1. Starting and Growing a Business
Part 2 Chapter 4
Starting and Growing a Business
We begin part 2 of your textbook, Starting and Growing a Business, with chapter 4, Options for Organizing Business.
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2. CHAPTER 4 CHAPTER 5 Options for Organizing Business
Small Business, Entrepreneurship, and Franchising
In chapter 4, we take a look at various options for organizing business. This chapter examines three primary forms of business ownership—sole proprietorship, partnership, and corporation—and weighs the advantages and disadvantages of each. These forms are the most often used whether the business is a traditional bricks and mortar company, an online-only one, or a combination of both. We also take a look at S corporations, limited liability companies, and cooperatives and discuss some trends in business ownership. You may wish to refer to Table 4.1 in the text to compare the various forms of business ownership mentioned in the chapter.
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3. Learning Objectives
LO 4-1 Define and examine the advantages and disadvantages of the sole proprietorship form of organization. LO 4-2 Identify two types of partnership, and evaluate the advantages and disadvantages of the partnership form of organization. LO 4-3 Describe the corporate form of organization, and cite the advantages and disadvantages of corporations. LO 4-4 Define and debate the advantages and disadvantages of mergers, acquisitions and leveraged buyouts. LO 4-5 Propose an appropriate organizational form for a startup business.
After reading this chapter, you will be able to:
Define and examine the advantages and disadvantages of the sole proprietorship form of organization.
Identify two types of partnership, and evaluate the advantages and disadvantages of the partnership form of organization.
Describe the corporate form of organization, and cite the advantages and disadvantages of corporations.
Define and debate the advantages and disadvantages of mergers, acquisitions and leveraged buyouts.
Propose an appropriate organizational form for a startup business.
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4. Introduction (1 of 2)
Comparison of Sole Proprietorships, Partnerships and Corporations
The pie charts in this graphic compare the three types of ownerships relative to sales, net income and total number of each type of business.
Proprietorships far outnumber corporations, but they net far fewer sales and less income.
Partnerships are the least used form of business.
Corporations account for the majority of all U.S. sales and income but represent a relatively small number of organizations in the United States.
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5. Introduction (2 of 2) Structure Ownership Taxation Liability Use
Sole Proprietorship
One owner
Individual income taxed
Unlimited
Owned by a single individual/easiest way to conduct business
Partnership
Two or more owners
Individual owners’ income taxed
Somewhat limited
Easy way for two individuals to conduct business
Corporation
Any number of shareholders
Corporate and shareholder taxed
Limited
Legal entity with shareholders or stockholders
S Corporation
Up to 100 shareholders
Taxed as a partnership
Legal entity with tax advantages for restricted number of shareholders
Limited Liability Company
Unlimited number of shareholders
Avoid personal lawsuits
Every student of business should be aware that there are three principle forms of organizing a business, whether it is a traditional “brick and mortar” organization, or a virtual corporation that does business exclusively through the Internet.
The three primary forms of business that we will examine are Sole proprietorship, Partnership, and Corporation.
This table compares a sole proprietorship, a partnership, a corporation, an S corporation and an LLC as they relate to ownership, taxation, liability and use.
As different businesses have different needs, they must compare the advantages and disadvantages of each form of ownership to determine which form is best for them.
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6. Sole Proprietorship Sole Proprietorship
Businesses owned and operated by one individual; the most common form of business organization in the United States
Many focus on services rather than manufacturing
Typically employ fewer than 50 people
Comprise nearly three-quarters of all U.S. companies
Men are twice as likely as women to start their own business
Let’s begin our discussion on the forms of business ownership with the sole proprietor. Businesses owned and operated by one individual are considered sole proprietorships and they are the most common forms of business organizations in the United States. Many focus on services rather than manufacturing which requires large sums of money.
Sole Proprietorships are typically small businesses employing fewer than 50 people. They comprise nearly three-fourths of all U.S. companies. It is interesting to note that men are twice as likely as women to start their own business.
In many areas, small businesses make up the vast majority of the economy.
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7. Advantages of Sole Proprietorship
Ease and cost of formation
Allow a high level of secrecy
Owner keeps all profits
Flexibility and control of the business
Government regulation is minimal
Taxes paid only once
Can be dissolved easily
Each form of business ownership has advantages and disadvantages.
The major advantages of a sole proprietorship are:
They are easy and inexpensive to form.
They allow a high level of secrecy as there is only one owner so trade secrets are safe.
All profits belong to the owner.
The owner has complete control over the business allowing them to respond quickly to changing business conditions.
Government regulation is minimal, therefore owners have the most freedom of any type of ownership.
Taxes are considered personal income and paid only once.
It can be dissolved easily.
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8. Disadvantages of Sole Proprietorship
Unlimited liability
Scarce external funding
Owners need diverse skills
Success is tied to the owner
Lack of qualified employees
Higher taxation
Each form of business ownership has advantages and disadvantages.
The disadvantages include:
The owner may have to use personal assets to borrow money as they have unlimited liability in meeting the debts of the business.
Sources of external funds are difficult to find so it is more difficult to obtain funds to start or expand a sole proprietorship
The owner must have many diverse skills such as marketing, finance, accounting and management.
The survival of the business is tied to the life of the owner and his or her ability to work.
Qualified employees are hard to find as it is difficult for small proprietors to pay competitive wages and benefits offered by large competing corporations.
Wealthy sole proprietors pay a higher tax than they would under the corporate form of business.
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9. Finding Talented Employees
Sole proprietorships have greater difficulty attracting talented employees
Large corporations such as McDonald’s have better profits and more job opportunities
Difficult to match the wages and benefits offered by large corporations
Little chance for advancement within sole proprietorship
Sole proprietorships have greater difficulty attracting talented employees because larger corporations such as McDonald’s have better profits and more job opportunities. It is usually difficult for a small sole proprietorship to match the wages and benefits offered by a large competing corporation because the proprietorship’s profits may not be as high. In addition, there is little room for advancement within a sole proprietorship, so the owner may have difficulty attracting and retaining qualified employees.
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10. Entrepreneur
This entrepreneur opened his small business as a sole proprietorship
As sole proprietor, he keeps his profits but is personally responsible for all risks and financial obligations
This entrepreneur opened his small business as a sole proprietorship.
As sole proprietor, he keeps his profits but is personally responsible for all risks and financial obligations.
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11. Partnership Partnership
A form of business organization defined by the Uniform Partnership Act as “an association of two or more persons who carry on as co-owners of a business for profit”
One way to minimize the disadvantages of sole proprietorship and maximize its advantages is to have more than one owner
Typically larger than sole proprietorships but smaller than corporations
Partnerships can be a fruitful form of business as long as you follow some keys to success
One way to minimize the disadvantages of sole proprietorship and maximize the advantages is to have more than one owner.
Which brings us to the second form of business ownership that we will discuss, the partnership.
A partnership is a form of business organization defined by the Uniform Partnership Act as an association of two or more persons who carry on as co-owners of a business for profit.
Typically, partnerships are larger than sole proprietorships but smaller than corporations.
Partnerships can be a fruitful form of business as long as you follow some keys to success, outlined on the following slide.
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12. Types of Partnerships General Partnership Limited Partnership
Involves a complete sharing in both the management and the liability of the business
Limited Partnership
Has at least one general partner, who assumes unlimited liability, and at least one limited partner whose liability is limited to his or her investment in the business
Articles of Partnership
Legal documents that set forth the basic agreement between partners
There are two types of partnerships: general partnerships and limited partnerships.
A general partnership involves a complete sharing in both the management and the liability of a business. In this type of partnership, each partner has unlimited liability for the debts of the business. Professionals such as lawyers, accountants, and architects often join together in general partnerships.
A limited partnership has at least one general partner who assumes unlimited liability, and at least one limited partner, whose liability is limited to his or her investment in the business. Limited partnerships exist for risky investment projects where the chance of loss is great. Limited partners do not share in the management of the business but share in the profits. Examples include oil-drilling partnerships and real estate partnerships.
Most states require either general or limited partnerships to have articles of partnership which are legal documents setting forth the basic agreement between the partners. Articles of partnership usually list the money or assets that each partner has contributed (called partnership capital), state each partner’s individual management role or duty, specify how the profits and losses of the partnership will be divided among the partners, and describe how a partner may leave the partnership as well as any other restrictions that might apply to the agreement.
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13. Advantages of Partnerships
Easy to organize
Availability of capital & credit
Combined knowledge and skills
Swift decision making
Government regulations are few
When deciding if a partnership is the right ownership choice, advantages and disadvantages must be compared with those offered by other forms of business organization, and not all apply to every partnership.
The advantages are:
Partnerships are easy to organize. Starting a partnership requires little more than drawing up articles of partnership.
They have higher credit ratings due to the partner’s combined wealth.
Partners can specialize in their particular areas of expertise such as accounting or marketing.
Partnerships can make decisions faster than larger businesses.
Government regulations are few.
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14. Disadvantages of Partnerships
Unlimited liability
Responsible for each others’ decisions
A new agreement is needed if the partnership changes
Difficult to sell a partnership interest
Distribution of profits may be uneven
Cannot find external funding as easily as large corporations
When deciding if a partnership is the right ownership choice, advantages and disadvantages must be compared with those offered by other forms of business organization, and not all apply to every partnership.
The disadvantages include
(1) General partners have unlimited liability for the debts of the partnership, just as in a sole proprietorship.
(2) Partners are responsible for each others’ decisions and a bad decision by one partner can put the other partners’ personal resources at risk.
(3) A partnership is terminated when a partner dies or withdraws.
(4) It is difficult to sell a partnership interest at a fair price.
(5) The distribution of profits may not correctly reflect the amount of work done by each partner.
(6) Partnerships cannot find external sources of funds as easily as can large corporations.
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15. Partnerships and Taxes
Partnerships are quasi-taxable organizations
Partnerships do not pay taxes but do file a tax return providing information on profitability and distribution of profits
Partners report their share of the profits and pay taxes at the income tax rate for individuals
One last thing about the taxation of partnerships.
Partnerships are quasi-taxable organizations, meaning the partnership does not pay taxes.
While they do file a tax return, this is simply to report on the profitability of the organization and the distribution of profits among the partners.
The partners must report their share of the profits on their own tax returns and pay taxes at the rate for individuals.
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16. Keys to Success in Business Partnerships
Keep profit sharing and ownership at 50/50, or you have an employer/employee relationship
Partners should have different skill sets to complement one another
Honesty is critical
Must maintain face-to-face communication in addition to phone and
Maintain transparency, sharing more information over time
Be aware of funding constraints, and do not put yourself in a situation where neither you nor your partner can secure additional financial support
To be successful, you need experience
Whereas family should be a priority, be careful to minimize the number of associated problems
Do not become too infatuated with “the idea” as opposed to implementation
Couple optimism with realism in sales and growth expectations/planning
Keys to success in business partnerships:
Keep profit sharing and ownership at 50/50, or you have an employer/employee relationship.
Partners should have different skill sets to complement one another.
Honesty is critical.
Must maintain face-to-face communication in addition to phone and .
Maintain transparency, sharing more information over time.
Be aware of funding constraints, and do not put yourself in a situation where neither you nor your partner can secure additional financial support.
To be successful, you need experience.
Whereas family should be a priority, be careful to minimize the number of associated problems.
Do not become too infatuated with “the idea” as opposed to implementation.
Couple optimism with realism in sales and growth expectations and planning.
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17. Google
In 1996 Stanford students Sergey Brin and Larry Page partnered to form the search engine Google as part of a research project
The company was incorporated in 1998 and is now the world’s top search engine
In 1996, Stanford students Sergey Brin and Larry Page partnered to form the search engine Google as part of a research project.
The company incorporated in 1998 and is now the world’s top search engine.
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18. Corporation Corporation
A legal entity, created by the state, whose assets and liabilities are separate from its owners
Has many of the rights, duties and powers of a person
Can own and transfer property
Can enter into contracts
Can sue and be sued in court
Account for the majority of all U.S. sales and income
The third form of business ownership that we will discuss in this chapter is the corporation. A corporation is a legal entity, created by the state, whose assets and liabilities are separate from its owners. A corporation differs from a sole proprietorship and partnership in that its assets and liabilities are separate from its owners.
A corporation has many of the rights, duties and powers of a person, such as the right to receive, own and transfer property. Corporations can enter into contracts with individuals or other legal entities and they can sue and be sued in court. Corporations account for the majority of all U.S. sales and income. Not all corporations are large, even small businesses can incorporate.
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19. Stock and Dividends Stock Dividends
Corporations are typically owned by many individuals and organizations who own shares of the business
Stock
Shares of the corporation that may be bought or sold
Can also be gifted or inherited
Dividends
Profits of a corporation that are distributed in the form of cash payments to the stockholders
Corporations are typically owned by many individuals and organizations who own shares of the business. Those shares are stock. That is why owners are often called shareholders or stockholders. Stock may be bought or sold, given or received as a gift or even inherited. As owners, stockholders are entitled to dividends. Dividends are profits of a corporation that are distributed in the form of cash payments to the stockholders. However, not all after-tax profits are paid to stockholders in dividends. Some corporations may retain profits to expand the business.
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20. Creating Corporations
Incorporators create the corporation
Following state procedure of chartering the corporation
Incorporators file legal articles of incorporation with the state
State issues a legal corporate charter to the company
Owners establish bylaws and board of directors
The individuals creating the corporation are known as the incorporators.
Each state has a specific procedure called chartering the corporation for incorporating businesses.
The incorporators then file legal documents with the state containing basic information, referred to as articles of incorporation.
A corporate charter is then issued. A corporate charter is a legal document issued by the state to a company based on information the company provides in the articles of incorporation.
After securing the charter, the owners establish bylaws and elect a board of directors.
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21. Types of Corporations Domestic Corporation Foreign Corporation
If conducting business in the state in which it is chartered
Foreign Corporation
If conducting business outside the state in which it is chartered
Alien Corporation
If conducting business outside the nation in which it is incorporated
There are different types of corporations. First of all, If the corporation does business in the state in which it is chartered, it is known as a domestic corporation.
In other states where the corporation does business, it is known as a foreign corporation.
If a corporation does business outside the nation in which it incorporated, it is called an alien corporation.
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22. American Companies with More than Half of Their Revenues from Outside the U.S.
Company
Description
Caterpillar Inc.
Designs, manufactures, markets, and sells machinery, engines, and financial products
Dow Chemical
Manufactures chemicals, with products including plastics, oil, and crop technology
General Electric
Operates in the technology infrastructure, energy, capital finance, and consumer and industrial fields, with products including appliances, locomotives, weapons, lighting and gas
General Motors
Sells automobiles including Chevrolet, Buick, Cadillac, and Isuzu
IBM
Conducts technological research, develops intellectual property including software and hardware, and offers consulting services
Intel
Manufactures and develops semiconductor chips/microprocessors
McDonald’s
Operates second-largest chain of fast-food restaurants worldwide
Nike
Designs, develops, markets, and sells athletic shoes/clothing
Procter & Gamble
Sells consumer goods including Tide, Bounty, Crest, Iams
Yum! Brands
Operates/licenses restaurants including Taco Bell, KFC, Pizza Hut
American Companies with More than Half of Their Revenues from Outside the United States:
Company Description
Caterpillar Inc. Designs, manufactures, markets, and sells machinery, engines, and financial products
Dow Chemical Manufactures chemicals, with products including plastics, oil, and crop technology
General Electric Operates in the technology infrastructure, energy, capital finance, and consumer and industrial fields, with products including appliances, locomotives, weapons, lighting, and gas
General Motors Sells automobiles with brands including Chevrolet, Buick, Cadillac, and Isuzu
IBM Conducts technological research, develops intellectual property including software and hardware, and offers consulting services
Intel Manufactures and develops semiconductor chips and microprocessors
McDonald’s Operates second-largest chain of fast-food restaurants worldwide after Subway
Nike Designs, develops, markets, and sells athletic shoes and clothing Procter & Gamble Sells consumer goods with brands including Tide, Bounty, Crest, and Iams
Yum! Brands Operates and licenses restaurants including Taco Bell, Kentucky Fried Chicken, and Pizza Hut
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23. Private Corporations and Initial Public Offering
Owned by just one or a few people who are closely involved in managing the business
None of their stock is sold to the public
Private companies are not required to disclose financial information publicly
Initial Public Offering (IPO)
Selling a corporation’s stock on public markets for the first time
Done when a private corporation wishes to “go public” or to raise additional capital and expand
Not all corporations, large or small, are publicly traded, some are privately owned.
A private corporation is owned by one or a few people who are closely involved in managing the business. This group of people, usually a family, own all the corporation’s stock and none is sold to the public. Privately owned companies are not required to disclose financial information to the public.
Private corporations who wish to expand operations and need additional capital to do this, may have to obtain financing by “going public.” This is facilitated through what is called an initial public offering, often referred to as an IPO. When this occurs, the private corporation is taken public; that is, it becomes a publicly traded corporation.
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24. Mars Corporation
The snack and food company Mars is privately owned by the Mars family
The company became one of the world’s largest candy makers when Mars purchased chewing-gum company Wm. Wrigley Jr. Co. in 2008
The snack and food company Mars is privately owned by the Mars family.
The company became one of the world’s largest candy makers when Mars purchased chewing-gum company Wm. Wrigley Jr. Co. in 2008.
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25. Public Corporations Public Corporations
A corporation whose stock anyone may buy, sell, or trade
Two types of public corporations
Quasi-Public
Owned and operated by the government
Provides a service but often operates at a loss
Nonprofit
Focuses on providing a service rather than making a profit
Not owned by the government
A public corporation is one whose stock is available to anyone who may buy, sell, or trade. A public corporation must provide financial information to the public.
There are two types of public corporation, the quasi-public corporation and the non- profit corporation.
The quasi-public corporation is owned and operated by the federal, state, or local government. Usually, the focus of this type of corporation is to provide a service to citizens, such as the U.S. Postal Service.
The final type of corporation that we consider in this chapter is the nonprofit corporation. Nonprofit corporations are similar to quasi-public corporations as they focus on providing services, not a profit. The difference, and it is an important one, is that nonprofit corporations are not owned by the government.
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26. Board of Directors
A group of individuals, elected by the stockholders to oversee the general operation of the corporation, who set the corporation’s long-range objectives
The board is responsible for meeting objectives on schedule
Legally liable for mismanagement or misuse
An important duty is to hire corporate officers
Private and public corporations, and most non-profit corporations, have a board of directors that oversee the general operation of the corporation. A board of directors is elected by the stockholders. They set long-range objectives and ensure that they are met on schedule. Board members are legally liable for the mismanagement of the firm or for any misuse of funds.
An important duty of the board is to hire corporate officers such as the president and chief executive officer (CEO), who are responsible to the directors for the management and daily operations of the firm.
Directors can be employees of the company, called inside directors, or people unaffiliated with the company, called outside directors. Inside directors are usually the officers responsible for running the company; outside directors are often top executives from other companies, lawyers, bankers, even professors.
Inside Directors are employees of the company
Outside Directors are people unaffiliated with the company
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27. Preferred and Common Stocks
Preferred Stock
A special type of stock whose owners, though not generally having a say in running the company, have a claim to profits before other stockholders do
Common Stock
Stock whose owners have voting rights in the corporation, yet do not receive preferential treatment regarding dividends
May vote by proxy, allows stockholders to assign their voting privilege to someone else
Have preemptive right , they can buy any new shares of stock the company issues
Corporations issue two types of stock: preferred stock and common stock. Owners of preferred stock are a special class of owners because, although they generally do not have any say in running the company, they have a claim to profits before any other stockholders do. Other stockholders do not receive any dividends unless the preferred stockholders have already been paid. Such dividends unpaid from previous years must also be paid to preferred stockholders before other stockholders can receive any dividends.
Although owners of common stock do not get such preferential treatment with regard to dividends, they do get some say in the operation of the corporation. Stock owners may vote by proxy, meaning they can assign their vote to someone else. Common stockholders, in most states, have preemptive rights to purchase new shares of stock from the corporations when the firm decides to sell new shares.
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28. Preferred Stock Owners of preferred stock have first claim to profits
Dividend payments on preferred stocks are usually a fixed percentage of the initial issuing price (set by the board of directors)
If a share of preferred stock originally cost $100 and the dividend rate was stated at 7.5%, the dividend payment will be $7.50 per share per year
The United States has a number of laws and regulations that govern the activities of U.S. firms engaged in international trade. Many of the legal rights Americans take for granted do not exist in other countries and a firm doing business abroad must understand and obey the laws of the host country.
Some countries have strict laws limiting the amount of local currency that can be taken out of the country and the amount of currency that can be brought in; others limit how foreign companies can operate within the country. Some countries have copyright and patent laws that are less strict than those of the United States, and some countries fail to honor U.S. laws. Because copying is a tradition in China and Vietnam and laws protecting copyrights and intellectual property are weak and minimally enforced, those countries are flooded with counterfeit products.
Thus, businesses engaging in foreign trade may have to take extra steps to protect their products because local laws may be insufficient to do so.
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29. Advantages of Corporations
Limited liability
Ease of transfer of ownership
Perpetual life
Securing funding is easier than for other forms of business
Expansion potential
As we have seen with sole proprietorships and partnerships, there are advantages and disadvantages associated with corporations as a form of business ownership.
Advantages of the corporate form of business include:
The owners have limited liability providing protection to shareholders in that the corporation’s assets and liabilities are separate from its owners
Ownership (stock) can be easily transferred
Corporations usually last forever, extending beyond the life of its owners
Raising money is easier than for other forms of business
Expansion into new businesses is simpler because of the ability of the company to enter into contracts
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30. Disadvantages of Corporations
Double taxation
Expensive to form
Disclosure of information to the government and the public
Owners and managers are not always the same and can have different goals
As we have seen with sole proprietorships and partnerships, there are advantages and disadvantages associated with corporations as a form of business ownership.
Corporations also have disadvantages:
The company is taxed on its income, and owners pay a second tax on any profits received as dividends
Forming a corporation can be expensive
Keeping trade secrets is difficult because so much information must be made available to the public and to government agencies
Most employees are not stockholders of the company for which they work. This separation of owners and employees may be problematic. Employees without an ownership stake do not always see how they fit into the corporate picture.
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31. Volkswagen Volkswagen is the eighth-largest corporation in the world
Did You Know?
The first corporation with a net income of more than $1 billion in one year was General Motors, with a net income in 1955 of $1,189,477,082
Volkswagen is the eighth-largest corporation in the world.
DID YOU KNOW?--The 1st corporation with a net income of more than $1 billion in 1 year was General Motors, with a net income in 1955 $1,189,477,082.
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32. Hostile Takeovers
Hostile takeovers occur when one individual or company attempts to buy a majority share in the company for the purpose of restructuring the management team and/or the board of directors
They are different from mergers and acquisitions because there is no mutual agreement for the transfer of company ownership
Many times, companies that are vulnerable to hostile takeovers will institute a “poison pill”, which works to dilute the value of company stock making it less attractive for the individual or company to purchase a majority share of the company
The poison pill can also serve to decrease the stock value of the takeover company if they follow through with the takeover
Hostile takeovers occur when one individual or company attempts to buy a majority share in the company for the purpose of restructuring the management team and/or the board of directors. They are different from mergers and acquisitions because there is no mutual agreement for the transfer of company ownership. Many times, companies that are vulnerable to hostile takeovers will institute a “poison pill”, which works to dilute the value of company stock making it less attractive for the individual or company to purchase a majority share of the company. The poison pill can also serve to decrease the stock value of the takeover company if they follow through with the takeover.
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33. Joint Venture and S Corporation
A partnership established for a specific project or for a limited time
Control can be divided equally, or one partner may control decision making
Used for ventures that call for large investments, such as development of new products
S Corporation
Corporation taxed as though it were a partnership with restrictions on shareholders
Eliminates double taxation and retains the limited liability benefit
Very popular with entrepreneurs, representing nearly half of all corporate filings
We have discussed the major types of business ownership but there are a few other types left to discuss.
Joint ventures, S corporations, limited liability companies, and cooperatives are forms of ownership that are not neatly categorized into the three primary forms of sole proprietorship, partnership, or corporation.
A joint venture is a partnership established for a specific project or for a limited time.
Partners in a joint venture may be individuals or organizations.
Control may be shared equally or one partner may control decision making.
This type of business ownership is popular in situations that call for large investments such as natural resource extraction or the development of new products.
S Corporations, are a form of business ownership that is taxed as though it were a partnership.
Net profits or losses pass to the owners eliminating double taxation associated with corporations.
Plus, the benefit of limited liability is retained as well. S Corporations are very popular for entrepreneurs, representing almost half of all corporate filings in the United States in a given year.
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34. Limited Liability Company and Cooperatives
Limited Liability Company (LLC)
Form of ownership that provides limited liability and taxation like a partnership but places fewer restrictions on members
Considered a blend of the best characteristics of corporations, partnerships and sole proprietorships
Cooperatives or Co-ops
Organizations composed of individuals or small businesses that have banded together to reap the benefits of belonging to a larger organization
Set-up not to make money as an entity but so members can become more profitable or save money
A limited liability company, or an LLC, is a form of business ownership that provides limited liability as in a corporation but is treated like a partnership. Lawyers, doctors, and engineers often use the LLC form of ownership. LLCs are often considered a blend of the best characteristics of corporations, partnerships and sole proprietorships.
Cooperatives or co-ops are organizations composed of individuals or small businesses that have banded together to reap the benefits of belonging to a larger organization.
A co-op is set up not to make money as an entity but so members can become more profitable or save money.
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35. Consumer Cooperative REI
REI is organized as a consumer cooperative
REI operates a bit differently because it is owned by consumers rather than farmers or small businesses
REI is organized as a consumer cooperative. REI operates a bit differently because it is owned by consumers rather than farmers or small businesses.
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36. Employee-Owned Businesses
Employee-owned companies have proven to be successful on many fronts whether the company is large or small
Employees who have ownership tend to have a higher sense of loyalty to the company because there is a mutual interest between the two
Two types of employee ownership structures
Equity benefit plan: offers employee a stake in the company without voting rights
Employee-controlled company: all are considered owners and may have varying degrees of voting rights
Employee-Owned Businesses
Employee owned companies have proven to be successful on many fronts whether the company is large or small. Employees who have ownership tend to have a higher sense of loyalty to the company because there is a mutual interest between the two. There are two types of employee ownership structures: equity benefit plan and employee-controlled company. The equity benefit plan offers the employee a stake in the company without voting rights. The employee-controlled structure may have less equity benefits, but all are considered owners and may have varying degrees of voting rights. Control and corporate income is shared and divided up among employee owners in this context.
SOURCE: Corey Rosen. “Choosing the Structure for Your Employee Ownership Plan”. June 1, (accessed September 25, 2013
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37. Mergers
The combination of two companies (usually corporations) to form a new company
Horizontal merger
Firms that make and sell similar products to the same customers merge
Vertical merger
Companies operating at different but related levels of an industry merge
Conglomerate merger
Firms in unrelated industries merge
We have looked at the types of business ownership, now let us look at the trends in business ownership.
Business growth and improved profitability through expansion are important considerations. New product development, new markets, and expanding operations are ways to grow the business. Companies also grow by merging with or purchasing other companies. A merger is the combination of two companies to form a new company.
When firms that make and sell similar products to the same customers merge, it is known as a horizontal merger. When the two defense contractors, Martin Marietta and Lockheed, merged to make Lockheed Martin, that was a horizontal merger.
When companies operating at different but related levels of an industry merge, it is known as a vertical merger. If Burger King were to purchase a large Idaho potato farm, a vertical merger would result.
A conglomerate merger results when two firms in unrelated industries merge. The purchase of Sterling Drug, a pharmaceutical firm, by Eastman Kodak was a conglomerate merger.
© 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

38. Google Acquisitions
In 2013, Google paid $3.2 billion for smart home company, Nest Labs
Just one of many that Google acquired during the year
These acquisitions have the potential to diversify Google’s service offerings and benefit it financially
Some believe Google might be investing in companies of which it has little knowledge
Acquisitions could end up harming the acquiring company
In 2013, Google paid $3.2 billion for smart home company, Nest Labs. The company was just one of many that Google acquired during the year. While these acquisitions have the potential to diversify Google’s service offerings and benefit it financially, some believe that Google might be investing in companies of which it has little knowledge. In these cases, acquisitions could end up harming the acquiring company.
© 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

39. Trends in Business Ownership (1 of 2)
Acquisition
The purchase of one company by another, usually by buying its stock
Corporate raider
A company or individual who wants to acquire or take over another company and first offers to buy some or all of its stock at a premium in a tender offer
Poison pill
The firm allows stockholders to buy more shares of a stock at lower prices than the current market value to head off a hostile takeover
An acquisition occurs when one company purchases another, generally by buying most of its stock. The acquired company may become a subsidiary of the buyer, or its operations and assets may be merged with those of the buyer.
When a company (or an individual), sometimes called a corporate raider, wants to acquire or take over another company, it first offers to buy some or all of the other company’s stock at a premium over its current price in a tender offer.
To head off a hostile takeover attempt, a threatened company’s managers may use:
poison pill where the firm allows stockholders to buy more shares of a stock at prices lower than the current market value.
© 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

40. Trends in Business Ownership (2 of 2)
Shark repellant
Management requires a large majority of stockholders to approve a takeover
White knight
A more acceptable firm that is willing to acquire a threatened company
shark repellant is when management requires a large majority of stockholders to approve a takeover.
Or seek a white knight which is a more acceptable firm that is willing to acquire a threatened company.
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41. Leveraged Buyout
A purchase in which a group of investors borrows money from banks and other institutions to acquire a company (or a division of one), using the assets of the purchased company to guarantee repayment of the loan
Mergers and acquisitions (particularly the merger mania in the late 20th century) have been criticized
Executives have to focus excessively on avoiding takeovers, not on managing the business
When a group of investors borrows money to acquire a company, or part of one, using assets of the purchased company to guarantee repayment of the loan, it is called a leveraged buyout, or an LBO.
In the 1980s and 1990s LBOs mergers, and acquisitions dominated the business landscape earning the label “merger mania”.
Some people see mergers and acquisitions as positive forces as they boost stock prices and market value, benefiting their stockholders.
Critics, on the other hand, argue that mergers hurt companies because they force managers to focus their efforts on avoiding hostile takeovers rather than managing effectively and profitably.
Plus, some companies have to take on heavy debt to stave off a takeover, often leading them into bankruptcy during the next economic downturn.
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42. Build Your Skills Selecting a Form of Business (1 of 2)
Ali Bush sees an opportunity to start her own website development business
Ali has a master’s degree in computer science
Has most of the computer equipment necessary
She needs additional software
She feels she can take this start-up firm and create a long- term career opportunity for herself and others
Can work out of her apartment’s extra bedroom
As the business grows, hire the additional full- and/or part- time help needed and reassess the location of the business
This Build Your Skills is taken from Chapter 4, page 141:
Ali Bush sees an opportunity to start her own website development business. Ali has just graduated from the University of Mississippi with a master’s degree in computer science. Although she has many job opportunities outside the Oxford area, she wishes to remain there to care for her aging parents. She already has most of the computer equipment necessary to start the business, but she needs additional software. She is considering the purchase of a server to maintain websites for small businesses. Ali feels she has the ability to take this startup firm and create a long-term career opportunity for herself and others. She knows she can hire Ole Miss students to work on a part-time basis to support her business. For now, as she starts the business, she can work out of the extra bedroom of her apartment. As the business grows, she’ll hire the additional full- and/or part-time help needed and reassess the location of the business.
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43. Build Your Skills Selecting a Form of Business (2 of 2)
TASK
Using what you’ve learned in this chapter, decide which form of business ownership is most appropriate for Ali
Evaluate the advantages and disadvantages of each business ownership
Using what you’ve learned in this chapter, decide which form of business ownership is most appropriate for Ali.
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44. Discussion Name five advantages of a sole proprietorship.
Differentiate among the different types of corporations. Can you supply an example of each type?
Would you rather own preferred stock or common stock? Why?
Which form of business requires the most specialization of skills? Which requires the least? Why?
Name five advantages of a sole proprietorship.
Sole proprietorships are easy and inexpensive to form.
Sole proprietors do not have to discuss their operating plans with anyone.
All profits from a sole proprietorship belong to the owner.
A sole proprietor has direct control of the sole proprietorship and can make decisions without anyone else’s approval.
Sole proprietorships have the most freedom from government regulations.
Differentiate among the different types of corporations. Can you supply an example of each type?
A private corporation is owned by just one or a few people who are closely involved in managing the business. These people, often a family, own all of the corporation’s stock, and no stock is sold to the public. Examples will vary, but Levi Strauss & Co. is a private corporation.
The stock of a public corporation is not held in the hands of a few persons. Instead, its stock may be bought, sold, or traded by anyone. Wal-Mart, IBM, Sears, and ExxonMobil are public corporations.
Quasi-public corporations such as NASA or the U.S. Postal Service are owned and operated by federal, state, or local governments.
Nonprofit corporations are not owned by the government and focus on providing a service rather than earning a profit. The University of Southern California, the American Red Cross, and Greenpeace are examples of such organizations.
Would you rather own preferred stock or common stock? Why?
The answer depends on what type of involvement in the firm the stockholder desires. Preferred stock owners receive a fixed dividend before common stockholders can receive any dividends on their shares. The disadvantage of preferred stock is that their owners have no voting right to elect the board of directors. Although common stock owners receive no preferential treatment in the distribution of profits, they do get to vote on members of the board of directors and other important issues relevant to the operation of the firm.
Which form of business requires the most specialization of skills? Which requires the least? Why?
Corporations allow the most specialization of skills. Sole proprietorships probably require the least specialization; sole proprietors must be able to “wear many hats” and perform many functions. The number of employees in a corporation allows for a high degree of specialization, whereas a sole proprietorship with a small number of employees cannot afford the specialization possible in a larger company.
© 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.