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Chapter 4 Choosing a Form of Business Ownership - Coggle Diagram
Chapter 4 Choosing a Form of Business Ownership
sole proprietorship
Sole proprietorship – a business that is owned (and usually operated) by one person
Although a few sole proprietorships are large and have many employees, most are small.
Some of today’s largest corporations, including Walmart and JCPenney, started out as sole proprietorships.
Sole proprietorships are the most popular form of ownership when compared to partnerships and corporations, but they rank last in sales revenues.
Pros
Ease of start-up and closure
Sole proprietorship is the simplest way to start a business.
Pride of ownership
Retention of all profits
All profits become the personal earnings of the owner.
No special taxes
Profits earned by a sole proprietorship are taxed as the personal income of the owner.
Flexibility of being your own boss
Cons
Unlimited liability – a legal concept that holds a business owner personally responsible for all the debts of the business
Lack of continuity
If the owner retires, dies, or is declared legally incompetent, the business essentially ceases to exist.
Lack of money
Banks, suppliers, and other lenders usually are often unwilling to lend large sums of money to sole proprietorships.
Limited management skills
The sole proprietor must have expertise in a number of different areas (sales, buying, accounting, etc.).
Difficulty in hiring employees
Partnerships
Partnership – a voluntary association of two or more persons to act as co-owners of a business for profit
Example: Before becoming incorporated, Procter & Gamble was formed as a partnership.
This form of ownership is much less common than the sole proprietorship or the corporation, representing only about 10 percent of all American businesses.
There is no legal maximum on the number of partners a partnership may have.
Pros
Ease of start-up
Availability of capital and credit
Because partners can pool their funds, a partnership usually has more capital available than a sole proprietorship does.
Personal interest
Combined business skills and knowledge
Partners often have complementary skills; the weakness of one partner may be offset by another partner’s strength in that area.
Retention of profits
All profits belong to the owners of the partnership.
No special taxes
TYPES OF PARTNERS
General partner
– a person who assumes full or shared responsibility for operating a business
Limited partner
– a person who invests money in a business but has no management responsibility or responsibility or liability for losses beyond the amount he or she invested in the partnership
Cons
Unlimited liability
Each general partner is legally and personally responsible for the debts, taxes, and actions of any other partner conducting partnership business, even if that partner did not incur those debts or do anything wrong.
Limited partners risk only their original investment.
Many states allow partners to form a limited-liability partnership (LLP), in which a partner may have limited-liability protection from legal action resulting from the malpractice or negligence of the other partners.
Management disagreements
Lack of continuity
Partnerships are terminated if any one of the general partners dies, withdraws, or is declared legally incompetent; however, the remaining partners can purchase that partner’s ownership share.
Frozen investment
Corporation / Company
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
Unlike a real person, a corporation exists only on paper.
Corporate Ownership
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
– a corporation whose stock can be bought and sold by any individual
Examples: General Electric, Microsoft, Nike
Corporate structure
In a corporation, both the board of directors and the corporate officers are involved in management.
Board of directors – the top governing body of a corporation, the members of which are elected by the stockholders
Board members can be chosen from within the corporation or from outside it.
Their major responsibilities are to set company goals, develop general plans (or strategies) for meeting those goals, oversee the firm’s overall operation, and appoint corporate officers.
Corporate officers – the chairman of the board, president, executive vice presidents, corporate secretary, treasurer, and any other top executive appointed by the board of directors
They help the board to make plans, carry out strategies established by the board, hire employees, and manage day-to-day business activities.
Pros
Limited liability
– a feature of corporate ownership that limits each owner’s financial liability to the amount of money that he or she has paid for the corporation’s stock (can just shut down, wont affect you)
Ease of raising capital
Corporations can not only borrow money but also raise additional sums of money by selling stock.
Ease of transfer of ownership
Perpetual life
Since it is essentially a legal “person,” a corporation exists independently of its owners and survives them.
Specialized management
Typically, corporations are able to recruit more skilled, knowledgeable, and talented managers than proprietorships and partnerships.
Cons
Difficulty and expense of formation
Government regulation and increased paperwork
A corporation must register and meet various government standards before it can sell its stock to the public.
Conflict within the corporation
Double taxation
Corporate profits are taxed twice—once as corporate income and a second time as the personal income of stockholders.
Lack of secrecy
Because open corporations are required to submit detailed reports to government agencies and to stockholders, competitors can use this information to compete more effectively
Joint Venture
Joint venture – an agreement 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
Once the goal is reached, the period of time elapses, or the project is completed, the joint venture is dissolved.
Syndicate
Syndicate – a temporary association of individuals or firms organized to perform a specific task that requires a large amount of capital
Like a joint venture, a syndicate is dissolved as soon as its purpose has been accomplished.
A syndicated loan is a loan offered by a group of lenders (called a syndicate) who work together to provide funds for a single borrower.
Growth through merger and acquisitions
Merger
– the combining of two corporations or other business entities to form one business
An acquisition is essentially the same thing as a merger, but the term generally is used in reference to a large corporation’s purchases of other corporations.
To pay for an acquisition, a leveraged buyout may be used.
Leveraged buyout
– a financing method that uses borrowed money to pay for the company that is being taken over
Although most mergers and acquisitions are often friendly, hostile takeovers also occur.
Hostile takeover
– a situation in which the management and board of directors of a firm targeted for acquisition disapprove of the merger
CLASSIFICATION OF MERGERS
Classifications of mergers:
Horizontal merger
– a merger between firms that make and sell
similar products or services in similar markets
Vertical merger
– a merger between firms that
operate at different but related levels in the production
and marketing of a product
Conglomerate
merger
– a merger between firms in
completely different industries