Forms of Business Ownership Chapter 4

I. Comparisons of Forms of Business Organization Sole proprietorships Partnerships Corporations

II. Sole proprietorships Advantages A. Advantages easy and inexpensive to form & dissolve profits all go to owner direct control of business freedom from government regulations no special taxation Disadvantages B. Disadvantages hard to raise capital unlimited liability & potential loss limited expertise in all areas trouble finding employees large personal time commitment

III. Partnerships A. General Partnerships 1. Partners co-own assets and share profits 2. Each partner is individually liable for all debts and contracts of the partnership B. Limited Partnerships 1. Controlled by one or more general partners who have unlimited liability 2. Limited partners’ liability is limited to their investment 3. Limited partners do not participate in the firm’s operations

Partnerships (cont’d) Advantages C. Advantages easy and inexpensive to form availability of capital diverse skills and expertise flexibility relative freedom from government regulations no special taxation. Disadvantages D. Disadvantages potential conflicts between partners unlimited liability & potential loss sharing profits limited life hard to leave or end partnership

E. Topics to Cover in a Partnership Agreement Purpose & duration of partnership Roles, responsibilities, compensation Contributions Procedures for adding/removing partners Buy-out procedures Dispute resolution Financial arrangements Dissolving the partnership Source: American Express Small Business Exchange, home3.americanexpress.com/smallbusiness

IV. Corporations - A legal entity with an existence and life separate from its owners, who therefore are not personally liable for its debts; it can own property, enter into contracts, sue and be sued, and operate under terms of its state charter.

A. Steps to Forming a Corporation 1. Select company’s name 2. Write and file Articles of Incorporation paperwork 3. Pay fees and taxes 4. Hold organizational meeting 5. Adopt bylaws, elect directors, pass operating resolutions

B. Organizational Structure of Corporations Stockholders Directors Officers (Top Management) President Vice Treasurer Secretary President elect hire

Corporations (cont’d) Advantages C. Advantages limited liability easy to get financing easy to transfer ownership unlimited life-span tax deductions Disadvantages D. Disadvantages double taxation of profits costly & complex to form government restrictions

E. Types of Hybrid Corporations 1. S corporations - organized like a corporation, but avoids double taxation of profits by routing income and losses through stockholders 2. Limited liability companies (LLC) - offers same limited liability as a corporation, but may be taxed as either a partnership or corporation Advantages a. Advantages 1. Protection of personal assets 2. Avoid double-taxation of profits Disadvantages b. Disadvantages 1. Often required to have a limited life (< 30 years) 2. Are not corporations so can not issue stock

V. Franchising A. Franchisor - company that supplies the product concept B. Franschisee - the individual or company that sells the goods/services in a certain region C. Franchise Agreement - a contract allowing franshisee to use name, trademark, logo of franchisor

Franchises (cont’d) Advantages D. Advantages increased opportunity to expand (franchisor) recognized name, product, and operating concept (franchisee) management training and assistance (franchisee) financial assistance (franchisee) Disadvantages E. Disadvantages loss of control (franchisor) costs of franchising restricted operating freedom (franchisee)

VI. Growth Through Mergers & Acquisitions Merger: The combination of 2 or more firms to form a new company, which often takes a new corporate identityAcquisition: The purchase of a corporation by another corporation or investment group

A. Benefits of Mergers Reduced:  costs  overlap in operations  competitionIncreased:  purchasing power  market share

B. Types of Mergers 1. Horizontal mergers - same industry, same stage of production 2. Vertical mergers - same industry, different stages of production 3. Conglomerate mergers - different industries