SEMINAR 4
Chapter 5: Building the Foundation: Forms of Business Ownership
Chapter 5
Building the Foundation:
Forms of Business Ownership
Learning Objectives
1.
2.
3.
4.
5.
5.
6.
List five advantages and four disadvantages of sole proprietorships
List five advantages and two disadvantages of partnerships
Explain the differences between common and preferred stock from a shareholder’s
perspective
Highlight the advantages and disadvantages of public stock ownership
Cite four advantages and three disadvantages of corporations
Delineate the three groups that govern a corporation and describe the role of each
Identify the synergies that companies hope to achieve by combining their operations
Summary of Learning Objectives
1.
List five advantages and four disadvantages of sole proprietorships.
Sole proprietorships have five advantages, including:
1.
They are easy to establish
2.
They provide the owner with control and independence
3.
The owner reaps all the profits
4.
Profits are taxed at individual rates
5.
The company’s plans and financial performance remain private.
The four main disadvantages of a sole proprietorship are:
1.
The company’s financial resources are usually limited
2.
Management talent may be thin
3.
The owner is liable for the debts and damages incurred by the business
4.
The business may cease when the owner dies.
2.
List five advantages and two disadvantages of partnerships.
The five advantages of partnerships are:
1.
Easy to establish
2.
Profits are taxed at individual rates
3.
Offer a greater ability to obtain financing
4.
Their longevity
5.
Broader base of skills
The two main disadvantages of partnerships are:
1.
Unlimited liability for general partners
2.
The potential for personality and authority conflicts
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Part 2: Starting and Organizing a Business
3.
Explain the differences between common and preferred stock from a
shareholder’s perspective.
Common shareholders can vote and can share in the company’s profits through
discretionary dividends and adjustments in the market value of their stock. In other
words, they can profit from their investment if the value of the stock rises above the
price they paid for it, or they can lose money if the value of the stock falls below the
price they paid for it.
In contrast, preferred shareholders cannot vote, but they can get a fixed return
(dividend) on their investment and a priority claim on assets after creditors.
5.
Highlight the advantages and disadvantages of public stock ownership.
Public stock ownership offers a company increased liquidity, enhanced visibility, financial
flexibility, and an independently established market value for the stock.
The disadvantages of public stock ownership are high costs, burdensome filing
requirements, loss of ownership control, heightened public exposure, and loss of direct
control over the market value of the company’s stock.
5.
Cite four advantages and three disadvantages of corporations.
The four advantages of corporations are:
1.
Being a separate legal entity, which offers the shareholders protection from
liability
2.
The power to raise large sums of capital
3.
Providing liquidity for investors
4.
Having an unlimited life span.
In exchange for these advantages, the disadvantages are:
1.
The large fees needed to incorporate
2.
Double taxation on the company profits; the corporations pay tax on profits and
individuals pay tax on dividends (distributed corporate profits)
3.
That if publicly owned, corporations must adhere to strict government reporting
requirements.
6.
Delineate the three groups that govern a corporation and describe the role of
each.
Shareholders are the basis of the corporate structure. They elect the board of directors,
who in turn elect the officers of the corporation. The corporate officers carry out the
policies and decisions of the board. In practice, the shareholders and board members
have often followed the lead of the chief executive officer. However, some board
members are more active than others. This is especially true of young dot-com
corporations that appoint directors for their management expertise and industry
connections.
7.
Identify six main synergies companies hope to achieve by combining their
operation.
By combining their operations, companies hope to:
1.
eliminate redundant costs
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2.
3.
4.
5.
6.
Chapter 5: Building the Foundation: Forms of Business Ownership
increase their buying power
increase their revenue
improve their market share
eliminate manufacturing overcapacity
gain access to new expertise and personnel.
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Part 2: Starting and Organizing a Business
Brief Chapter Outline
I.
Choosing a Form of Business Ownership
A.
Sole proprietorships
1.
Advantages of sole proprietorships
2.
Disadvantages of sole proprietorships
B.
Partnerships
1.
Advantages of partnerships
2.
Disadvantages of partnerships
3.
Keeping It Together: The Partnership agreement
C.
Corporations
1.
Ownership
a.
Common Stock
b.
Preferred Stock
c.
Public versus Private Ownership
2.
Advantages of corporations
3.
Disadvantages of corporations
4.
Special types of corporations
5.
Corporate Governance
a.
Shareholders
b.
Board of Directors
III.
Understanding Business combinations
A.
Mergers and acquisitions
1.
Advantages of mergers and acquisitions
2.
Disadvantages of mergers and acquisitions
3.
Current trends in mergers and acquisitions
4.
Merger and acquisition defenses
B.
Strategic Alliances and Joint Ventures
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SEMINAR 4
Chapter 5: Building the Foundation: Forms of Business Ownership
Detailed Chapter Outline:
I.
Choosing a Form of Business Ownership
A.
Sole proprietorship – a business owned by one person (although it may have
many employees), and it is the easiest and least expensive form of business to
start. Some examples of sole proprietorships: farms, retails, establishments,
and small service businesses
1.
Advantages of sole proprietorships
a.
Easier and less expensive to start
b.
Satisfaction of working for self
c.
Make own decisions (what hour sot work, whom to hire)
d.
All profits kept by proprietor
e.
Privacy (do not have to reveal performance or plans to anyone)
2.
Disadvantages of sole proprietorship
a.
Unlimited liability (any legal debts incurred by the business are the
owner’s responsibility)
b.
Success depends on talents of proprietor
c.
Difficult to obtain substantial amounts of money
d.
Limited life (the owner’s death may mean the demise of the
business)
B.
Partnership – a legal association of two or more people as co-owners of a
business for profit (least common form of business ownership)
1.
Two basic types of partnerships:
a.
General partnerships (all partners considered equal by law and are
liable for the business’s debt)
b.
Limited partnerships (one or more people run business, others
invest passively)

General partners: run the business

Limited partners: passive investors (the amount of money
they can lose is limited to the amount of their capital
contribution.
2.
Advantages of partnerships
a.
Easy to form partnerships
b.
Tax advantages: profits are taxed at individual income-tax rates
rather than at corporate rates
c.
Easier to obtain funds (strength in numbers)
d.
Diversity of skills (leads to innovation in products, services, and
processes
e.
Shared liability
f.
Broadens the pool of capital
g.
Increase chances that the organization will endure (new partners
can be drawn into the business to replace those who die or retire)
3.
Disadvantages of partnerships
a.
Unlimited liability of general partners
b.
Shared debts
c.
Interpersonal problems
d.
Disputes over profits
e.
Lack of privacy (easy access to information)
f.
Fierce competition
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Part 2: Starting and Organizing a Business
– Student Activity:
Divide students into several groups. Give each group the task of forming either a partnership or
sole ownership of a company. Once they have made these choices, give them each situations in
which partnerships and sole ownerships run into problems. For example, a sole ownership can run
into financial problems or have trouble finding financing. A partnership shares liability equally
between partners regardless of whether or not both partners are responsible for creating debt. Tell
students that they can either come up with solutions to the problem or switch forms of ownership.
However, if they switch forms of ownership, they must justify this change. Have students present
problems and solutions to the class in order to show the diverse situations that can arise in each
form of ownership.
4.
C.
6
Keeping It Together: The Partnership Agreement – a written document
that states all the terms of operating the partnership by spelling out the
partner’s rights and responsibilities.
a.
Law does not require a written partnership agreement
b.
Partnership agreement should address the following

Sources of conflict that could result in battles between
partners

Division of profits

Decision-making authority

Expected contributions

Dispute resolution

Buy-sell agreement (the steps a partner must take to sell
his or her partnership interest or what will happen if one of
the partners dies)
Corporation – a legal entity with the power to own property and conduct
business
1.
The law generally treats the corporation the same way it treats an
individual person
a.
can receive, own and transfer property
b.
make contracts
c.
sue and be sued
d.
legal status and obligations exist independently of its owners
2.
Shares are sold to investors as a way to raise the large amounts of capital
needed
a.
investors can vote on certain issues
b.
not involved with the daily operations
3.
Ownership
a.
a corporation is owned by its shareholders

Issued a stock certificate, which may be bequeathed or
sold

Thus, company ownership may change drastically over
time
b.
Common Stock – most stock issued by corporations

Voting privileges, ability to elect board of directors

Voting rights for major policies such as mergers
SEMINAR 4
Chapter 5: Building the Foundation: Forms of Business Ownership

c.
d.
e.
Dividends (profits paid on shares of company profits, they
are declared by the board of

directors but their payment is not mandatory)

Cash dividend – dividend paid in the form of cash

Stock dividend – dividend paid in the form of
additional stock

Risky investment because of the volatility of the stock
market
Preferred stock

Does not usually carry voting rights

Allows stockholders right of first claim of corporation
assets after

Debts (important if a company folds)

Dividends tend to be higher than with common stocks

Less control but more safety
Public Versus Private Ownership

Private Corporations (also referred to as close corporations
or closely held companies)

Withhold stock from public sale so that owners can:

Retain control over operations

Protect business from unwelcome takeover
attempts; Example: Hallmark, Hyatt Hotels
Public corporations – held by and available for sale to the general
public

Said to be publicly traded – meaning the shares of a public
corporation may be bequeathed or sold to someone else

Typically, the more shareholders a company has, the less
tangible the influence of any single shareholder on the
company

Institutional investors

Such as pension funds, insurance companies and
mutual fund

Have accumulated increasing numbers of shares

Have a powerful role in governing corporations

Advantages of public stock ownership

Increased liquidity

Enhanced visibility

The establishment of an independent market value
for the company

Having a publicly traded stock gives companies
flexibility to use such stock to acquire other firms

Disadvantages

The cost of going public is high

The filing requirements with the sec are
burdensome

Ownership control is lost
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Part 2: Starting and Organizing a Business


4.
Management must be ready to handle the
administrative and legal demands of heightened
public exposure
e.
The value of the company’s stock becomes
subject to external forces beyond the company’s
control
Advantages of corporations
a.
Compilation of money, resources, talent
b.
Diverse labor pool
c.
Greater financing options
d.
Expanded research and development capabilities
e.
Limited liability
f.
Liquidity (investors can easily convert their stock into cash by
selling it on the open market)
g.
Shareholders can easily transfer their shares to someone else
h.
Ability to finance projects internally
5.
Disadvantages of corporations
a.
Paperwork and costs associated with incorporation can be
burdensome
b.
Double taxation
c.
Public corporations are required by law to publicly disclose
financial information
Teaching Suggestion – What’s In the News?
Have students discussion the proposed and finalized changes to the taxation of dividends. What
are their thoughts on the current outcomes of those legislative discussions?
6.
8
Special types of corporations: enjoy special privileges because they follow
certain rules
a.
S corporations (subchapter corporations)

Cross between corporation and partnership

Small number of investors (75 or under)

Must be a domestic corporation (u.s.)

Can only issue one class of common stock: all stock must
have the same dividend and liquidation rights
b.
Limited liability companies

Tax advantage of partnership

Personal liability protection of a corporation

No limit on number of shareholders

Members of LLCs adopt an operating agreement (like
partnership agreement)

Agreements can fit needs of owners (such as voting rights
etc.)
c.
Subsidiary corporations

Partly owned by another corporation (parent company)
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Chapter 5: Building the Foundation: Forms of Business Ownership

7.
Holding company – special type of parent company that
owns other companies for investment reasons & little
operating control
d.
Alien corporation – operates in the US but is incorporated in
another country
e.
Foreign or out-of-state corporation

Incorporated in one state & does business in several other
states

Domestic corporation

Operates only in the state where it is incorporated
Corporate Governance – shareholders own a business, but rarely run it;
Instead, elect board of directors
a.
Chief Executive Officer (CEO)

The center of power in a corporation

Responsible for establishing company policies

Responsible for managing corporate direction

Responsible for making the big decisions that will affect
the company’s growth and competitive position
b.
Shareholders

Can be individuals, other companies, nonprofit
organizations, pension funds and mutual funds

Can attend an annual meeting

during which the previous year’s record is reviewed
and upcoming plans are described

if unable to attend can vote by proxy

institutional investors now own half of all U.S. stock and
have considerable influence over management
c.
Board of Directors

Represent the shareholders

Responsible for declaring dividends

Responsible for guiding corporate affairs

Responsible for reviewing long-term strategic plans

Responsible for selecting corporate officers

Responsible for overseeing financial performance

Power to vote on major management decisions

Several may be inside directors, company employees

Some boards act independently of the company while
others act as rubberstamps

Directors involved in corporate strategy, evaluation of
executives, etc.

Directors are often compensated with stock to give them a
stake in their decisions
d.
Current issues being wrestled with regarding boards:

Composition

Ideally want a balanced group of seasoned
executives who each bring something unique to the
board
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Part 2: Starting and Organizing a Business



The ratio of insiders (executives) and outsiders
(independent directors) is another concern
Sarbanes-Oxley requires that the majority of
directors be independent so an objective viewpoint
is brought forward
However, outsiders must have enough knowledge
about the inner workings of the company to make
informed decisions
Teaching Suggestion – Outside Research & Class Discussion:
Have students investigate the Sarbanes-Oxley issue and to be prepared to discuss the benefits and
drawback of the policy for class.
Divide the students into three groups – those representing the Congressional Leaders in favor of the
policy change and those representing Boards of Directors who face increased liability. The third
group should represent an independent board that will make the final recommendation as to the
strength of Sarbane-Oxley policy.
Teaching Suggestion – Classroom Discussion:
Ask students to speculate on why a board of directors is made up of both inside and outside members.
What would happen if the board of directors was made up of entirely inside members? What might be
the problems involved in such a situation? Students will hopefully recognize that inside information
can be useful but sometimes limiting. What might happen if a board of directors were made up
entirely of outside members? In this case, the emphasis on profit might outweigh the emphasis on
quality, excellent performance, and ethical issues. Help students to see that a balance must be struck.



II.
10
Education

The complexity of overseeing a corporate is
immense

Being well versed in financial understanding is
mandatory, so many companies are starting
educational programs to get board members up to
speed
Liability

Directors can potentially be held legally and
financially responsible for misdeeds of the company
Recruiting Challenges
Business Combinations
A.
Mergers and Acquisitions
1.
Merger
a.
One company buys another (or parts of another) and emerges as
controlling corporation
b.
The controlling corporation assumes all debts and contractual
obligations of the company it acquires, which then ceases to exist
2.
Consolidation
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Chapter 5: Building the Foundation: Forms of Business Ownership
a.
3.
4.
5.
An entirely new firm is created by two or more companies that
pool their interests
b.
Both firms terminate their precious legal existence and become
part of the new firm
Acquisition
a.
purchasing another company’s voting stock in exchange for cash,
stock, security
b.
most often parties agree to sell
c.
however, sometimes a buyer attempts to acquire a company
against management’s wishes – hostile takeover – the buyer tries
to convince enough shareholders to go against management and
vote to sell
d.
Leveraged Buyouts (LBO)

Occurs when one or more individuals purchase a
company’s publicly traded stock by using borrowed funds

The debt is expected to be repaid with fund generated by
the company’s operations and often sale of some assets
Combinations can take one of several forms, including:
a.
Vertical Merger – when a company purchases a complementary
company at a different level in the “value chain”
b.
Horizontal Merger

involves two similar companies at the same level

because they are often between competitors, regulators
review these combinations carefully to avoid creating
monopolies
c.
Conglomerate Merger

two firms offer dissimilar products or services, often in
widely different industries

new twist in recent years – a company that is good in one
particular area acquires underperforming companies that
can benefit from that skill set
d.
Market Extension Merger – combines firms that offer similar
products and services in different geographic locations
e.
Product Extension Merger – used when a company needs to round
out a product line
Advantages of Mergers and Acquisitions
a.
All advantages are grouped under umbrellas terms such as
economies of scale, efficiencies, synergies such as the benefits of
working will be greater than is each company continued to
operate independently

Eliminate expenditures from combined resources

Increase buying power

Increase revenue by cross-selling each other’s products

Increase market share by combining product lines to
provide more comprehensive offering

Eliminate manufacturing overcapacity

Gain access to new expertise, systems and teams of
employees who already know how to work together
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Part 2: Starting and Organizing a Business
6.
B.
12
Disadvantages of Mergers and Acquisitions
a.
Companies often borrow immense sums of money to acquire a
firm, leaving them cash poor in terms of running the company
b.
Managers must help combine the operations and are taken from
daily responsibilities
c.
Culture clash (different belief systems and acceptable ways of
behaving within company structure)
7.
Current Trends in Mergers and Acquisitions
a.
From 1992-2000, there were larger mergers (mega-mergers)
b.
Now, some of the largest U.S. companies are shedding their
unprofitable acquisitions and focusing on generating internal
growth from their core businesses. Factors contributing to this
trend reversal include:

Economic slowdown

Increased political uncertainty

Global market saturation

Pressure from shareholders to generate profits
8.
Merger and Acquisition Defenses
a.
Hostile takeovers: when one party fights to gain control over
another company against the wishes of existing management
b.
All companies who sell stock to public are vulnerable to takeovers
c.
A hostile takeover can be launched in one of two ways:

Tender offer: raider offers to buy a certain number of
stocks in the corporation at a specific price (usually more
than current price for stock, so stockholders motivated to
sell)

Proxy fight: raider launches a public relations battle for
shareholder votes hoping to enlist enough votes to oust
board and management
d.
Steps companies take to protect themselves

Poison pill: deliberately making the company less valuable
to the raider

Shark repellent: Requires stockholders representing a large
majority of shares to approve any takeover attempt.

White knight: friendly buyer takes over company before a
raider, usually allows current management to remain in
place
Strategic alliances and joint ventures: alternative to mergers, consolidations, and
acquisitions
1.
Strategic Alliance: long-term partnership between companies to jointly
develop, produce, or sell products
a.
Advantages of strategic alliances:

Can accomplish many of the same goals as mergers,
consolidations, and acquisitions
without requiring a painstaking process of integration

Can help a company gain credibility in a new field

Can help a company expand its market presence

Can help a company gain access to technology
SEMINAR 4
Chapter 5: Building the Foundation: Forms of Business Ownership



Can help a company diversify offering
Share best practices without forcing the partners to
become fast friend for life
Ease of dissolve
Teaching Suggestion – Reflection and Discussion:
Have students spend three to five minutes listing strategic alliances with which they are familiar.
They may benefit from some prompting, which could include:
 Domino’s Pizza and Coke
 RadioShack and Verizon Wireless & Sprint PCS
 Barnes & Noble Bookstores and Starbucks
Ask students to share their lists with the class. As a consumer do they believe they benefit from
strategic alliances?
2.
Joint venture – special type of strategic alliance in which two or more
firms jointly create a new business entity that is legally separate and
distinct from its parents
a.
Advantages of joint ventures:

Allow companies to use each other’s complementary
strengths that might otherwise take too long to develop on
their own

Allow companies to share what may be the substantial
costs and risk of starting a new operation
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Part 2: Starting and Organizing a Business
Potential Difficulties and Suggestions Solutions
1.
It may be necessary to reemphasize the difference between private and public
corporations, outlining the major differences between the two. To initiate discussion,
the following questions could be posed:
Why might a closely held corporation choose to remain private?
As a means of retaining control over the firm and protect their businesses from
unwelcome takeover attempts.
Why might a closely held corporation choose to become a publicly traded corporation?
Increased liquidity; Establishment of an independent market value for the company;
Enhanced visibility
2.
To emphasize the importance of legal contracts to form partnerships and alliances, you
may want to pose the following question:
What are the ramifications of not having a legally binding agreement in the creation of a
partnership or an alliance?
Legal contracts are advisable in business dealings to avoid misunderstandings and
ensure that both parties complete the agreement. In most business dealings, there is a
lot of money and time on the line. The risk of losing this is far too great; therefore, a
legally binding agreement is necessary (even if it is not required).
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Chapter 5: Building the Foundation: Forms of Business Ownership
FedEx Kinko’s: What’s Next?
Critical Thinking Questions
1.
Why did Kinko’s change its structure from individual partnership to a single
corporation entity?
Kinkos changed its structure because the managerial demands of the business had
grown beyond the skills of the founding entrepreneur. In addition, bringing together
FedEx and Kinkos better served both of their customers by expanding beyond their
original businesses into supply chain management, thus, helping customers organize the
sourcing and delivery of their products.
2.
Why is it important for all FedEx Kinko’s stores to have the same equipment
and offer the same services?
All FedEx Kinko’s stores need to have the same equipment and offer the same services
because customers expect to find replicable opportunities within each store regardless of
location. This replication also allows for better management of each store since upperlevel managers can supervise a number of stores and simply duplicate expectations
within each location.
3.
What are the potential advantages and disadvantages of being purchased by
FedEx?
The advantages to Kinko’s of being purchased by FedEx is the increased name
recognition as they join forces with an internationally recognized company. There are
also increased opportunities for expanding market share.
The major disadvantage is the potential for Kinko’s to lose their original focus of
providing printing and duplicating service to customers. There is also the potential of
culture clashes as the two companies come together.
Answers to End-of-Chapter Questions
Test Your Knowledge
Questions for Review
1.
What are the three basic forms of business ownership?
The three basic forms are sole proprietorships, partnerships, and corporations.
2.
What is the difference between a general and a limited partnership?
A general partnership is owned by general partners who are equally liable for the
business’s debts. A limited partnership is owned by at least one general partner who
runs the business, and limited partners who are passive investors and are generally
liable for no more than the amount of their investment.
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Part 2: Starting and Organizing a Business
3.
4.
5.
What is a closely held corporation, and why do some companies choose this
form of ownership?
Closely held corporations, also known as private or closed corporations, do not sell stock
to the general public. By withholding their stock from public sale, the owners retain
complete control over their operations and protect their businesses from unwelcome
takeover attempts.
What is the role of a company’s board of directors?
Representing the shareholders, the board of directors is responsible for guiding
corporate affairs and selecting corporate officers. Increasingly, boards are becoming
involved in corporate strategy, management succession, evaluation of executives, and
other crucial issues. To accomplish this, many companies seek outside directors who
own large shares in the company. Evidence shows that companies with directors who
own large shares and take active roles usually outperform companies with more passive
boards.
What is culture clash?
Different belief systems and acceptable ways of behaving within one company structure
come into conflict with the belief systems and acceptable behaviors of the other
company system when brought together in a merger or acquisition.
Questions for Analysis
6.
Why is it advisable for partners to enter into a formal partnership
arrangement?
A formal partnership arrangement spells out the partners’ rights and responsibilities, and
also defines what will happen if one of the partners dies. Without the safeguards
provided by such arrangements, partners leave themselves open to conflicts and legal
difficulties down the road. To further protect the company’s interests, many
partnerships also require their partners to sign covenants that make it difficult for them
to join a competitor should they leave.
7.
To what extent do shareholders control the activities of a corporation?
The shareholders are owners of a corporation so, in theory, they are the ultimate
governing body of the organization. However, in practice, they have very little control
over the day-to-day activities of the firm—these activities rest with the management.
Shareholders are able to influence the firm by electing directors. However, unless an
individual owns a large number of common shares, or unless the corporation allows
cumulative voting, no single shareholder carries much influence in an election.
8.
How might a company benefit from having a diverse board of directors that
includes representatives of several industries, countries, and cultures?
A diverse board of directors can bring unique and global perspectives to the company,
which can lead to new products, new market opportunities, improved performance, and
better overall business strategies.
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Chapter 5: Building the Foundation: Forms of Business Ownership
9.
Why do so many mergers fail?
According to recent studies, underestimating the power of culture clash was the major
factor in failed mergers. In many mergers, the acquiring companies impose their values
and systems on the acquired companies without any regard to what had been working
well there previously. In addition, mergers can create immense burdens of high-risk
corporate debt, can divert investment from productive assets, and can distract
managers’ attention from day-to-day operations.
10.
Ethical Considerations: Your father sits on the board of directors of a large,
well-admired public company. Yesterday, while looking for an envelope in his
home office, you stumbled on a confidential memorandum. Unable to resist
the temptation to read the memo, you discovered that your father’s company
is talking to another publicly traded company about the possibility of a
merger, with Dad’s company being the survivor. Dollar signs flashed in your
mind. Should the merger occur, the value of the other company’s stock is
likely to soar. You’re tempted to log on to your E*trade account in the
morning and place an order for 1,000 shares of that company’s stock. Better
still, maybe you’ll give a hot tip to your best friend in exchange for the four
Dave Matthews Band tickets he’s been flashing in your face all week. Would
either of these actions be unethical? Explain your answer.
When exploring the question of whether any of these actions are unethical, students
might benefit from going back to the discussions in Chapter 2, including the checklist in
Exhibit 2.1. In addition, the question of illegality—i.e., insider trading—should also be
addressed. (Insider trading involves buying and selling shares of stock or other
securities based on special knowledge not available to others.)
Questions for Application
11.
Suppose you and some friends want to start a business to take tourists on
wilderness backpacking expeditions. None of you has much extra money, so
your plan is to start small. However, if you are successful, you would like to
expand into other types of outdoor tours and perhaps even open up branches
in other locations. What form of ownership should your new enterprise take,
and why?
Because there are multiple owners, a sole proprietorship is out of the question. Because
of the potential danger inherent to wilderness expeditions, a partnership could expose
the owners to too much financial risk (i.e., a client might sue for injuries sustained on an
expedition). Due to the limited financial resources of all of the owners, and the fact that
all will probably be leading expeditions, a limited partnership is not a viable option
either. If the owners didn’t anticipate remaining in the business for a long time, a limited
liability company might be the best option, as it would allow them to pay taxes as
though they were partners while limiting their liability to their investment in the
company. However, because the owners have goals to expand the company, the best
form of ownership would be a corporation. This will limit their liability and enable them
to raise expansion capital by selling shares. Depending on their personal income tax
rate, their anticipated need for capital to finance growth, and the expected future
earnings of their company, the owners may want to establish a C corporation.
17
Part 2: Starting and Organizing a Business
12.
Selling antiques on the Internet has become more successful than you
imagined. Overnight your website has grown into a full-fledged business-now
generating some $200,000 in annual revenue. It’s time to think about the
future. Several competing online antique dealers have approached you with a
proposal to merge their website with yours to create the premier online
antique store. The money sounds good, but you have some concerns about
joining forces. What might they be? What other growth options should you
consider before joining forces with another business?
Students’ answers will vary. Combined entities hope to eliminate expenditures for
redundant resources; increase their buying power as a result of larger size; increase
revenue by cross-selling products to each other’s customers; increase market share by
combining product lines to provide more comprehensive offerings; and gain access to
new expertise, systems, and teams of employees who may already know how to work
together. Part of the problem with mergers is that companies often borrow immense
amounts of money to fund the merged entity; another obstacle that companies face
when combining forces is culture clash.
Other growth options might: (1) public stock ownership; that will offer increased
liquidity, enhanced visibility financial flexibility and an independently established market
value for the stock, and (2) a partnership with one other online antique dealer to
investigate the possibility of a larger merger of dealers.
13.
Integrated: Chapter 3 discussed international strategic alliances and joint
14.
Integrated. You’ve developed considerable expertise in setting up new
18
ventures. Why might a U.S. company want to enter into those types of
arrangements instead of merging with a foreign concern?
Two competing companies might establish a joint venture to make them both more
competitive through the sharing of technology, finances, and human resources. By
pooling resources, both companies can accomplish goals that would be more difficult to
accomplish alone. In a merger, the participating companies completely combine their
operations into a single company. Joint ventures, on the other hand, allow the
participating companies to keep their autonomy, even though they may work together
on a project or even create a new, separate company.
manufacturing plants, and now you’d like to strike out on your own as a
consultant who advises other companies. However, you realize that
manufacturing activity tends to expand and contract at various times during
the business cycle (see Chapter 1). Do you think a single-consultant sole
proprietorship or a small corporation with half dozen or more consultants
would be better able to ride out tough times at the bottom of a business
cycle?
There would be benefits and drawbacks to each approach. The major benefit would be
that different consultants could be working with different organizations at varying times
of their business cycle. Thus, the increased earnings from one consultant could offset
the drop in earnings of another consultant who is working with a client during their
down times in their business cycle. However, with more than one employee, the owner
is responsible for maintaining the salary and benefits of those employees regardless of
the business cycles of their clients.
SEMINAR 4
Chapter 5: Building the Foundation: Forms of Business Ownership
Practice Your Knowledge
Handling Difficult Situations on the Job: Determining Accountability in a
Crisis
Responses to “Your Task”
In this case, students are asked to serve in the role of board members for the
Westlake Therapy and Rehabilitation Center. The board had agreed with
management’s proposal to install an “Endless Pool, which would allow for indoor,
year-round therapy. At the grand opening, with press present the pool, due to
installation errors, malfunctioned. Although the Rehab Center management had
been told professionals were not required for installation of the pool, professional
pool-installers were hired. The press is coming back tomorrow for a follow-up
interview.
The students, as board members, must help to decide how to handle this muchpublicized fiasco. What actions should the board take, and what should it leave to
management’s discretion? Consider the impact on company image, profitability,
liability, and daily operations. Who will you hold accountable? How?
Students should be encouraged to review the responsibilities of board members outlined in the
text. These responsibilities include:

Responsible for declaring dividends

Responsible for guiding corporate affairs

Responsible for reviewing long-term strategic plans

Responsible for selecting corporate officers

Responsible for overseeing financial performance

Power to vote on major management decisions

Several may be inside directors, company employees

Some boards act independently of the company while others act as rubber stamps

Directors involved in corporate strategy, evaluation of executives, etc.

Directors are often compensated with stock to give them a stake in their decisions
Students should be encouraged to discuss the role of the board with the Center’s Management,
with the press and with the installation and manufacturing companies.
Building Your Team Skills
In this exercise students are asked to serve as the board of directors for their
college or university. As the board they are asked to assume the responsibility for
hiring the new college president who has announced his or her retirement for the
next term.
Students are to consider the qualities and qualifications the new president should
posses, the stakeholders that need to be considered and the questions that should
be posed to determine if candidates meet the requirements.
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Part 2: Starting and Organizing a Business
Students will be able to learn more about the specific positions qualifications by visiting the
Occupational Outlook Handbook at: http://www.bls.gov/oco/ and entering “Top Executives.”
They could also check the American Council on Educations’ Center for Policy Analysis report on
“The American College President: Executive Summary,” which can be found at:
http://www.acenet.edu/programs/policy/president-study/index.cfm. In this study they will be
able to read about duties of the college president and statistics about typical length in the
position, etc.
The stakeholders the students consider should include:

Students

Faculty

Administrators

Funders

Alumni

Employers

State legislators – if a public school

Potential students

Parents

The community
Expand Your Knowledge
Discovering Career Opportunities
Are you best suited to working as a sole proprietor, as a partner in a business, or in a different
role within a corporation? For this exercise, select three businesses with which you are familiar:
one run by a single person, such as a dentist’s practice or a local landscaping firm; one run by
two or three partners, such as a small accounting firm; and one that operates as a corporation,
such as Target.
1.
Write down what you think you would like about being the sole proprietor,
one of the partners, and the corporate manger or an employee in the
businesses you have selected. For example, would you like having full
responsibility for the sole proprietorship? Would you like being able to
consult with partners in the partnership before making decisions? Would you
like having limited responsibility when you work for other people in the
corporation?
Students’ answers will vary.
2.
Now write down what you might dislike about each form of business. For
example, would you dislike the risk of bearing all the responsibility on a sole
proprietorship? Would you dislike having to talk with your partners before
spending the partnership’s money? Would you dislike having to write reports
for top managers and shareholders of the corporation?
Students’ answers will vary.
20
SEMINAR 4
3.
Chapter 5: Building the Foundation: Forms of Business Ownership
Weigh the pluses and minuses you have identified in this exercise. On
balance, which form of business most appeals to you?
Students’ answers will vary.
Developing Your Research Skills
Review recent issues of business newspapers or periodicals (print or online
editions) to find an article or series of articles illustrating one of the following
business developments: merger, acquisition, consolidation, hostile takeover, or
leveraged buyout.
1.
Explain in your own words what steps or events led to this development.
Answers will vary depending on the articles selected.
2.
What results do you expect this development to have on (a) the company
itself, (b) consumers, (c) the industry the company is part of? Write down and
date your answers.
Answers will vary depending on the articles selected.
3.
Follow your story in the business news over the next month (or longer, as
your instructor requests). What problems, opportunities, or other results are
reported? Were these developments anticipated at the time of the initial
story, or did they seem to catch industry analysts by surprise? How well did
your answers to question 2 predict the results?
Answers will vary depending on the articles selected.
Exploring the Best of the Web
URLs for all Internet exercises are provided at the website for this book,
www.prenhall.com/bovee. When you log on to this text’s website, select Chapter 6, then select
“Student Resources,” click on the name of the featured website, and follow the detailed
navigational directions to complete Internet exercises.
Explore these chapter-related websites, review their content, and answer the following
questions for each website you visit:
1.
What is the purpose of this website?
2.
What kinds of information does this website contain? Please be specific.
3.
How is the information provided at this website useful for businesspeople? Consumers?
4.
How did you expand your knowledge of forms of business ownerships and business
combinations by reviewing the material at this website? What new things did you learn
about this topic?
Choose a Form of Ownership
Which legal form of ownership is best suited for a new business? Answering this question can
be a challenge-especially if you’re not familiar with the attributes of sole proprietorships,
partnerships, and corporations. That’s where Nolo Self-Help Centers can help. Because there’s
no right or wrong choice for everyone, your job is to understand how each legal structure works
and then pick the one that best meets your needs. Start your research by browsing the small
business law center at Nolo. Be sure to check out the FAQs and Legal Encyclopedia.
21
Part 2: Starting and Organizing a Business
www.nolo.com
1.
What is the purpose of this website?
To provide a small business law center for potential and current business owners to
understand the legal structure of each of the forms of business ownership. This will
assist these potential business owners in choosing the most appropriate from of
business ownership for them. This website provides small business information for
starting a business, choosing a business structure, and writing a business plan.
2.
What kinds of information does this website contain? Please be specific.
Student answers may vary, but may include any of the following:
This website provides information about the following: evaluating your business idea,
writing a business plan, choosing a business name; finding and renting space for your
business; legal structures of small business; employing workers; business financing;
bookkeeping and accounting; business taxes; marketing and advertising; small business
legal concerns; home businesses; doing business online; protecting your business’
intellectual property, etc. This website also provides a law library as a resource for
potential or current small business owners.
3.
How is the information provided at this website useful for businesspeople?
Consumers?
Student answers may vary, but may include any of the following:
It is useful for businesspeople as a resource to obtain information on what is listed in
the above answer. The website serves as a valuable resource for businesspeople.
Consumers may find this site useful because it provides information concerning wills and
estate planning as well as information on retirement planning. It also includes
information on traveling, financial preparation for college, etc.
4.
How did you expand your knowledge of forms of business ownerships and
business combinations by reviewing the material at this website? What new
things did you learn about this topic?
Students’ responses will depend, in large part, on the material currently posted on the
website.
Follow the Fortunes of the Fortune 500
Quick! Name the largest corporation in the United States, as measured by annual revenues.
Give up? Just check Fortune magazine’s yearly ranking of the 500 largest U.S. companies. For
years, General Motors has topped the list with its $170 billion-plus in annual revenues, but now
Wal-Mart has taken over with over $200 billion in annual revenues. The Fortune 500 not only
ranks corporations by size but also offers brief company descriptions along with industry
statistics and additional measures of corporate performance. You can search the list by ranking,
by industry, by company name, or by CEO. And to help you identify the largest international
corporations, there’s a special Global 500 list as well.
www.fortune.com
1.
22
What is the purpose of this website?
Student answers may vary, but may include any of the following:
SEMINAR 4
Chapter 5: Building the Foundation: Forms of Business Ownership
This website exists to provide rankings on corporations and to also offer brief company
descriptions along with industry statistics and additional measures of corporate
performance. This website also provides rankings and information on the following:
best companies to work for, most admired companies (domestic and global), top small
businesses, etc.
2.
What kinds of information does this website contain? Please be specific.
Student answers may vary, but may indicate that this website contains information on
the following:

Investments

Careers

Companies

Company profiles

Rankings in regards to best companies to work for

Most admired companies (domestic and global)

Fastest growing companies

Small business

Best companies for minorities

CEOs

Articles pertaining to technology
3.
How is the information provided at this website useful for businesspeople?
Consumers?
Student answers may vary, but may include any of the following:
Businesspeople may be able to search through the company profiles to see how the
most successful companies are operating. To enhance their business operations,
businesspeople may emulate some business practices of these most successful firms.
Individuals may find this website helping when looking for a company that best fits their
personality and profile. It also lists the best companies to work for so that consumers
are aware of the business practices of these companies. It also offers a wide range of
articles that pertain to possible solutions to work problems. Information on investments
is also provided.
4.
How did you expand your knowledge of forms of business ownerships and
business combinations by reviewing the material at this website? What new
things did you learn about this topic?
Students’ responses will depend, in large part, on the material currently posted on the
website.
Build a Great Board
Want a great board of directors? This inc.com guide contains the best resources for
entrepreneurs who are ready to recruit outside directors for their boards. Find out how to
recruit board members and how to persuade top-notch people to come on board. Once you’ve
selected your members, learn how to maximize your board’s impact and resolve conflicts among
board members. Check out one expert’s five practical tips for good nuts-and-bolts
boardsmanship.
23
Part 2: Starting and Organizing a Business
www.inc.com/guides/growth/20672.html
1.
What is the purpose of this website?
Student answers may include any of the following:
This inc.com guide contains the best resources for entrepreneurs who are ready to
recruit outside directors for their boards. This website offers advice on how to maximize
your board’s impact and resolve conflicts among board members. It offers guideline to
help you build and use your board.
2.
What kinds of information does this website contain? Please be specific.
Student answers may include any of the following:
This website provides information concerning the following: building the board;
persuading top-notch people to join your advisory board; finding diverse candidates for
your board; board conflict resolution; board evaluation problems and solutions; tips for
first-time board members.
3.
How is the information provided at this website useful for businesspeople?
Consumers?
Student answers may include any of the following:
This information is useful for businesspeople who are building a board of directors.
(Refer to answer for question #2)
Consumers can learn more about how companies build their boards.
4.
How did you expand your knowledge of forms of business ownerships and
business combinations by reviewing the material at this website? What new
things did you learn about this topic?
Students’ responses will depend, in large part, on the material currently posted on the
website.
A Case for Critical Thinking
AOL Time Warner: Deal of the Century Turns into Disaster of a Lifetime
Critical Thinking Questions
1.
Why did the media refer to the merger as the deal of the century?
The merger between AOL and Time Warner was originally called the “Deal of the
Century” because it was the largest merger in U.S. history on the date it was finalized –
January 11, 2001. The merger cost $160 million.
2.
Why was Time Warner eager to merge with AOL?
Time Warner was eager to merge with AOL because they were lacking in terms of
development in the digital age and say AOL as an excellent pathway into this area for
them.
3.
What challenges did AOL Time Warner face as a merged company?
The biggest challenge facing the AOL Time Warner merger was that of combining two
very distinct, yet very profitable cultures. Additionally, the economic slump, which drove
24
SEMINAR 4
Chapter 5: Building the Foundation: Forms of Business Ownership
advertising to an all-time worse level of spending, had an enormous impact on AOL’s
ability to generate revenue, thus dropping their stock prices down. Most Time Warner’s
shareholders were being paid in AOL stock, thus making the situation worse.
4.
Visit the AOL Time Warner website. Review the site to get the latest news
about the fate of the merger. How is the company doing financially? How
much turnover has occurred among high-level executives? If any parts of the
business have been sold off, what has the acquiring company said about
future prospects?
The AOL Time Warner address is: http://www.aoltw.com/. Here students can click on
links for:

Corporate information

Corporate citizenship

Companies

International

Investors

New

Features

Careers
By clicking on “Investors” students will find additional links to:

Quarterly Earnings

Trending Schedules

Annual Reports

Annual Meeting Materials

Archival Materials

SEC Filings

General Filings

Section 16 Filings

Stock

Historical Stock Prices

Stock Split & Dividend History

Fixed Income Securities

Events & Analysis

Events & Presentations

Analyst Coverage

Shareholder Services

Frequently Asked Questions

Order Investor Materials

Receive Materials Online

Contact Investor Relations
25
Part 2: Starting and Organizing a Business
Part 2: Mastering Global and Geographical Skills—
Communicating with International Suppliers
1.
Look at 10 products sold in the store and note where they are made. How
many of the products can you easily identify as coming from outside the
United States?
Students’ answers will vary.
2.
Arrange to meet with the store’s owners or managers. Find out how they
order these international products. Do they submit their orders by mail?
Telephone? Fax machine? Internet? Find out if these local stores sell any of
their products overseas. How do their international customers purchase
products from them? Do they have a website? Do they send out international
mailings or catalogs?
Students’ answers will vary.
3.
Although it’s easier today, doing business around the globe increases your
need to understand world geography. Consider time differences, for example.
Your U.S. business hours certainly won’t coincide with the store hours of your
suppliers in Europe or Asia.
How will you adjust for these differences? The Internet, of course, is one
way. But what if you really need to talk to the store manager? When should
you place the call? Visit your local library, search the Web, or use resources
such as the World Almanac to learn more about international time.
a.
How many time zones are there in the United States (including
possessions)?
There are seven different time zones: Alaska, Atlantic, Central, Eastern, Hawaii-Aleutian,
Mountain, and Pacific.
b.
4.
26
If its noon in New York City, what time is it in Cape Town, South
Africa? Copenhagen, Denmark? Sydney, Australia? Tokyo, Japan?
Athens, Greece? Honolulu, Hawaii? Moscow, Russia?
Cape Town, South Africa:
7:00 p.m.
Copenhagen, Denmark:
6:00 p.m.
Sydney, Australia:
4:00 a.m. the next morning
Tokyo, Japan:
2:00 a.m.
Athens, Greece:
7:00 p.m.
Honolulu, Hawaii:
6:00 a.m.
Moscow, Russia:
8:00 p.m.
As a new business owner, you will be communicating with people who speak
many different languages. Log on to this text’s website, Chapter 6—Mastering
Global and Geographical Skills, for a current link to the AltaVista Translation
Service. Use this resource to answer these questions: How do you say,
“inventory” in Italian? Portuguese? German? French?
Italian:
inventario
Portuguese: inventário
German:
inhalt
SEMINAR 4
French:
Chapter 5: Building the Foundation: Forms of Business Ownership
inventaire
Answers to Boxed Features
Box 1: Hey Wanna Lose a Few Billion? We Have a Sure Deal for You.
Questions for Critical Thinking
1.
If you were on the board of directors at a company and the CEO announced
plans to merge with a competitor, what types of questions would you want
answered before you gave your approval? How would you view your ethical
responsibilities in this situation?
The questions that would be essential to have answered are:

How will the regulatory environment change?

How will competitors respond?

Do the expected gains justify the up-front costs and disruption to business
operations?

Will the cultures, systems, processes and product lines of the two companies
blend well?

Will customers benefit?

Will investors in both original companies benefit?
2.
If a CEO has the opportunity to merge with or acquire another company and
is reasonable certain that the transaction will benefit shareholders, is the CEO
obligated to pursue the deal? Why or why not?
The students’ answers will depend on what the view the major role of business to be.
Ask them to reconsider the perspectives explored in Chapter Two. In Chapter Two,
three perspectives on the role of business were raised, including:
1.
the only responsibility of business is to make money
2.
business has a larger responsibility to society, and ethical behavior leads to
financial success
3.
businesses must balance social responsibility and financial objectives, even if that
means taking a less-profitable course of action at times.
Depending upon which perspective students embrace, their responses will be different.
Box 2: DaimlerChrysler: Merger of Equals or Global Fender Bender?
Questions for Critical Thinking
1.
What prevented DaimlerChrysler from achieving the promised synergies?
There were several factors such as fundamental differences in management,
operational, and decision-making styles that made matters worse for the merger.
Although the merger made sense and was a perfect match on paper, the cultural
differences were monumental. Management from both sides spent more time defending
their way of doing things than promoting the integration of systems.
27
Part 2: Starting and Organizing a Business
2.
28
Which of these stakeholders benefited the most from the merger: the original
Chrysler shareholders or the new DaimlerChrysler shareholders? Explain your
answer.
The case does not indicate that any of these shareholders particularly benefited from
the merger. If the original Chrysler shareholders received a higher dollar value than
where the stock was trading before the merger was announced, obviously they
benefited the most because the post-merger price of the stock has definitely suffered a
decline, both in price and number of U.S. shareholders (the stock was banished from the
S & P 500 Index because the new company was not incorporated in America).