BADM1103F07Ch05

Basic Forms of Business Ownership Sole Proprietorship • A business owned, and usually managed, by one person • the most common form Sole Proprietorship (cont.) • Advantages • • • • • • Ease of starting and ending the business Working for yourself Pride of ownership Legacy Retention of profits Taxed as personal income Sole Proprietorship (cont.) • Disadvantages • • • • • • • Unlimited liability Limited financial resources No one with whom to share the burden Management issues No fringe benefits Limited growth Limited lifespan Partnership • A legal form of business with two or more owners Partnership (cont.) • Types of partnerships • General Partnership  all owners share in operating the business and in assuming liability for the business’s debts Partnership (cont.) • Limited Partnership  one or more general partners and one or more limited partners • General partner  owner (partner) who has unlimited liability and is active in managing the firm Partnership (cont.) • Limited partner  owner who invests money in the business but does not have any management responsibility or liability for losses beyond the investment • Limited liability  the responsibility of a business’ owners for losses only up to the amount they invest Partnership (cont.) • Master Limited Partnership (MLP)  much like a corporation (in that it acts like a corporation and is traded on a stock exchange) but is taxed like a partnership • avoids the corporate income tax Partnership (cont.) • Limited Liability Partnership  limits partners’ risk of losing their personal assets to only their own acts and omissions and the acts and omissions of the people under their supervision Partnership (cont.) • Uniform Partnership Act  enforced in all states except Louisiana  common ownership  shared profits and losses  the right to participate in managing the operations of the business Partnership (cont.) • Advantages of Partnerships  more financial resources  shared management  longer survival  no special taxes Partnership (cont.) • Disadvantages  unlimited liability • General partners liable for the debts of the firm, no matter who was responsible for causing those debts  division of profits  possible disagreements  difficult to terminate Corporations • A legal entity with authority to act and have liability separate from its owners Corporations (cont.) • Conventional “C” Corporation • State-chartered legal entity with authority to act and have liability separate from its owners  owners (stockholders) are not liable for the debts of the corporation beyond the money they invest  lets many people to share in the ownership of a business without working there Corporations (cont.) • Advantages • Limited liability • most significant advantage • More money for investment  stocks  bonds Corporations (cont.) • Size  ability to raise large amounts of money  buy other corporations  have the size and resources to take advantage of opportunities anywhere in the world • Perpetual life • Ease of ownership change Corporations (cont.) • Ease of ownership change • Ease of drawing talented employees • Separation of ownership from management Corporations (cont.) • Disadvantages of Corporations • Extensive paperwork • Double taxation  states often tax corporations more harshly than other enterprises • Size • Difficulty of termination • Management conflicts Corporations (cont.) • Initial costs • Individuals can incorporate • Doctors and lawyers can save on taxes and receive other benefits • Small corporations do not issue stock Corporations (cont.) • S Corporations • Unique government creation  looks like a corporation but is taxed like sole proprietorships and partnerships • No more than 100 shareholders • Shareholders  individuals or estates and are citizens or permanent residents of the U.S. Corporations (cont.) • Limited Liability Corporations (LLC) • Company similar to an S corporation but without the special eligibility requirements • More than half of new business registrations in some states today are LLCs Corporations (cont.) • Advantages • Personal assets are protected • Can choose to be taxed as partnerships or as corporations • Do not have to comply with ownership restrictions as S corporations do Corporations (cont.) • Profit and losses don’t have to be distributed in proportion to the money each person invests • Reporting requirements are less than for a corporation Corporations (cont.) • Disadvantages • Ownership is nontransferable • Have to identify dissolution dates in the articles of organization • Can’t deduct the cost of fringe benefits or use stock options • Members must pay self-employment taxes on profits • More paperwork than for sole proprietors Mergers and Acquisitions • Merger • two firms forming one company • Acquisition • one company’s purchase of the property and obligations of another company Mergers and Acquisitions (cont.) • Vertical • Joining of two companies involved in different stages of related businesses • Horizontal • Joins two firms in the same industry • Conglomerate • Completely unrelated industries Mergers and Acquisitions (cont.) • Leveraged buyout • An attempt by employees, management, or a group of investors to purchase an organization primarily through borrowing Franchising • Advantages • Assistance  established product  help in choosing a location  assistance in all phases of operation Franchising (cont.) • Personal ownership • Recognized name • Financial advice and assistance • Lower failure rate Franchising (cont.) • Disadvantages • • • • • • Last start-up costs Shared profit Management regulation Coattail effect Restrictions on selling Frauds Franchising (cont.) • Home-based franchising • E-commerce franchising • Technology in franchising Franchising (cont.) • Franchising in international markets • Costs of franchising are high • Less competition and rapidly expanding consumer base • Smaller franchises expand (Rug Doctor Pro and Merry Maid) • Cooperatives • A business owned and controlled by the people who use it • 47,000 cooperatives in the U.S. • Farm cooperatives