Lecture 05 [email protected] Business Ownership Types.... • Sole Proprietorship. – • Partnership. – • A business that is owned and usually managed by one person. A legal form of business with two or more owners. Corporation. – A legal entity with authority to act and have liability separate from its owners. • Corporations make up 20% of the total number of businesses. – They generate 81% of the total revenue. • Sole proprietorships make up 72% of the total number of businesses. – Generate 6% of the revenue. Sole Proprietorships • Pros – – – – – Ease of starting and ending. Being your own boss. Pride of ownership. Retention of profit. No special taxes. • Cons – Unlimited liability ~ define (?) – Limited financial resources. – Difficulty in management. – Overwhelming time commitment. – Few fringe benefits. – Limited growth. – Limited time span. Partnerships • Three main elements – – – • General partners – • Common ownership. Shared profit/loss. Right to participate in managing of the business operations. Have unlimited liability and are active in managing the company. Limited Partners – Have limited liability and do not participate in management of the company. Liability • Unlimited liability – • Sole proprietors and general partners must pay all debts and damages caused by their company. Personal possessions may have to be sold to pay these costs. Limited liability – Corporate owners (stock holders) and limited partners are only responsible for the amount they invest. Personal property is not at risk. • Pros – Greater availability of financial resources. – Shared management & pooled knowledge. – Longer survival chance. • Cons – Unlimited liability. – Division of profits. – Disagreements among partners. – Difficulty of termination. Corporations • • A corporation is a state chartered entity with authority to act and have liability separate from its owners. Reason for people incorporating? – – Special tax advantages. Limited liability. • Pros – Greater amount of money for investment. – Limited liability. – Size. – Perpetual life. – Ease of ownership change. – Ease of drawing talented employees. • Cons – High initial cost. – Large amount of paperwork. – Difficulty of terminations. – Size. – Double taxation. – Conflict with board of directors. S Corporations. • • A unique government creation that looks like a corporation but is taxed like sole proprietorships/partnerships. (single Tax for shareholders and business). Conditions to be eligible – – – Fewer than 75 stock holders Stockholders must be individuals or estates & U.S. citizens or permanent residents. Company cannot have more than 25% of income derived from passive sources (rents, royalties, interest etc). Limited liability Companies • • A company that is similar to the S corporation but without the special eligibility requirements. Pros – – – – – Limited liability. Choice of taxation. Flexible ownership rules. Flexible distribution of profit and loss. Operating flexibility. • Cons – No stock. – Limited life span. – Fewer incentives. – Taxes. – Paperwork. • Comparison of types of business ownership. – Chapter 5 , Book I, pg.155 Mergers & Acquisitions • Merger – • Acquisition – • One company's purchase of the property and obligations of another company. Vertical Merger – – • The result of two firms forming a company. The joining of two companies involved in different stages of related businesses. Examples? Horizontal Merger – – The joining of two firms in the same industry. Examples? • Conglomerate merger – The joining of firms in completely unrelated industries. • Leveraged buyout (LBO) – An attempt by employees, management, or a group of investors to purchase an organisation. – Done primarily through borrowing. Franchise • • An arrangement to buy the rights to use the business name and sell its products or services in a given territory. Pros – – – – Nationally recognised name and reputation. A proven management system. Promotional assistance. Pride of ownership. • Cons – High franchise fees. – Managerial regulation. – Shared profits. – Transfer of adverse effects if other franchisees fail. Co-operatives • • • • Organisations are organisations that are owned by the members/customers themselves. Controlled by the people who use it – producers, consumers or workers with similar needs who pool their resources for mutual gain. Some people form co-operatives to give members more economic power than they would have as individuals. Small businesses often form co-operatives to gain purchasing, marketing or product development strength.