1. Choosing a Form of Business Ownership
Chapter 4
Choosing a Form of Business Ownership

2. Learning Objectives
Describe the advantages and disadvantages of sole proprietorships.
Explain the different types of partners and the importance of partnership agreements.
Describe the advantages and disadvantages of partnerships.
Summarize how a corporation is formed.
Describe the advantages and disadvantages of a corporation.
Examine special types of corporations, including S-corporations, limited-liability companies, and not-for-profit corporations.
Discuss the purpose of a cooperative, joint venture, and syndicate.
Explain how growth from within and growth through mergers can enable a business to expand.

3. …a business that is owned (and usually operated) by one person.
Sole Proprietorship
…a business that is owned (and usually operated) by one person.

4. 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.

5. The Small Business Administration website
SBA Online
The Small Business Administration website
explores topics important to new and established businesses
answers questions such as
Which legal form is best?
How to get financing?
offers SBA answer desk where you can submit questions about specific concerns

6. Forming a Sole Proprietorship
Simplest form of ownership
Easiest to start
Owner decides to start business and begins operations
Common in
Retailing
Service
Agriculture

7. Figure 4.1: 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., 2009, p. 483 (

8. Figure 4.2: Total Sales Receipts of American Businesses
Source: U.S. Bureau of the Census, Statistical Abstract of the United States,
Washington, D.C., 2009, p (

9. Advantages of Sole Proprietorships
Ease of Start-up and Closure
Pride of Ownership
Retention of All Profits
Flexibility of Being Your Own Boss
No Special Taxes

10. Disadvantages of Sole Proprietorships
Unlimited Liability
Lack of Continuity
Lack of Money
Limited Management Skills
Difficulty in Hiring Employees

11. Partnerships
A voluntary association of 2 or more persons to act as co-owners of a business for profit
Much less common than sole proprietorship or corporation
No legal maximum on number of partners

12. Types of Partners
General ─ person who assumes full or shared responsibility for operating a business
Is active in day-to-day business operations
Can enter into contracts on behalf of other partners
Assumes unlimited liability
Limited ─ person who contributes capital to a business but assumes no management responsibility or losses beyond amount he/she invested

13. National Association of Publicly Traded Partnerships
Types of Partnerships
General ─ business co-owned by 2 or more general partners who are liable for everything the business does
Limited ─ business co-owned by 1 or more general partners who manage the business and limited partners who invest money in it
Master Limited ─ owned and managed like a corporation but often taxed like a partnership
National Association of Publicly Traded Partnerships

14. Articles of Partnership
…an agreement listing and explaining the terms of the partnership.

15. Figure 4.3: Articles of Partnership

16. Advantages of Partnerships
Ease of Start-up
Availability of Capital and Credit
Personal Interest
Combined Business Skills and Knowledge
Retention of Profits
No Special Taxes

17. Disadvantages of Partnerships
Unlimited Liability
Management Disagreements
Lack of Continuity
Frozen Investment

18. Corporation
…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.

19. Table 4.1: The Seven Largest U.S. Industrial Corporations
Source: Fortune website at accessed April 6, 2009.

20. Corporate Ownership
Stock ─ shares of ownership of a corporation
Stockholder ─ 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 ─ a corporation whose stock can be bought and sold by any individual

21. Decide where to incorporate
Forming a Corporation
Consult a lawyer
Decide where to incorporate
Cost of incorporating
Advantages/disadvantages of each state’s corporate laws and tax structure
Choose corporate location
Domestic corporation ─ in state in which it is incorporated
Foreign corporation ─ in any state in which it does business except the one in which it is incorporated
Alien corporation ─ chartered by a foreign government and conducting business in the U.S.
Hold organizational meeting

22. Table 4.2: 10 Aspects of Business That May Require Legal Help

23. Corporate Charter
…a contract between a corporation and the state in which the state recognizes the formation of the artificial person that is the corporation.

24. Charter and Articles of Incorporation
Firm’s name and address
Incorporators’ names and addresses
Purpose of corporation
Maximum amount of stock and types of stock to be issued
Rights and privileges of stockholders
Length of time corporation is to exist

25. Stockholders’ Rights
Common Stock owned by individuals who vote on corporate matters and whose claims on profit/assets are subordinate to others
Preferred Stock owned by individuals/firms who do not have voting rights, whose claims on dividends are paid before those of common-stock owners
Dividend a distribution of earnings to stockholders
Proxy legal form listing issues to be decided at stockholders’ meeting and enabling stockholders to transfer voting rights to other individual(s)

26. Corporate Dividends Paid to Stockholders
Spotlight
Source: U.S. Department of Commerce Bureau of Economic Analysis
website at accessed April 13, 2009.

27. Corporate Structure
Board of Directors top governing body of corporation, members are elected by stockholders
Corporate Officers chairman of the board, president, executive vice- presidents, corporate secretary, treasurer, and other top executives appointed by board of directors

28. Advantages of Corporations
Limited Liability
Ease of Raising Capital
Ease of Transfer of Ownership
Perpetual Life
Specialized Management

29. Disadvantages of Corporations
Difficulty and Expense of Formation
Government Regulation and Increased Paperwork
Conflict within Corporation
Double Taxation
Lack of Secrecy

30. Table 4.3: Some Advantages and Disadvantages of a Sole Proprietorship, Partnership, and Corporation

31. Corporation taxed as partnership Criteria:
S-Corporation
Corporation taxed as partnership
Criteria:
No more than 100 stockholders
Stockholders must be individuals, estates, or exempt organizations
Only 1 class of stock
Must be domestic corporation
No nonresident-alien stockholders
All stockholders must agree to S-corporation

32. Limited-Liability Company (LLC)
Provides limited liability protection, taxed like a partnership
Advantages:
With 2 or more members = taxed as partnership avoiding double taxation,1 member = taxed as sole proprietorship
Extends protection of personal assets
More management flexibility when compared to corporations

33. Table 4.4: Some Advantages and Disadvantages of a Regular Corporation, S-Corporation, and Limited-Liability Company

34. Not-for-Profit Corporations
…a corporation organized to provide a social, educational, religious, or other service rather than to earn a profit.

35. Cooperatives, Joint Ventures, and Syndicates
Cooperative association of individuals or firms organized to perform some business function for members
Joint Venture agreement between 2 or more groups to form business entity to achieve specific goal or operate for specific period
Syndicate temporary association of individuals or firms organized to perform specific task requiring large amount of capital

36. Corporate Growth from Within
Expand present operations
Introduce/sell new related products
Sell present products to new geographic markets / groups of consumers
Growth from within has relatively little adverse effect on firm.

37. Corporate Growth Through Mergers/Acquisitions
Merger purchase of one corporation by another
Hostile takeover purchase in which management and board of directors of firm targeted for acquisition disapprove of merger
Corporate raider
Tender offer
Proxy fight

38. Types of Mergers
Horizontal between firms that make and sell similar products/services in similar markets
Vertical between firms that operate at different levels in the production and marketing of a product
Conglomerate between firms in completely different industries

39. Figure 4.5: Three Types of Growth by Merger

40. Biggest Mergers Target Acquirer Value Date Mannesmann
($ billions)
Date
Mannesmann
Vodafone Airtouch
172.2
2/2000
Time Warner
America Online
112.1
1/2001
Warner-Lambert
Pfizer
111.8
6/2000
Mobil
Exxon
85.6
12/1999
SmithKline
Glaxo Wellcome
79.6
12/2000
Ameritech
SBC Communications
76.2
10/1999
GTE
Bell Atlantic
74.9
Aventis SA
Sanofi-Synthelabo
71.3
6/2004
Amoco
British Petroleum
64.3
12/1998
Source: MSNBC, February 15, 2009.

41. Current Merger Trends Takeover 21st Century Leveraged Buyout (LBO)
Pro: makes company more profitable
Con: does not enhance profitability; only ones who benefit are investment bankers, brokerage firms, takeover “artists”
21st Century
Cash-rich companies acquire businesses to enhance their position in the marketplace
More foreign companies/investors
Leveraged Buyout (LBO)
purchase arrangement allowing firm’s managers, employees, investors to purchase company, taking firm private

42. 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.

43. Chapter Quiz (cont.)
Which of the following is not an advantage of a sole proprietorship?
Flexibility
No special taxes
Pride of ownership
Retention of all profits
Unlimited liability

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

45. Chapter Quiz (cont.)
A corporation that received its corporate charter in California and is doing business in Oregon is called a(n) ____________corporation in Oregon.
alien
domestic
visiting
international
foreign

46. Chapter Quiz (cont.)
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