy to invest in, but sometimes hard to get your money back out if you need to.
14 CorporationsAn 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.Unlike a real person, however, a corporation exists only on paper.They comprise about 19% of all businesses, but they account for 83% of sales revenues.
15 Stock Ownership in a Corporation Important Terms:StockThe shares of ownership of a corporationStockholderA person who owns a corporation’s stockClosed corporationA corporation whose stock is owned by relatively few people and is not sold to the general publicOpen corporation (publicly traded)A corporation whose stock is bought and sold on the stock exchange and can be purchased by any individual
16 Forming a Corporation Incorporation The process of forming a corporationMost experts recommend consulting a lawyer
17 Forming a Corporation (cont.) Where to incorporateBusinesses can incorporate in any state they choose
18 Forming a Corporation (cont.) The Corporate Charter (the articles of incorporation):A contract between the corporation and the state in which the state recognizes the formation of the artificial person that is the corporation and includesfirm’s name and addressincorporators’ names and addressespurpose of the corporationmaximum amount of stock and types of stock to be issuedrights and privileges of stockholderslength of time the corporation is to exist
19 Forming a Corporation (cont.) Stockholders’ rightsCommon stockStock owned by individuals or firms who may vote on corporate matters but whose claims on profit and assets are subordinate to the claims of othersPreferred stockStock owned by individuals or firms who usually do not have voting rights but whose claims on dividends are paid before those of common stock ownersDividendA distribution of earnings to the stockholders of a corporationProxyA legal form listing issues to be decided at a stockholders’ meeting and enabling stockholders to transfer their voting rights to some other individual or individualsBoard members are directly responsible to stockholders for how they operate the firm
20 Hierarchy of Corporate Structure Stockholders exercise a great deal of influence through their right to elect the board of directors.
21 Corporate Structure Board of directors The top governing body of a corporation, the members of which are elected by the stockholdersResponsible for setting corporate goals, developing strategic plans to meet those goals, and the firm’s overall operationOutside directors: experienced managers or entrepreneurs from outside the corporation who have specific talentsInside directors: top managers from within the corporation
22 Corporate Structure (cont.) Corporate officersThe chairman of the board, president, executive vice presidents, corporate secretary, treasurer, and any other top executive appointed by the boardImplement the chosen strategy and direct the work of the corporation, periodically reporting results to the board and stockholders
23 A Change Since Enron…Before Enron, boards of directors used to basically “rubber stamp” what the Chief Executive Officers (like Ken Lay) wanted. After Enron and the passage of the Sarbanes-Oxley Act, which makes directors responsible for acting in accordance with sound financial practices, boards are no longer content to just rubber stamp CEOs’ decisions, especially where chief financial officers (like Andy Fastow) are concerned.In 2010, as part of Wall Street reform, the Securities and Exchange Commission (SEC) made it easier for shareholders to have a bigger say on corporate leadership at publicly traded companies. Shareholders who own 3 percent or more of company stock for at least three years are now able to nominate candidates for directors on the annual proxy ballot. The intent is to help shareholders hold corporate boards more accountable for their decisions.
24 Advantages and Disadvantages of Corporations Limited liabilityEach owner’s financial liability is limited to the amount of money that he or she has paid for the corporation’s stockEase of raising capitalEase of transfer of ownershipPerpetual lifeSpecialized managementDISADVANTAGESDifficulty and expense of formationGovernment regulation and increased paperworkConflict within the corporationDouble taxationLack of secrecy
25 Advantages and Disadvantages of a Sole Proprietorship, Partnership, and Corporation
26 Special Types of Corporations S-corporationA corporation that is taxed as if it were a partnership (income taxed as personal income of stockholders) but still offers limited liabilityRestricted to having only 100 or less stockholdersLimited-liability company (LLC)Combines the benefits of a corporation and partnership but avoids some of the restrictions and disadvantagesNot restricted to having only 100 stockholders
27 Advantages and Disadvantages of a Regular Corporation, S-Corporation, Limited-Liability Company
28 Special Types of Business Ownership (cont.) Not-for-profit corporationsCorporations organized to provide social, educational, religious, or other services, rather than to earn a profitCharities, museums, private schools, colleges, and charitable organizations are organized as not-for-profits primarily to ensure limited liabilityMust meet specific IRS guidelines to obtain tax-exempt status
29 Joint Ventures and Syndicates 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 timeExample: Walmart and India’s Bharti EnterprisesSyndicatesTemporary associations of individuals or firms organized to perform a specific task that requires a large amount of capitalMost commonly used to underwrite large insurance policies, loans, and investments
30 Corporate Growth Growth from within Introducing new productsEntering new marketsGrowth through mergers and acquisitionsMerger: the purchase of one corporation by another; essentially the same as an acquisitionHostile takeover: a situation in which the management and board of directors of a firm targeted for acquisition disapprove of the mergerTender 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 sharesProxy fight: a technique used to gather enough stockholder votes to control a targeted company
31 Corporate Growth (cont.) Horizontal mergersMergers between firms that make and sell similar productsSubject to approval by federal agencies to protect competitionExample: If Dell and Apple were to mergeVertical mergersMergers between firms that operate at different but related levels of production and marketing of a productUsually one firm is a supplier or customer of the otherExample: If UniRoyal (makes tires) merged with a company that supplies rubber.Conglomerate mergersMergers between firms in completely different industries
32 Chapter QuizIn the United States, the form of business ownership that generates the largest amount of sales revenues is thesole proprietorship.partnership.corporation.limited-liability company.S-corporation.
33 Chapter QuizWhich of the following is a disadvantage of a sole proprietorship?FlexibilityNo special taxesPride of ownershipRetention of all profitsUnlimited liability
34 Chapter QuizA business co-owned by one or more general partners who manage the business and limited partners who invest money into it is called anot-for-profit partnership.limited partnership.general partnership.limited-liability company.S-partnership.
35 Chapter QuizA ____________ is a merger between firms that make and sell similar products or services in similar industries.horizontal mergervertical mergerconglomerate mergerhostile takeovertender offer