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Selecting a Form of Selecting a Form of Business OwnershipBusiness Ownership

Chapter ObjectivesChapter Objectives1. Identify questions in choosing a form of business ownership2. Describe sole proprietorship and advantages and disadvantages3. Identify types of partnerships and explain partnership agreement4. Describe advantages and disadvantages of partnership5. Explain corporate formation and operation6. Discuss advantages/disadvantages of corporation7. Examine special types of ownership8. Define mergers and acquisitions and explain motivation to

merge/acquire

Factors to ConsiderFactors to Considerin Selecting Legal Formin Selecting Legal Form

1) What willing to do?2) How much control?3) Share profits?4) Special Taxes?5) Skills Needed?6) Business continuance?7) Financing Needs?8) Liability exposure?

Sole Sole ProprietorshipProprietorship

•“…a business owned by only one person.”

Positive CharacteristicsPositive Characteristicsof Sole Proprietorshipof Sole Proprietorship

Most common- 75%Easiest and cheapestFew government regulationsComplete ControlGet all earned incomeNo special taxes

Negative CharacteristicsNegative Characteristicsof Sole Proprietorshipof Sole Proprietorship

Supply all talentsDeath = dissolutionOwn Resources = financingUnlimited liability

Sole ProprietorshipSole Proprietorship& Unlimited Liability& Unlimited Liability

General PartnershipGeneral Partnership

•“…a business owned jointly by two or more

people.”

Characteristics ofCharacteristics ofGeneral PartnershipGeneral Partnership

6% of businessesSome large = Big 4 accounting firmsRelatively easy & inexpensiveShared responsibility & talentFinancing easierContinuity not issueNo special taxes

More complex than sole proprietorshipDisputes among partnersUnlimited liability including for partner actionsShared decisionsShare profits

Partnership AgreementPartnership Agreement

Cash/Contribution of partnersDivision of income/lossPartner responsibilitiesConditions for saleConditions for dissolvingConditions for settling disputes

General PartnershipGeneral Partnership& Unlimited Liability& Unlimited Liability

Limited PartnershipLimited Partnership

Permitted by lawPartners

•General- runs business and responsible for liability

•Limited- limited involvement, losses = investment

Limited Limited PartnershipPartnership

GeneralGeneral

PartnerPartner

LimitedLimited

PartnerPartner

LimitedLimited

PartnerPartner

LimitedLimited

PartnerPartner

LimitedLimited

PartnerPartner

CorporationCorporation

•“…a legal entity separate from the

parties who own it.”

Characteristics of Characteristics of Corporation as Legal Corporation as Legal

EntityEntity1) Enter into binding contracts2) Buy/Sell property3) Sue/Be sued4) Responsible for all actions5) Taxed

Types of U.S. BusinessesTypes of U.S. Businesses

Characteristics of Characteristics of ShareholdersShareholders

Invest money (stock or shares)

Ownership % = % of total shares

Elects Board of Directors

Board of DirectorsBoard of Directors1) Outside group of people2) Responsible for governing3) Oversees major policies & decisions4) Sets goals5) Holds management accountable6) Hires/Evaluates CEO7) Approves dividends

CorporationCorporation•Benefits

Limited LiabilityFinancial ResourcesSpecialized managementContinuity & Transferability

•DrawbacksGoals of management & shareholders differCostly to set upRegulation & Gov’t OversightDouble taxation

Closely Held CorporationClosely Held Corporation

•“…stock is held by only a few individuals...not

allowed to sell it to the general public.”

Other Types ofOther Types ofBusiness OwnershipBusiness Ownership

S-Corp. Tax rules = partnership/sole proprietorship Limited liability protection Qualify

• <100 stockholders• U.S. resident/citizen• 100% agreement on decision to form

Limited-Liability Corp. Members not personally liable Taxed once No ownership restrictions

Other Types ofOther Types ofBusiness Ownership (cont’d)Business Ownership (cont’d) Cooperatives

Owned/controlled by those using services Shares financial success with members

Not-For-Profit Corp. Public service besides financial gain Exempt from taxes Contributions tax deductible

Merger V. Merger V. AcquisitionAcquisition

Merger- two companies combine to form new company

Acquisition- purchase of one company by another

Motives BehindMotives BehindMergers & AcquisitionsMergers & Acquisitions

1) Gain complementary products2) Attain new markets or

distribution channels3) Realize economies of scale

Hostile TakeoverHostile Takeover

•“…a takeover resisted by the targeted company’s

management and its board of directors.”