Methods of teaching

Module

Entrepreneurship
Forms of business ownership and business combination

Sheryl Morales

Professor

Labuyo, Marilyn R.

BBTE 3-2
 ENTERPRENEURSHIP
(Forms of business ownership and business combination)

WHAT THIS MODULE ALL ABOUT

ENTERPRENEURSHIP is a process of innovation and new venture creation. It

is both the art and science of converting ideas into marketable goods and services to improve
man’s quality of life. This course is designed to help students know the forms of business
ownership and business combination.

WHAT ARE YOU EXPECETED TO LEARN

In this module you are expected to.

1. Identify the forms of business ownership and business combination.

2. Define sole-proprietorship, partnership, and corporation.
3. Enumerate the advantages and disadvantages of sole-proprietorship, partnership, and
corporation.
4. Know the several special categories of corporation.

HOW TO LEARN FROM THIS MODULE

Imagine yourself that you want to put up on business. And you are deciding for what
forms of business ownership you want to establish.

In this module you’ll know the different forms of business ownership and also the business
combination. This will help you to decide for what is the form of business you want to establish.

Answer the activity and self-check exercises honestly for you to know the forms of business
ownership and business combination.
PRE-TEST:

DIRECTION: choose the correct answer

1. It is form of business ownership owned by only one person.

a) Sole proprietorship c) corporation
b) Partnership d) share holders
2. It is a form of business ownership that can legally own property and conduct business.
a) Partnership c) sole proprietorship
b) Corporation d) share holders
3. It is a form of business ownership that is unincorporated business owned by two or more
people.
a) Share holders c) corporation
b) Sole proprietorship d) partnership
4. It is a type of parent company that owns other companies for investment, but not
management.
a) Parent company c)subsidiary company
b) Holding company d) domestic company
5. It is the one that operates only in one state only.
a) Subsidiary company c) domestic company
b) Parent company d) holding company
6. It is a corporation owned by a few individuals or companies that retain ownership
control, which can be an advantage.
a) Closely-held c) Publicly traded company
b) Privately-held d) Preferred stock
7. It owns the corporation.
a) Shareholders c) Common stock
b) Stockholders d) Stock certificate
8. It is the document that declares the ownership.
a) Common stock c) Preferred stock
b) Dividends d) Stock certificate
9. It is the second type of corporation ownership
 a) Preferred stock c) Common stock
b) Dividends d) Cumulative preferred stock
10. It is a company that offers its stock for sale to the general public.
a) Publicly traded company c) Closely held
b) Privately held d) Domestic company

DEFINATION of TERMS

SOLE-PROPRIETORSHIP------is owned by one person. It is the least expensive form of

business to begin.

PARTNERSHIP------- is unincorporated business owned by two or more people.

GENERAL PARTNERSHIP---- all partners have the right to participate as co-owners and are
individually liable for the business.

LIMETID PARTNERSHIP----have one or more general partners, and one or more limited
partners.

CORPORATION---- is an organization that can legally owned property and conduct business.

SUBSIDIARY COMPANY-----is one owned by another company.

PARENT COMPANY-----------owns the subsidiary.

HOLDING COMPANY-----is a type of parent company that owns other companies for
investment, but not management.

ALIEN CORPORATION------operates in the U.S but incorporates in other country.

OUT-OF-STATE or FOREIGN COMPANY----- if a company operates in one state, but

operates in others.

DOMESTIC COMPANY-----is one that operates only in one state only.

SHARE HOLDERS------owns the corporation.

STOCK CERTIFICATE---- is the documents that declare that ownership.

COMMON STOCK------is ownership that includes voting rights.

DIVIDENDS------the distributed profits.

PREFERRED STOCK----this type of stock does not usually include voting rights, but the
shareholders of preferred stock have first claim on the corporation assets after the company debts
are paid.

CUMULATIVE PREFERRED STOCK----the most usual type of preferred stock.

PRIVATELY HELD CORPORARION--- Corporation is owned by a few individuals or

companies that retain ownership control, which can be an advantage.

PUBLICLY TRADED COMPANY-----a company that offers its stock for sale to the general
public.

BOARD Of DIRECTORS------is a group of people responsible for the company’s welfare.

MERGER------one company purchases and absorbs another company, or parts of that company.

CONSOLIDATION------companies combine to create a third company.

ACQUISITION-------- occurs when a company purchases another through obtaining the

majority of voting stock.

HOSTILE TAKE OVERS----are the unwelcome attempts to shift control of a company.

RAIDER--------- is the aggressor in a hostile takeover.

TENDER OFFER----- a raider offers to purchase a large amount of voting stock at an inflated
price, and then gather enough voting power to force replacement of the board of directors BOD)
and management.

PROXY FIGHT-------the raider hopes to sway existing stockholders to agree with the raider’s
viewpoint.
 FORMS OF BUSINESS OWNERSHIP AND
BUSINESS COMBINATION

 Sole proprietorship
 Partnership
 Corporation

Class, these factors should be considered when considering

which type of business organization to form. Tolerance for risk,
long term goals, and tax advantages there are three most common
form of business ownership first is sole-proprietorship, partnership
and corporation.

SOLE-PROPRIETORSHIP---- is owned by one person. It is the least expensive form of

business to begin, and is often started part-time based in the home.

CLASS, in the sole-proprietorship there are some advantages and disadvantages.

ADVANTAGES:

 Cost of establishment
 Satisfaction of independence and privacy.
 The ability to keep all after-tax income.
 Public disclosure of financials is not necessary.
 Profits are taxed at the individual income rate.

DISADVANTAGES:

 Unlimited liability.
 Least likely to find outside financing.
 Cannot take advantages of synergy of joint ownership.

The next form of business ownership is PARTNWERSHIP are incorporated business

owned. Class, there are two types of partnership, GENERAL and LIMITED. In general
partnership all partners has the right to participate as co-owners and is individually liable for the
business. Limited partnerships have one or more general partners, and one or more limited
partners. Limited partners have a liability limited to their investment. Only general partners,
participate in the daily management. A limited liability partnership [LLP] is one in w/c all
partners have limited liability. LLPs are restricted by states to include or omit particular types of
business. In addition to the same advantages as sole proprietorship, partnerships also have the
advantage of distributed liability (among partners) and a greater chance for survival.
Disadvantages include the increased likelihood of disagreements among owners, and controversy
over exit strategies.

Class the third business ownership is CORPORATION.

Example of a corporation:

Ok class, any idea about corporation? Corporation is an organization that can legally own
property and conduct business. It has most of the legal rights of a person. Unlike sole
proprietorship and partnerships, a corporations legal status and obligation exist independently of
its owners this means that the owners are not personally liable for any business debts. Choosing
to organize a business as a corporation has advantages and disadvantages:

ADVANTAGES:

 Greater financing options.

 Expanded research and development capabilities.
 Limited liability.
  Liquidity-investors can easily convert stock to cash.
 Unlimited life span.
 Ability to finance internal projects.

DISADVANTAGES:

 Cost of “going public “is high.

 Burdensome paperwork.
 Corporations are taxed twice.
 Must publish financial and operational information.
 Pressure to show short-term growth.
 Less control for owners

There are several special categories of corporations including S corporations, limited liability
corporations, subsidiary corporations, parent companies, and holding companies. The
advantages of being an S corporation are monetary. Normally a corporation is taxed twice,
but an S corporation is taxed like a partnership -- only once at the individual rate.
Requirements for an S corporation company:

• Must have less than 76 investors

• No investors of the corporation can be nonresident aliens

• Must be a U.S. company

• Can only issue one class of common stock

o        All stock shares the same dividend rights

o        All stock shares the same liquidation rights

o        Stock may have different voting rights

 Another corporation type is the Limited liability company (LLC). This type combines
personal liability protection of a corporation with tax advantages of a partnership. Neither the
number of shareholders nor management participation is limited. The LLC has a flexible
operating agreement that that details how the LLC should be managed.

A subsidiary company is one owned by another company. The parent company owns the
subsidiary. A holding company is a type of parent company that owns other companies for
investment, but not management. An alien corporation operates in the U.S. but incorporates in
another country. For example, Total is a gasoline company in the U.S. that originates in France;
therefore, it is an alien company. If a company incorporates in one state, but operates in others,
then it is an out-of-state or foreign company. A domestic company is one that operates only in
one state only.

Shareholders own the corporation. These people have an ownership share (percent) of the
company. A stock certificate is the document that declares that ownership. There are two types
of stock: common and preferred. Common stock is ownership that includes voting rights.
Owners of common stock have the last claim on distributed profits and assets. Distributed profits
are called dividends.  The distribution of these dividends is authorized by the Board of Directors.

Companies do not have to provide dividends to their stockholders. In addition to the

possibility of receiving dividends, the common stockholder hopes that the company’s worth will
increase. If the company is valued higher, then each share of stock will also be valued higher,
thus giving the stockholder a profit upon selling the stock. The second type of corporation
ownership is preferred stock. This type of stock does not usually include voting rights, but the
shareholders of preferred stock have first claim on the corporation’s assets after the company’s
debts are paid. This benefit is important if the company goes out of business. The most usual
type of preferred stock is cumulative preferred stock. With cumulative preferred stock, the
stockholders will receive dividends before the common stockholders are offered dividends.

A corporation can choose to be private or public. A privately-held corporation is owned

by a few individuals or companies that retain ownership control, which can be an advantage.
These corporations are also called closed or closely-held. If a company offers its stock for sale to
the general public, then it is called a publicly traded company. Advantages of creating a publicly
traded corporation are:

• Increased liquidity

• Enhanced visibility

• Establishment of an independent market value for the company

• Flexibility to purchase other companies

Disadvantages to creating a publicly traded company:

• Cost of going public is high

• Filing requirements with the SEC are burdensome

• Ownership is lost

• Management handle increased pressure and publicity

• Value of the company’s stock is subject to external influences like the economy

Shareholders own the corporation, but most of the owners are not involved in its management.
The Chief Executive Officer (CEO) is the managing head of the company. He works with other
C-level (CxO) executives like the Chief Financial Officer (CFO), Chief Operations Officer
(COO), Chief Information Officer (CIO), and others to ensure the corporation runs smoothly and
profitably.

Choosing to organize a business as a corporation has advantages and disadvantages:

Advantages Disadvantages
• Greater financing • Cost of “going public” is
options high

• Expanded research and • Burdensome paperwork

 development capabilities • Corporations are taxed
twice
• Limited liability
• Must publish financial and
• Liquidity – investors can
operational information
easily convert stock to
cash • Pressure to show short-
term growth
• Unlimited life span
• Less control for owners
• Ability to finance
internal projects

There are several special categories of corporations including S corporations, limited

liability corporations, subsidiary corporations, parent companies, and holding companies.
The advantages of being an S corporation are monetary. Normally a corporation is taxed
twice, but an S corporation is taxed like a partnership -- only once at the individual rate.
Requirements for an S corporation company:

• Must have less than 76 investors

• No investors of the corporation can be nonresident aliens

• Must be a U.S. company

• Can only issue one class of common stock

o        All stock shares the same dividend rights

o        All stock shares the same liquidation rights

o        Stock may have different voting rights

Another corporation type is the Limited liability Company (LLC). This type combines personal
liability protection of a corporation with tax advantages of a partnership. Neither the number of
shareholders nor management participation is limited. The LLC has a flexible operating
agreement that that details how the LLC should be managed.
 A subsidiary company is one owned by another company. The parent company owns the
subsidiary. A holding company is a type of parent company that owns other companies for
investment, but not management. An alien corporation operates in the U.S. but incorporates in
another country. For example, Total is a gasoline company in the U.S. that originates in France;
therefore, it is an alien company. If a company incorporates in one state, but operates in others,
then it is an out-of-state or foreign company. A domestic company is one that operates only in
one state only.

The Board of Directors is a group of people responsible for the company’s welfare. It is
common for a company to have 15 to 25 directors on the board. They are elected by and
representatives of the shareholders. The board does not manage day-to-day operations. Instead, it
sets the goals and strategic direction for the company. From those goals, the executives and
managers develop the management plans and short-term objectives. The board also decides to
distribute dividends and votes to allow major investments. Some boards approve everything that
the executive managers suggest; other boards require additional investigation before agreement.
How independent should the directors on the board be? Large company scandals have increased
the pressure to examine governance. Studies show that companies in which directors own large
amounts of stock and take an active role in guiding the company usually outperform those whose
directors are less involved.

Shareholders own the corporation, but most of the owners are not involved in its
management. The Chief Executive Officer (CEO) is the managing head of the company. He
works with other C-level (CxO) executives like the Chief Financial Officer (CFO), Chief
Operations Officer (COO), Chief Information Officer (CIO), and others to ensure the corporation
runs smoothly and profitably. Most executives work 50 to 70 hours a week, travel extensively,
and endure great stress. The compensation for that commitment is now under the public’s
microscope. Recently, the CEO of the New York Stock Exchange (NYSE) was forced out
because of an exorbitant compensation package. 

Mergers, acquisitions, buyouts and acquisitions all have the same goal: An individual’s or
company’s purchase of another company. In a merger, one company purchases and absorbs
another company, or parts of that company. The absorbed company ceases to exist. In a
consolidation, companies combine to create a third company. An acquisition occurs when a
company purchases another through obtaining the majority of voting stock. If individuals use
borrowed funds to purchase a publicly traded company’s stock, then the transaction is called a
leveraged buyout (LBO). The lenders expect that the loan to be repaid through company profits
or by selling some of the company assets. This transaction usually depletes the cash available for
operations because of their cash will be required to make principle and interest payments on the
new owner’s loan. The numbers of mergers increase when the economy is strong. Companies
eliminate unprofitable segments when the economy is poor.

There are usually difficulties blending the corporate cultures, called culture clash. There
are often struggles for power and problems merging the organizational structures and
communication paths. Once the new organization is settled, the larger company has advantages
because of its size. These advantages are economies of scale, synergy, or efficiencies, and
include:

• Elimination of redundant expenditures

• Increased purchasing power

• Increased revenue

Hostile takeovers are the unwelcome attempts to shift control of a company. A raider is
the aggressor in a hostile takeover. There are two types of hostile takeovers: tender offers and
proxy fights. In a tender offer, a raider offers to purchase a large amount of voting stock at an
inflated price, and then gather enough voting power to force replacement of the board of
directors (BOD) and management. In a proxy fight, the raider hopes to sway existing
stockholders to agree with the raider’s viewpoint. Once he has enough supporters, the raider will
force the change of BOD members and management. Of course the raider intends to lead the
BOD.

A number of strategies are available to discourage hostile takeovers including poison

pills, golden parachutes, shark repellants, and white knights.
 Strategy Characteristics

Poison pill • Triggered by takeover attempt

• Makes company less valuable in

Golden parachute
some way – like selling stock below
market value
• Guarantees executives big
compensation packages if they leave
as a result of a takeover

• Similar effect to poison pill –

company becomes less valuable
Shark repellant • Direct method, but only works if
mgmt. has support of stockholders

• Large majority of stockholders

must approve any takeover attempt
White knight • Another buyer, one who agrees
with current management, steps in to
purchase company before the raider
can

• White knight then steps aside to

allow current management to
continue
Taking the company • Large investors buy back all
private publicly traded stock

• Investors only offer future stock to

select investors

Strategic alliances are sometimes preferred over mergers, acquisitions, and consolidations
because they do not require a long-term commitment. Strategic alliances can give the
same effect as mergers because they help the company:
 • Gain credibility in a new field

• Expand market presence

• Gain access to technology

• Diversify offerings• Share business practices

Activity..

TITLE: The boat is sinking.

DIRECTION: class, the members of this activity is if I will say the

boat is sinking group yourself into sole proprietorship you will group
into one and if the partnerships you will group into 3-5 members w/
your group and the corporation are 9-13 members

Self check

DIRECTION: choose the correct answer

1 It is form of business ownership owned by only one person.

c) Sole proprietorship c) corporation

b.) Partnership d) share holders

2. It is a form of business ownership that can legally own property and conduct business.

c) Partnership c) sole proprietorship

b.) Corporation d) share holders

3. It is a form of business ownership that is unincorporated business owned by two or more

people.

c) Share holders c) corporation

b.) Sole proprietorship d) partnership

4. It is a type of parent company that owns other companies for investment, but not management.

c) Parent company c)subsidiary company

b.) Holding company d) domestic company

5. It is the one that operates only in one state only.

c) Subsidiary company c) domestic company

b.) Parent company d) holding company

6. It is a corporation owned by a few individuals or companies that retain ownership control,

which can be an advantage.

c) Closely-held c) Publicly traded company

b.) Privately-held d) Preferred stock

7. It owns the corporation.

c) Shareholders c) Common stock

b.) Stockholders d) Stock certificate

8. It is the document that declares the ownership.

c) Common stock c) Preferred stock

 b.) Dividends d) Stock certificate

9. It is the second type of corporation ownership

c) Preferred stock c) Common stock

b.) Dividends d) Cumulative preferred stock

10. It is a company that offers its stock for sale to the general public.

c) Publicly traded company c) Closely held

b) Privately held d) Domestic company

11. It is the most usual type of preferred stock

a.) Cumulative preferred stock c. ) Common stock

b.) preferred stock d.) Stock certificate

12. It owns the subsidiary

a.) Parent company c.) Subsidiary company

b.) Domestic company d.) Holding company

13. It is a company incorporates in one state, but operates in others

a.) out of state of foreign company c.) Holding company

b.) Domestic company d.) Parent company

14. It is called as a distributed profit.

a.) Domestic company c.) Dividends

b.) Share of stocks d.) Alien company

15. It is a group of people responsible for the company’s welfare.

a.) Shareholders c.) Merger

 b.) Raider d.) Board of directors

Post test
DIRECTION: choose the correct answer

1 It is form of business ownership owned by only one person.

d) Sole proprietorship c) corporation

e) Partnership d) share holders

2. It is a form of business ownership that can legally own property and conduct business.

d) Partnership c) sole proprietorship

e) Corporation d) share holders

3. It is a form of business ownership that is unincorporated business owned by two or more

people.

d) Share holders c) corporation

e) Sole proprietorship d) partnership

4. It is a type of parent company that owns other companies for investment, but not management.

d) Parent company c)subsidiary company

e) Holding company d) domestic company

5. It is the one that operates only in one state only.

d) Subsidiary company c) domestic company

e) Parent company d) holding company
f)

6. It is a corporation owned by a few individuals or companies that retain ownership control,

which can be an advantage.
 d) Closely-held c) Publicly traded company
e) Privately-held d) Preferred stock

7. It owns the corporation.

d) Shareholders c) Common stock

e) Stockholders d) Stock certificate

8. It is the document that declares the ownership.

d) Common stock c) Preferred stock

e) Dividends d) Stock certificate

9. It is the second type of corporation ownership

d) Preferred stock c) Common stock

e) Dividends d) Cumulative preferred stock

10. It is a company that offers its stock for sale to the general public.

d) Publicly traded company c) Closely held

e) Privately held d) Domestic company

11. It is the most usual type of preferred stock

a.) Cumulative preferred stock c. ) Common stock

b.) preferred stock d.) Stock certificate

12. It owns the subsidiary

a.) Parent company c.) Subsidiary company

b.) Domestic company d.) Holding company

13. It is a company incorporates in one state, but operates in others

a.) out of state of foreign company c.) Holding company

b.) Domestic company d.) Parent company

14. It is called as a distributed profit.

a.) Domestic company c.) Dividends

b.) Share of stocks d.) Alien company

15. It is a group of people responsible for the company’s welfare.

a.) Shareholders c.) Merger

b.) Raider d.) Board of directors

Enumeration

Give at least five advantages of a Corporation.

1.

2.

3.

4.

5.

Give at least five disadvantages of a Corporation.

1.

2.

3.

4.

5.
. . . . End of the lesson

. . . . . . . . . . . Good luck . . . . . . . . . . .