1. Choosing a Form of Business Ownership
Chapter 4

2. 3 Main Forms of Ownership
Sole Proprietorship
Partnership
Corporation

3. Sole Proprietorships
A business that is owned (and usually operated) by one person
The simplest form of business ownership and the easiest to start
The 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 (

5. Total Sales Receipts of American Businesses

6. Advantages and Disadvantages of Sole Proprietorships
Ease of start-up and closure
Pride of ownership
Retention of all profits
No special taxes
Flexibility of being your own boss
DISADVANTAGES
Unlimited liability
The business owner is personally responsible for all the debts of the business
Lack of continuity
Lack of money to put into the business
Limited management skills
Difficulty in hiring employees

7. Class Exercise
You 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. Partnerships
A voluntary association of two or more persons to act as co-owners of a business for profit
Less common form of ownership than sole proprietorship or corporation
No 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 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 contributes 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

10. The Partnership Agreement
Articles of partnership
An agreement in writing explaining the terms of the partnership
Agreement should state
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

11. Articles of Partnership

12. Articles of Partnership (cont.)

13. Advantages and Disadvantages of Partnerships
Ease of start-up
Availability of capital and credit
Personal interest
Combined business skills and knowledge
Retention of profits
No special taxes
DISADVANTAGES
Unlimited liability
Management disagreements
Lack of continuity
Frozen investment-easy to invest in, but sometimes hard to get your money back out if you need to.

14. Corporations
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.
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:
Stock
The shares of ownership of a corporation
Stockholder
A person who owns a corporation’s stock
Closed corporation
A corporation whose stock is owned by relatively few people and is not sold to the general public
Open 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 corporation
Most experts recommend consulting a lawyer

17. Forming a Corporation (cont.)
Where to incorporate
Businesses 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 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

19. Forming a Corporation (cont.)
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
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 owners
Dividend
A distribution of earnings to the stockholders of a corporation
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
Board 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 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

22. Corporate Structure (cont.)
Corporate officers
The chairman of the board, president, executive vice presidents, corporate secretary, treasurer, and any other top executive appointed by the board
Implement 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 liability
Each owner’s financial liability is limited to the amount of money that he or she has paid for the corporation’s stock
Ease of raising capital
Ease of transfer of ownership
Perpetual life
Specialized management
DISADVANTAGES
Difficulty and expense of formation
Government regulation and increased paperwork
Conflict within the corporation
Double taxation
Lack of secrecy

25. Advantages and Disadvantages of a Sole Proprietorship, Partnership, and Corporation

26. Special Types of Corporations
S-corporation
A corporation that is taxed as if it were a partnership (income taxed as personal income of stockholders) but still offers limited liability
Restricted to having only 100 or less stockholders
Limited-liability company (LLC)
Combines the benefits of a corporation and partnership but avoids some of the restrictions and disadvantages
Not 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 corporations
Corporations organized to provide social, educational, religious, or other services, rather than to earn a profit
Charities, museums, private schools, colleges, and charitable organizations are organized as not-for-profits primarily to ensure limited liability
Must 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 time
Example: Walmart and India’s Bharti Enterprises
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

30. Corporate Growth Growth from within
Introducing new products
Entering new markets
Growth through mergers and acquisitions
Merger: the purchase of one corporation by another; essentially the same as an acquisition
Hostile takeover: a situation in which the management and board of directors of a firm targeted for acquisition disapprove of the merger
Tender 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 shares
Proxy fight: a technique used to gather enough stockholder votes to control a targeted company

31. Corporate Growth (cont.)
Horizontal mergers
Mergers between firms that make and sell similar products
Subject to approval by federal agencies to protect competition
Example: If Dell and Apple were to merge
Vertical mergers
Mergers between firms that operate at different but related levels of production and marketing of a product
Usually one firm is a supplier or customer of the other
Example: If UniRoyal (makes tires) merged with a company that supplies rubber.
Conglomerate mergers
Mergers between firms in completely different industries

32. Chapter Quiz
In the United States, the form of business ownership that generates the largest amount of sales revenues is the
sole proprietorship.
partnership.
corporation.
limited-liability company.
S-corporation.

33. Chapter Quiz
Which of the following is a disadvantage of a sole proprietorship?
Flexibility
No special taxes
Pride of ownership
Retention of all profits
Unlimited liability

34. Chapter Quiz
A business co-owned by one or more general partners who manage the business and limited partners who invest money into it is called a
not-for-profit partnership.
limited partnership.
general partnership.
limited-liability company.
S-partnership.

35. Chapter Quiz
A ____________ is a merger between firms that make and sell similar products or services in similar industries.
horizontal merger
vertical merger
conglomerate merger
hostile takeover
tender offer