Lecture 05
emad@iqraisb.edu.pk
Business Ownership Types....
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Sole Proprietorship.
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Partnership.
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A business that is owned and usually managed
by one person.
A legal form of business with two or more
owners.
Corporation.
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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
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Pros
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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
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Three main elements
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General partners
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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
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Have limited liability and do not participate in
management of the company.
Liability
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Unlimited liability
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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
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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
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A corporation is a state chartered entity with
authority to act and have liability separate
from its owners.
Reason for people incorporating?
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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.
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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
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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
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A company that is similar to the S corporation
but without the special eligibility
requirements.
Pros
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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
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Merger
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Acquisition
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One company's purchase of the property and obligations
of another company.
Vertical Merger
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The result of two firms forming a company.
The joining of two companies involved in different stages
of related businesses.
Examples?
Horizontal Merger
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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
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An arrangement to buy the rights to use the
business name and sell its products or services
in a given territory.
Pros
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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
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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.