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

Elects Appoints Shareholders Owners can be: l Individuals l Other Companies l Not-for-Profit Organizations l Pension Funds l Mutual Funds Board of Directors Group of people elected by the shareholders who have the ultimate authority in guiding the affairs of a corporation Proxy: Document authorizing another person to vote on behalf of a shareholder in a corporation Officers Chief 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: 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: Poison Pill 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.