FHF

Ferrell Hirt Ferrell

M: Business
2
nd
Edition

FHF
Options for Organizing Business
Copyright 2011 by the McGraw-Hill Companies, I nc. All rights reserved. McGraw-Hill/I rwin
FHF
Sole proprietorship
Partnership
Corporation
Forms of Business Ownership
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FHF Comparing Forms of Business Ownership
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FHF
Comparing Forms of Business Ownership
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FHF
Businesses owned and operated by one individual; the most
common form of business organization in the United States
15-20 million in the U.S.
80% of all businesses
Men 2x more likely than women to start own business
Sole Proprietorship
Restaurants
Hair salons
Flower shops
Dog kennels
Independent grocery stores
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FHF
Ease and cost of formation
Secrecy
Distribution and use of profits
Flexibility and control of the
business
Government regulation
Taxation
Disadvantages
Unlimited liability
Limited sources of funds
Limited skills
Lack of continuity
Lack of Qualified Employees
Taxation
Advantages
Sole Proprietorship
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FHF

Founded in 1997
Locations in Illinois, Minnesota, Washington D.C., and
Virginia
A high-end bake-at-home pizza company
Preservative-free, mostly organic gourmet pizza
Fresh-Baked Enterprises
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FHF
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
General partnership
Limited partnership
Articles of Partnership
Legal documents that set forth the basic agreement between partners
Partnership
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FHF
General Partnership
A partnership that involves a complete sharing in both the
management and the liability of the business
Limited Partnership
A business organization that 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
Two Types of Partnerships
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1. Name, purpose, location
2. Duration of the agreement
3. Authority and responsibility of each partner
4. Character of partners (i.e., general or limited, active or silent)
5. Amount of contribution from each partner
6. Division of profits or losses
7. Salaries of each partner
Articles of Partnership
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FHF
Articles of Partnership (continued)
8. How much each partner is allowed to withdraw
9. Death of partner
10.Sale of partnership interest
11.Arbitration of disputes
12.Required and prohibited actions
13.Absence and disability
14.Restrictive covenants
15.Buying and selling agreements
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FHF
Ease of organization
Capital & credit
Knowledge & skills
Decision making
Regulatory controls
Disadvantages
Unlimited liability
Business responsibility
Life of the partnership
Distribution of profits
Limited sources of funds
Taxation of partnerships
Advantages
Partnership
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FHF
Keep profit sharing and ownership at 50-50
Partners should have different & complementary skill sets
Honest is critical
Maintain face-to-face communications
Transparency sharing information
Awareness of funding constraints and limited resources
To be successful, you need experience
Family is priority; limit associated problems
Do not become too infatuated with the idea think
implementation
Couple optimism with realism in sales and growth expectations
Keys to Success in Partnership
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FHF
Legal entities created by the state whose assets and
liabilities are separate from its owners
Typically owned by shareholders/stockholders
A corporation is created (incorporated) under the laws
of the state in which it incorporates
The individuals creating the corporation are called
incorporators
Corporations
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Legal documents filed with basic information about the
business with the appropriate state office (often the secretary of
state)
Common elements:
Name & address of corporation
Objectives of the corporation
Classes of stock (common, preferred, voting, nonvoting)
Number of shares of each class of stock
Financial capital required at time of incorporation
Articles of Incorporation
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Provisions for transferring shares of stock
Regulation of internal corporate affairs
Address of business office
Names and addresses of the initial board of directors
Names and addresses of the incorporators
Articles of Incorporation (continued)
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FHF
Private corporation
A corporation owned by just one or a few people who are closely
involved in managing the business
Public corporation
A corporation whose stock anyone may buy, sell, or trade
I nitial Public Offering
A private corporation who wishes to go public to raise additional
capital and expand. The IPO is selling a corporations stock on public
markets for the first time
Types of Corporations
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Quasi-public corporation
Corporation owned and operated by the federal, state, or local
government
NASA, U.S. Postal Service
Non-profit corporation
Focuses on providing a service rather than earning a profit but are not
owned by a government entity
The American Red Cross, The Conservation Fund
Types of Corporations (continued)
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FHF
Board of directors: A group of individuals elected by the stockholders to oversee
the general operation of the corporation who set the corporations long-range objectives.
I nside Directors
Individuals who serve on a board and are employed by the corporation
(usually executives of the corporation)
Outside Directors
Individuals who serve on a board who are not directly affiliated with the
corporation (usually executives of other corporations)
Elements of a Corporation
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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.
Stock Ownership
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While trust in the stock market is generally high, it took a
hit in the wake of the 2008 recession
Confidence in the Stock Market
Source: One Year Confidence Index, The International Center for Finance at the Yale School of Management
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Limited liability
Transfer of ownership
Perpetual life
External sources of funds
Expansion potential
Disadvantages
Double taxation
Forming a corporation
Disclosure of information
Employee-owner separation
Advantages
Corporations
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FHF
J oint Venture
A partnership established for a specific project or for a
limited time
S-Corporation (S-Corp)
Corporation taxed as though it were a partnership with
restrictions on shareholders. Very popular with
entrepreneurs
Other Types of Business Ownership
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Other Types of Business Ownership (continued)
Limited Liability Company (LLC)
Form of ownership that provides limited liability and taxation
like a partnership but places fewer restrictions on members
Cooperative (Co-Op)
An organization composed of individuals or small businesses
that have banded together to reap the benefits of belonging to
a larger organization
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Merger
The combination of two companies (usually corporations) to
form a new company
Acquisition
The purchase of one company by another, usually by buying
its stock and/or assuming its debt.
Leveraged buyout (LBO)
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.
Trends in Business Ownership
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