Ferrell Hirt Ferrell
M: Business
nd
2 Edition
FHF
Options for Organizing Business
FHF
McGraw-Hill/Irwin
Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved.
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.
• 80% of all businesses
• Men 2x more likely than women to start own business
 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
• Lack of continuity
business
• Government regulation
• Taxation
• Lack of Qualified
Employees
• Taxation
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Fresh-Baked Enterprises
• Founded in 1997
• Locations in Illinois, Minnesota, Washington D.C., and
Virginia
• A high-end bake-at-home pizza company
• Preservative-free, mostly organic gourmet pizza
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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 coowners of a business for 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
1. Name, purpose, location
2. Duration of the agreement
3. Authority and responsibility of each partner
4. Character of partners (i.e., general or limited, active or silent)
5. Amount of contribution from each partner
6. Division of profits or losses
7. Salaries of each partner
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Articles of Partnership (continued)
8. How much each partner is allowed to withdraw
9. Death of partner
10.Sale of partnership interest
11.Arbitration of disputes
12.Required and prohibited actions
13.Absence and disability
14.Restrictive covenants
15.Buying and selling agreements
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Partnership
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
• Taxation of partnerships
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Keys to Success in Partnership
• Keep profit sharing and ownership at 50-50
• Partners should have different & complementary skill sets
• Honest is critical
• Maintain face-to-face communications
• Transparency – sharing 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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Corporations
• Legal entities created by the state whose assets and
liabilities are separate from its owners
• 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)
• Number of shares of each class of stock
• Financial capital required at time of incorporation
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Articles of Incorporation (continued)
• 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
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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 (continued)
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 are
not owned by a government entity
• The American Red Cross, The Conservation Fund
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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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Confidence in the Stock Market
• While trust in the stock market is generally high, it
took a hit in the wake of the 2008 recession
Source: “One Year Confidence Index,” The International Center for Finance at the Yale School of Management
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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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Other Types of Business Ownership
Joint Venture
• A partnership established for a specific project or for a
limited time
S-Corporation (S-Corp)
• Corporation taxed as though it were a partnership with
restrictions on shareholders. Very popular with
entrepreneurs
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Other Types of Business Ownership (continued)
Limited Liability Company (LLC)
• Form of ownership that provides limited liability and
taxation like a partnership but places fewer restrictions on
members
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
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Trends in Business Ownership
Merger
• The combination of two companies (usually corporations)
to form a new company
Acquisition
• The purchase of one company by another, usually by
buying its stock and/or assuming its debt.
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 FHF
company to guarantee repayment of the loan.
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