TOPIC:

Choosing a Form of
Business Ownership

1
 Chapter Learning Goals
 What are the three main forms of business
organization, and what factors should a company’s
owners consider when selecting a form?

 What are the advantages and disadvantages of sole

proprietorships?

 Why would a new business venture choose to

operate as a partnership, and what downside would
the partners face?
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 Chapter Learning Goals (cont’d.)
 How does the corporate structure provide
advantages and disadvantages to a company and
what are the major types of corporations?
 Does a company have any business organization
options besides sole proprietorship, partnership, and
corporation?
 Why is franchising growing in importance?
 Why would a company use mergers and acquisitions
to grow?
 What trends will affect business organization in the
future?
3
 Legal Forms of
Business

Sole Proprietorships Partnerships Corporations

General Partnership Regular Corporation

Subchapter S
Limited Partnership Corporation
(S-Corporation)

Master Limited
Partnership
4
Business Ownership Options: The Big
Three
Sole Proprietorship – the business is owned
by a single individual

Partnership – two or more people serve as

co-owners of the business

Corporation – the business is a separate

legal entity

5
 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?
Business Ownership Options: The
Big Four

7
Comparisons of Forms of Business
Organization

Number Sales Profits

Sole proprietorships
Partnerships
Corporations 8
Business Ownership Statistics
Reasons People Go into
Business for Themselves

4 | 10
 Relative Percentages of Sole Proprietorships,
Partnerships, and Corporations in the U.S.
 Sole proprietorships are most common in retailing, the service industries, and
agriculture .
 Sole Proprietorship
Advantages Disadvantages

 Ease of establishment  Unlimited liability

 Self-satisfaction / Pride of Ownership  Personal pressure

Privacy  Difficult to get funding

 Tax advantages  Limited life

Retention of Control Limited Financial Resources

Retention of Profits Limited ability to attract and

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maintain talented employees
 Business Partnerships
General Partnerships Limited Partnerships

Equal
Equal Unequal
Unequal
Partners
Partners Partners
Partners

Share
Share Unlimited
Unlimited Passive
Passive Limited
Limited
Ownership
Ownership Liability
Liability Investors
Investors Liability
Liability

13
 Partnerships: General vs.
Limited
General Partnerships
All partners have the right to participate in
the management of the firm and share in any
profits/losses.

Limited Partnerships
All partners contribute financially and share
in the profits but the limited partner(s) cannot
actively participate in management.

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Partnership Advantages

Easy to Establish Tax Advantages

Strength in Numbers Diversity of Skills

Increased Capital Extended Life

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16
 Partnership Disadvantages

Unlimited Interpersonal
Liability Problems

Managing Unproductive
Debts Law Suits
Partner Partners

17
 Partnership Agreement

Division Dispute
of Profits Resolution

Decision-Making Expected
Authority Contributions

18
Steps of Forming a Corporation
1. Select company’s name
2. Write and file Articles of
Incorporation paperwork
3. Pay fees and taxes
4. Hold organizational meeting
5. Adopt bylaws, elect directors,
pass operating resolutions

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Forming a Corporation
 Consulta 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

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 10 Aspects of Business
That May Require Legal Help

21
 Organizational Structure of Corporations

Stockholders
elect

Directors
elect

Officers (Top
Management)

President Vice Treasurer Secretary

President

22
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

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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)

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Corporations
Enter Into Contracts

Buy and Sell Property

Sue and Be Sued

Face Limited Liability

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 The Seven Largest U.S.
Industrial Corporations

Source: Fortune website at www.fortune.com, accessed April 6, 2009.

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Some Advantages and Disadvantages of a Sole
Proprietorship, Partnership, and Corporation

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 Organizational Chart
Owners/
Stockholders/
Shareholders

Chief Executive
Officer (CEO)

Board of Directors

President

Senior
Vice President

Vice President Vice President Vice President Vice President

Finance Production Marketing Human Resources
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 Ownership of Corporations
Shareholders Shareholders

Shareholders Shareholders
Shareholders Shareholders

Common Stock Preferred Stock

Full Voting Rights Minimal Voting Rights

Cash or Stock Dividends Cash or Stock Dividends

Last Claim on Distributed First Claim on Dividends

Profits and Assets and Assets

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 Public Versus Private Ownership

Public Private
Corporation Corporation

Many Publicly Few Not Publicly

Shareholders Traded Shareholders Traded

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 Advantages
of “Going Public”
Ready supply of capital
Increased liquidity
Enhanced visibility
Independent market value
Increased flexibility

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 Disadvantages
of “Going Public”
High cost
SEC filing requirements
Reduced ownership control
Demands of public exposure
Pressure for quarterly results

32
 Corporations
Advantages Disadvantages

 Access to capital  Excess paperwork

 Limited liability  Burdensome costs

 Increased liquidity  Double taxation

 Unlimited life span  Disclosure requirements

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 World’s Largest
Corporations
1. Citigroup 11. UBS
2. General Electric 12. Wal-Mart Stores
3. American Intl Group 13. Royal Bank of Scotland
4. Bank of America 14. JP Morgan Chase
5. HSBC Group 15. Berkshire Hathaway
6. ExxonMobil 16. BNP Paribas
7. Royal Dutch/Shell 17. IBM
8. BP 18. Total
9. ING Group 18. Verizon Communication
10. Toyota Motor 20. Chevron Texaco
5-34
Types of Corporations

Subchapter S
Corporation

Limited
Liability Company

Subsidiary
Corporation

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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

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 Corporations: Characteristics
TYPE KEY ADVANTAGE LIMITATIONS

S Corp. • IRS does not tax earnings • No more than 100 stockholders
separately • Stockholders must be U.S.
• Stockholders have limited liability citizens or permanent residents

Statutory • Not require to have a board or hold • Limited number of stockholders

Close annual meetings • Stockholders must offer shares to
Corp. • Owners can participate in owner first before selling publicly
management while maintaining • Not all states allow this
limited liability corporation type

Nonprofit • Earnings are exempt from federal • May have dues paying members
Corp. and state income taxes but no stockholders
• Members/directors have limited • Can’t distribute dividends
liability • Can’t make political donations
• Contributions
© 2009 South-Western, made
a division of Cengage by individuals
Learning • Must keep37 accurate records to
are tax-deductible document tax-exemption
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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

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 Some Advantages and Disadvantages of a Regular
Corporation, S-Corporation, and Limited-Liability Company

39
 Corporate Governance

Elect Appoint Hire

Common Board Corporate Employees of

Shareholders of Directors Officers the Company

•Individuals •Dividends •Operations

•Companies •Corporate Affairs •Chief Executive •Finance
•Non-profits •Strategic Plans •Chief Financial •Marketing
•Pensions •Select Officers •Chief Operations •Personnel
•Mutual Funds •Finances •Engineering

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Business Combinations

Mergers
Mergers Consolidations
Consolidations

Acquisitions
Acquisitions Cooperatives
Cooperatives

41
 Corporate Restructuring: Mergers &
Acquisitions
Mergers – two Acquisitions – when
companies agree to a one firm buys another
combination of equals
Corporations look for:
• Growth opportunities
• Operational efficiencies
• Competitive advantages

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 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

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 Types of Mergers

1. Horizontal mergers
◦ same industry, same stage of production
2. Vertical mergers
◦ same industry, different stages of production
3. Conglomerate mergers
◦ different industries
4. Leveraged buyouts
◦ corporate takeovers with borrowed money

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 Types of Mergers

Horizontal

Vertical

Conglomerate No
Relationship
between
companies

5-45
 Types of Mergers &
Acquisitions
Type of Definition Objective Example
Merger

Horizontal Combine firms in • Increase size AT&T and

same industry • Increase market SBC
power
• Gain efficiency

Vertical Combine • Provide tighter Time Warner

companies with integration and and Turner
buyer-seller increase control Broadcasting
relationship

Conglomerate Combination of • Increase company’s GE acquiring

unrelated diversity RCA
companies
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 Benefits of Mergers

Reduced: Increased:
 costs  purchasing power
 overlapin  market share
operations
 competition

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 Franchising
Franchise
◦ License to operate an individually owned
business as though it were part of a chain of
outlets or stores
◦ The business itself
Franchising
◦ Actual granting of a franchise

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 Franchising
Franchisor
◦ Supplies a known & advertised business name
◦ Supplies management skills
◦ Supplies training & materials
◦ Supplies method of doing business

Franchisee:
◦ Supplies labor & capital
◦ Operates the franchised business
◦ Agrees to abide by the franchise agreement

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 Franchise Contract
Franchisor, Inc.
Branded
Product/Service

Performance
Monitoring

$$$$$

Franchisee

5-50
 Franchisor
Provides
Assigns Territory
Training/Support
May Provide Financial BusinessExpansion
Aid/Advice
Using O.P.M.
OffersMerchandise/
Supplies at Competitive
Price

5-51
 Franchisee
Pays Up-Front Costs
Makes Monthly Payment to
Franchisor
Runs Business by Franchisor’s
Rules/Procedures
Buys Materials from Franchisor/
Approved Supplier

5-52
 Franchises
Advantages Disadvantages
Management & marketing High start-up costs
assistance Shared Profit
Personal ownership Management regulation
Recognized name Coattail effects
Restrictions on selling
Financial advice &
Fraudulent franchisors
assistance
Lower failure rate

5-53
 Franchising Advantages
Franchisor
◦ Fast, Selective Distribution
◦ Motivated Franchisee

Franchisee
◦ Opportunity to start a business
◦ Business Experience of others
◦ Nationally recognized name
◦ National promotional campaigns

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Well Known Franchises
McDonald’s
ThriftyRent-a-Car System
Mail Boxes Etc.
Dairy Queen
Super 8 Motels Inc.
TGI Fridays
Pearle Vision Inc.
Baskin-Robbins

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Franchising in Today’s Economy

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Trends in Mergers and Acquisitions

Year Number Value (in billions)

1970 5,152 $16

1975 2,297 $12
1980 1,889 $44
1985 3,001 $180
1990 2,074 $108
1995 3,510 $356
2000 11,123 $1,269
2003 8,232 $530

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Strategic Alliances
and Joint Ventures
Gain Credibility/expectancy

Expand Markets

Access Technology

Diversity Offerings

Share Best Practices

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Double Taxation in Corporations

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 Looking Back
What are the four basic forms of business and their
characteristics?
What are the advantages and disadvantages of a sole
proprietorship?
What are the pros and cons of partnerships?
Why have corporations become the dominant form of
business ownership?
Why are limited liability companies becoming increasingly
popular?
What are the advantages and disadvantages of
franchising?

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