1. Chapter 7
Business Ownership

2. 3 Basic Types of Business Ownership

3. Characteristics: compare & contrast
Formation
Source of funding
Liability
Tax implications
Management and control
Transferability

4. Relative Percentages of Sole Proprietorships, Partnerships, and Corporations in the U.S.
Sole proprietorships are most common in retailing, agriculture, and the service industries
Source: U.S. Bureau of the Census, Statistical Abstract of the United States, Washington, D.C., 2008, p. 487 (

5. Compare and Contrast

6. Sole Proprietorship

7. 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
The most widespread form of business ownership

8. Sole Proprietorship Advantages Disadvantages Formation
Easy establishment
Low start up cost
Source of funding
Limited financial resources
Liability
Unlimited Liability
Tax implications
No corporate income taxes
Income tax deduction of business losses
Management and control
Self control of all operations
retention of all profit
Limited management resources and skills
Transferability
Limited life
(lack of continuity)
Others
Freedom, pride
pressure

9. Reasons People Go into Business for Themselves
Source: Timothy S. Hatten, Small Business Management: Entrepreneurship and Beyond, 3rd ed. Copyright © 2006 by Houghton Mifflin Company. Used by permission. Data from A Small Business Primer.

10. Questions to answer before you start your own business:
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?

11. Partnership

12. A business that is owned and run by two or more people who share responsibilities, profits, and unlimited liability
A voluntary association of two or more persons to carry on a business as co-workers for profit
Less common form of ownership than sole proprietorship or corporation
No legal limit on the maximum number of partners; most have only 2
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

13. Partnership Advantages Disadvantages Formation Source of funding
Easy establishment
Source of funding
Combined financial resources
Easier capital and credit
Liability
Unlimited Liability
Tax implications
No corporate income taxes
Management and control
Combined managerial knowledge and skills, shared responsibilities
Transferability
Extended life
Potential lack of continuity; difficult ownership transfer
Others
Retention of profits
Possible interpersonal conflicts and management disagreement

14. Types of Partners and Partnership
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
Limited partner
A person who contribute 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

15. The Partnership Agreement
Articles of partnership
An agreement listing and explaining the terms of the partnership
Should include
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

16. Voluntary Partnership (Articles of Partnership)
Names of partners
Name of partnership
Nature of business
Time frame of operation
Capital contribution
Managerial power
Rights and duties
Accounting procedures
P/L sharing
Salaries
Dissolution
Property distribution
Disability issues
Insurance coverage
Sale of interest
Divorce of one partners
Indemnity agreements
Non-competition agreement
Leaves of absence

17. Limited Partnership at least one general partner
Has to have agreement, with “Limited Partnership” in business name
Promise to contribute in writing
Liability limited to investment
Certificate for limited partner status
Not involve in management
Personal name not appear in business name

18. Corporation

19. A business that exists separately from its owners and is permitted to sell stocks
An artificial being, (a legal person), invisible, intangible, and existing only in contemplation of the law.
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 5.6 million corporations in the U.S.
They comprise only 20% of all businesses, but they account for 83.8 % of sales revenues

20. Corporation Advantages Disadvantages Formation Source of funding
Difficulty / complex / high cost starting
Source of funding
Greater Financial Capital(stock & loans)
Liability
Liability Limited to the amount paid for stocks
Tax implications
Double taxation
Management and control
Specialized Management
Internal Conflicts
Transferability
Increased Liquidity Unlimited Life
Hostile takeover (tender offer)
Others
Government regulations and paperwork

21. Corporate Ownership Corporate ownership Types of corporation Stock
The shares of ownership of a corporation
Stockholder
A person who owns a corporation’s stock
Types of corporation
Closed corporation
A corporation whose stock is owned by relatively few people and is not sold to the general public
Open corporation
A corporation whose stock is bought and sold on security exchanges and can be purchased by any individual

22. Incorporation: the process of formation
Where to register: law, tax, employees, incentives
Documents: Articles of Incorporation
Name of corporation
Names and addresses of all incorporators
Share structure: common vs. preferred; vote; rights
Statutory agent
Incorporator: natural person, corporation, (limited)
partnership, association

23. Where to incorporate
In US, 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 in any state in which it does business except the one in which it is incorporated
Alien corporation
A corporation chartered by a foreign government and conducting business in the U.S.

24. Document: 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
Articles of incorporation 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

25. 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
With voting rights
No fixed dividend rate
No right to declare dividend
Right to share of assets at dissolution
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
Priority in payment of dividends
Some dividends at fixed rate, some guaranteed (cumulative preferred)
Priority in assets distribution at dissolution
Dividend: A distribution of earnings to the stockholders

26. 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
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

27. Bylaws: after formation
Operational rules:
Define the authority of each elected officer
Prescribe procedures for meetings
Set terms of officers and directors

28. Corporate Governance Structure
Shareholders: owners
Preferred stocks: first to be paid; not voting right
Common stocks: last to be paid; with voting right
Board of Directors:
Elected by shareholders
Oversees corporate management: policies
Corporate Officers: CEO, President, VPs, (directors)
Hired by the board
Day-to-day operations

29. Corporate Governance Structure
Shareholders:
Electing directors
Voting on critical issues
Delegating votes:
Proxy: temporarily transfer voting rights to others
Pooling agreements: a contract to vote for the same thing
Voting trust: turn shares to a trustee, with a certificate, the trustee votes according to agreements

30. Corporate Governance Structure
Board of directors:
strategic planning and policy making
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
Executive Committee: management (3 board members)
Audit Committee: watch dog (independent outside directors)

31. Corporate Governance Structure
Corporate Officers
chairman of the board
president；executive vice presidents
corporate secretary, treasurer,
other top executives
Implement the chosen strategy and direct the work of the corporation, periodically reporting results to the board and stockholders

32. Corporate Governance Structure Hannas Natural Gas

33. Sources of funding: Short-term financing: Debt financing: bond
bank loans, credit lines
higher interest rates; shorter payback periods
Debt financing: bond
long-term promissory notes
fixed interest rate, tax deductible
rating

34. Special Types of Corporations
S corporation vs. C corporation
(for tax purpose, with limitations)
LLC: Limited Liability Corporation
Government-owned corporation
Not-for-profit corporation

35. 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

36. 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
Provides more management flexibility
Difference between LLC and S-corporation
LLCs not restricted to 100 stockholders
LLCs have fewer restrictions on who can be a stockholder

37. LLC Advantages disadvantages Formation Difficulty/complexity starting
Source of funding
Greater Financial Capital
Liability
Limited Liability
Tax implications
Double taxation
Management and control
Specialized Management
Transferability
Increased Liquidity Unlimited Life

38. LLC Formation: articles of organization, with LLC in business name
Funding: member contribution as in partnership
Liability: limited to contribution
Tax: flow through (individual tax only)
Management and Control: collective, delegate, hire
Transferability: transferee becomes a member with majority approval
Dissolution and termination: death, withdrawal, expulsion of a member, unanimous consent

39. C, SC, LLC

40. 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)
the Federal Deposit Insurance Corporation (FDIC)

41. 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

42. Cooperatives
Associations 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

43. Strategic Alliance
Two or more organizations collaborate on a project for mutual gain
Expand Market Share
Access Technology
Diversity Offerings
Share Best Practices

44. 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
Attain Specific Goals
Share Strengths
Spread Cost
Minimize Risk
Example:
Wal-Mart and India’s Bharti Enterprises

45. 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

46. ESOP and Institutional Ownership
Employee Stock Ownership Plan:
Employee owns a substantial share of the corporation
Employee trusts
Institutional Ownership:
Mutual funds
Pension funds

47. Corporate Growth through Joining Companies
Mergers / Consolidations : two firms combine to create a new company
Acquisition: one firm buys another out right. The other firm becomes a part of the firm and only one firm’s name is retained, and it assumes automatically all assets and all liabilities of the other.
 increase product line
 expand operations
 globalize

48. Business Combination Procedures
Board resolution:
Notice to shareholders:
Shareholder approval:
Merger / consolidation: all shareholders have right to vote
*short-term merger: between a subsidiary and a parent that owns at least 90% of its stock
*appraisal rights: written objection before voting, right to sell shares to the corporation for fair value
*freeze-out: use merger as a way to buy back minority shares at low price

49. Reasons for Merger/Acquisition
Scale - gain revenue, channels, etc.
Geographic reach - access new markets
Customers - new lists
Products - new products for existing customers
Segments - new vertical markets
Channels - new ways of delivering same products and services
Employees - new talent quickly
Technology - adding key capabilities

50. Acquisitions Advantages： Disadvantages： Economies of Scale
Efficiencies
Synergies
Disadvantages：
High-Risk Corporate Debt
Leveraged buyouts: a large fraction of the purchase price is debt financed (below investment grade); the shares no longer traded in the open market
Management Distractions
Culture Clashes

51. Growth by Merger

52. 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 and the desire to compete internationally
There will be more leveraged buyouts
A purchase arrangement that allows a firm’s managers and employees or a group of investors to purchase the company

53. Pros and Cons of Merger opponents: advocates:
Companies that are taken over are made more profitable and productive
Proceeds from the sale of non-core subsidiaries help pay off debt or enhance the company
opponents:
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

54. Debate Issue: Should the Government Restrict Corporate Merger Activity?
YES
Takeovers and mergers do nothing to increase the productivity of the firm.
Existing managers must spend time and effort to fend off hostile mergers—time that could be invested in product development.
The only people that benefit from corporate takeovers and mergers are the corporate raiders. NO
Firms that are taken over are more productive because unneeded assets are sold.
A takeover shakes up existing management and makes managers more productive. Less productive managers may be fired.
Corporate raiders have a basic right to take over a firm if they can acquire enough stock.

55. Hostile Takeover
Not solicited and approved by the target’s management (proxy fight; tender offer)
a situation in which the management and board of directors of the firm targeted for acquisition disapprove of the merger
Types
Tender offer:
direct offer to shareholders
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:
seek stockholder support at annual meeting
a technique used to gather enough stockholder votes to control the targeted company

56. Defenses against Hostile Takeover
Poison pill: shareholder rights to buy future shares at bargain price
Golden parachute: generous payoff to management going out
Shark repellent: changes in company charter - staggered board, supermajority; fair price
White knight:

57. Ownership Changes Separating Companies
Divestiture: sell a part of the firm’s business operations
Focus on core business;
Sell unrelated or under-performing
Spin-off: sell part of the company to raise capital
set it up as a new and independent corporation