CHAPTER 6: BUSINESS FORMATION Choosing the Form that Fits.
-
Upload
isaac-garrett -
Category
Documents
-
view
254 -
download
3
Transcript of CHAPTER 6: BUSINESS FORMATION Choosing the Form that Fits.
CHOICES, CHOICES, CHOICES
The form of ownership of a business is a big decision.
Form of ownership affects:
• Operation• Start-up Costs• Profit Distribution• Taxes• Management Succession plans• Liability Exposure• Managerial Ability• Business Goals
The “Big Three” is Becoming the “Big Four”:
• Sole Proprietorship• Partnership• Corporation• Limited Liability
Company
SOLE PROPRIETORSHIP: BUSINESS AT ITS MOST BASIC
Advantages: Ease of Formation
Retention of Control
Pride of Ownership
Retention of Profits
Possible Tax Advantages
Disadvantages: Limited Financial
Resources
Unlimited Liability
Limited ability to attract and maintain talented employees
Lack of Permanence
MOST COMMON TYPES OF SOLE PROPRIETORSHIPS
Source for Table: “Sole Proprietorship Returns”, by Kevin Pierce Statistics of Income Bulletin, Summer, 2005, Figure A, p.9; website: http://www.irs.gov/pub/irs-soi/03solp.pdf )
PARTNERSHIPS: TWO HEADS CAN BE BETTER THAN ONE
Advantages: Pooled Financial
Resources
Shared Responsibilities
Ease of Formation
Tax Advantages
Disadvantages: Unlimited Liability
Disagreements
Difficulty in withdrawing from agreement
Lack of Continuity
GENERAL VS LIMITED PARTNERSHIPS
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 have limited liability
LIMITED PARTNERSHIPS
Limited Partnership – includes at least one
general partner and at least one limited partner
Limited Liability Partnership – All partners are actively
involved but they have some form of limited liability. The
amount of liability differs per state.
CORPORATIONS: AN ARTIFICIAL REALITY A corporation is a legal entity, separate
and distinct from its owners. Corporations are owned by stockholders. The Board of Directors
Elected by stockholders to oversee the operation of their company and protect their interests
Oversee the operation of corporation and protect investors’ interest
Establish mission and set objectives
Rarely get involved in day-to-day management
Responsible for monitoring the performance of the corporate officers
Articles of Incorporation
Corporate Name Shares of stock the corporation is
authorized to issue Number of shares each owner will buy Each owner’s contribution to obtain stock Business of the corporation Management structure of the corporation
CORPORATIONS
Advantages: Limited Liability
Permanence
Easy to Transfer Ownership
Ability to Raise Capital
Specialized Management
Disadvantages: Expense/complexity of
formation and operation
Double Taxation
Paperwork and Regulation
Conflicts of Interest
LIMITED LIABILITY COMPANY: THE NEW KID ON THE BLOCK
Advantages: Limited Liability
Tax Pass-Through
Simplified Management and Operation
Flexible Ownership
Disadvantages: Franchise Taxes
Foreign Status in other States
State Law Differences
Limited to Select Industries
COMPARING BUSINESS FORMS
SoleProprietorshi
ps
Partnerships Corporations
LOW HIGH
HIGH LOW
DEGREE OF COMPLEXITY AND PERPETUITY
DEGREE OF PERSONAL LIABILITY
CORPORATE RESTRUCTURING
Large corporations constantly look for ways to grow and
achieve competitive advantage.
Mergers – two companies agree to a
combination of equals.
Acquisitions – when one firm buys
another.
TYPES OF MERGERS AND ACQUISITIONS
Type of Merger
Definition Objective Example
Horizontal Combine firms in same industry.
•Increase size•Increase market
power•Gain efficiency
AT&T and SBC
Vertical Combine companies with
buyer-seller relationship.
•Provide tighter integration and increase control
Time Warner and
Turner Broadcasti
ng
Conglomerate
Combination of unrelated
companies.
•Increase company’s diversity.
GE acquiring
RCA
DIVESTITURES: WHEN LESS IS MORE
Divestitures allow the firm to streamline their operations and focus
Spin-off – setting up the division or part of the business as a separate company
Sell stock to existing stockholders
Carve-out – setting up a separate business from an operation
Sell stock to outside investors