Ferrell Hirt Ferrell
A CHANGING WORLD
EIGHTH EDITION
FHF
McGraw-Hill/Irwin
Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.
part
Starting and Growing
A Business
2
CHAPTER 4 Options for Organizing Business
CHAPTER 5 Small Business, Entrepreneurship, and Franchising
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Forms of Business Ownership



Sole proprietorship
Partnership
Corporation
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Comparing Forms of Business
Ownership
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Comparing Forms of Business
Ownership
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Sole Proprietorship
Businesses owned and operated by one
individual; the most common form of business
organization in the United States
 15-20 million in the U.S.
 Nearly three-quarters of all businesses
 Men 2x more likely than women to start own business
o
o
o
o
o
Restaurants
Hair salons
Flower shops
Dog kennels
Independent grocery stores
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Sole Proprietorship
Advantages
Disadvantages
Ease and cost of formation
Unlimited liability
Secrecy
Limited sources of funds
Distribution and use of profits
Limited skills
Flexibility and control of the business
Lack of continuity
Government regulation
Lack of Qualified Employees
Taxation
Taxation
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Partnership
A form of business organization defined by the
Uniform Partnership Act as “an association of two
or more persons who carry on as co-owners of a business
profit”
 General partnership
 Limited partnership
 Articles of Partnership
• Legal documents that set forth the basic agreement between partners
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Two Types of Partnerships
General Partnership

A partnership that involves a complete sharing in both
the management and the liability of the business
Limited Partnership

A business organization that has at least one general partner, who assumes
unlimited liability, and at least one limited partner whose liability is limited
to his or her investment in the business
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Articles of Partnership
 Name, purpose, location
 Duration of the agreement
 Authority and responsibility of each partner
 Character of partners (i.e., general or limited, active or silent)
 Amount of contribution from each partner
 Division of profits or losses
 Salaries of each partner
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Articles of Partnership
 How much each partner is allowed to withdraw
 Death of partner
 Sale of partnership interest
 Arbitration of disputes
 Required and prohibited actions
 Absence and disability
 Restrictive covenants
 Buying and selling agreements
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Partnerships
Advantages
Disadvantages
Ease of organization
Unlimited liability
Capital & credit
Business responsibility
Knowledge & skills
Life of the partnership
Decision making
Distribution of profits
Regulatory controls
Limited sources of funds
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Keys to Success in Partnership
 Keep profit sharing and ownership at 50-50
 Partners should have different & complementary skill sets
 Honesty is critical
 Maintain face-to-face communications
 Transparency – share information
 Awareness of funding constraints and limited resources
 To be successful, you need experience
 Family is priority; limit associated problems
 Do not become too infatuated with “the idea;” think implementation
 Couple optimism with realism in sales and growth expectations
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Relationships, not Partnerships
Strategic partnerships require relationship building
Putting two businesses or individuals together does not create a successful
partnership without relationships
Microsoft and Cisco formed a strategic partnership to create better computer
networking solutions.
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Corporations
Legal entities created by the state whose assets and
liabilities are separate from its owners
 Have most of the rights of people
 Typically owned by shareholders /stockholders
 A corporation is created (incorporated) under the laws of the state in which it
incorporates
 The individuals creating the corporation are called incorporators
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Articles of Incorporation
Legal documents filed with basic information
about the business with the appropriate state office
(often the Secretary of State)
 Common elements:
 Name & address of corporation
 Objectives of the corporation
 Classes of stock (common, preferred, voting, nonvoting) and number of
shares of each class of stock
 Financial capital required at time of incorporation
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Articles of Incorporation
 Provisions for transferring shares of stock
 Regulation of internal corporate affairs
 Address of business office
 Names and addresses of the initial board of directors
 Names and addresses of the incorporators
 The state issues a corporate charter based on the
information in the articles of incorporation.
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Types of Corporations
 A corporation doing business in the state in which
it is chartered is a domestic corporation.
 When a corporation does business in other states, it is then
referred to as a foreign corporation.
 If a corporation does business outside the nation in which it is
incorporated, it is termed an alien corporation.
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Types of Corporations
Private Corporation
 A corporation owned by just one or a few people who are
closely involved in managing the business
Public Corporation
 A corporation whose stock anyone may buy, sell, or trade
Initial Public Offering
 A private corporation who wishes to go “public” to raise additional capital
and expand. The IPO is selling a corporation’s stock on public markets for
the first time
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Types of Corporations
Quasi-Public Corporation
Corporation owned and operated by the federal, state,
or local government
NASA, U.S. Postal Service
Non-Profit Corporation
Focuses on providing a service rather than earning a profit but is not owned by
a government entity
Mercy Corps., The Conservation Fund
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Largest U.S. Corporations
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Elements of a Corporation
Board of Directors: A group of individuals, elected
by the stockholders to oversee the general operation
of the corporation, who set the corporation’s long-range
objectives.
 Inside Directors
 Individuals who serve on a board and are employed by the corporation
(usually executives of the corporation)
 Outside Directors
 Individuals who serve on a board who are not directly affiliated with the
corporation (usually executives of other corporations)
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Stock Ownership
Preferred Stock
 A special type of stock whose owners, though not generally having a say in
running the company, have a claim to profits before other stockholders do.
Common Stock
 Stock whose owners have voting rights in the corporation, yet do not receive
preferential treatment regarding dividends.
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Corporations
Advantages
Disadvantages
Limited liability
Double taxation
Transfer of ownership
Forming a corporation
Perpetual life
Disclosure of information
External sources of funds
Employee-owner separation
Expansion potential
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Corporations Can Do Good
Greyston Bakery (Located in Yonkers, NY)
 Founded with a goal of providing quality products to a low-income
neighborhood
 Provides jobs for the “unemployable” in the community
 Donates 100% of its $6 million annual profits to the Greyston Foundation,
which supports local community development causes
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Other Types of
Business Ownership
Joint Venture
 A partnership established for a specific project or for a limited time
 Control can be divided equally, or with one party taking more responsibility
for decision making
S-Corporation (S-Corp)
 Corporation taxed as though it were a partnership (no double-taxation) with
restrictions on shareholders.
 Very popular with entrepreneurs
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Other Types of Business Ownership:
S-Corporations
Subchapter S-Corporation
 Popular because the form eliminates double-taxation
 Combines the taxation structure of partnerships with legal
environment of C-corporations
 Qualifications:
• Only 1 class of stock
• Less than 100 shareholders
• Shareholders must be U.S. citizens or residents
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Other Types of Business Ownership:
Limited Liability
Limited Liability Company (LLC)
 Form of ownership that provides limited
liability and taxation like a partnership but
places fewer restrictions on members
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Other Types of Business Ownership:
Cooperative
Cooperative (Co-Op)
 An organization composed of individuals or small
businesses that have banded together to reap the benefits
of belonging to a larger organization
 Can take many different forms (retail, housing, social, worker)
 Co-ops are increasingly popular with small farmers and artisans
 Gives small producers more power as a group
Organic Valley
 Largest co-op of independent farmers in the U.S.
 Product dairy, meat and vegetable products
 Provides Stonyfield Farm with dairy products
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Trends in Business Ownership
Merger
The combination of two companies (usually corporations)
to form a new company
 Horizontal merger: When firms that make and sell similar products merge.
 Vertical merger: When companies operating at different but related levels of
an industry merge.
 Conglomerate merger: When firms in unrelated industries merge.
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Trends in Business Ownership
Acquisition
The purchase of one company by another, usually by buying
its stock and/or assuming its debt.

Corporate raider: A company or individual who wants to acquire or take over
another company and first offers to buy some or all of its stock at a premium in a
tender offer.

Poison pill: The firm allows stockholders to buy more shares of a stock at lower
prices than the current market value to head off a hostile takeover.

Shark repellant: Management requires a large majority of stockholders to approve a
takeover.

White knight: A more acceptable firm that is willing to acquire a threatened
company.
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Trends in Business Ownership
Leveraged Buyout (LBO)
A purchase in which a group of investors borrows money from banks
and other institutions to acquire a company (or a division of one), using the
assets of the purchased company to guarantee repayment of the loan.
 Mergers and acquisitions (particularly the merger mania in the late 20th
century) have been criticized
 Executives have to focus excessively on avoiding takeovers, not on
managing the business
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