Chapter 5
Choosing a Form
of Business
Ownership
Sole Proprietorships
“…a business that is owned (and usually
operated) by one person.”
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Forming a Sole Proprietorship
Simplest form of ownership
Easiest to start
Owner decides to start
business and begins
operations
Common in:
Retailing
Service
Agriculture
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Figure 5.1: Relative Percentages of Sole
Proprietorships, Partnerships, and
Corporations in the U.S.
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Figure 5.2: Total Sales Receipts
of American Businesses
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Advantages of
Sole Proprietorships
 Ease of Start-up & Closure
 Pride of Ownership
 Retention of All Profits
 Flexibility of Being Your Own Boss
 No Special Taxes
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Disadvantages of
Sole Proprietorships
 Unlimited Liability
 Lack of Continuity
 Lack of Money
 Limited Management Skills
 Difficulty in Hiring Employees
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Partnerships
 A voluntary association
of 2 or more persons to
act as co-owners of a
business for profit
 Much less common than
sole proprietorship or
corporation
 No legal maximum on
number of partners
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Types of Partners
o General- person who assumes full or shared
responsibility for operating a business
o Active in day-to-day business operations
o Each partner can enter into contracts on behalf of
other partners
o Assumes unlimited liability
o Limited- person who contributes capital to a
business but no management responsibility or
losses beyond amount he/she invested
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Articles of Partnership
“…an agreement listing and explaining
the terms of the partnership.”
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Advantages of Partnerships
 Ease of Start-Up
 Availability of Capital and Credit
 Personal Interest
 Combined Business Skills and Knowledge
 Retention of Profits
 No Special Taxes
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Disadvantages of Partnerships
 Unlimited Liability
 Management
Disagreements
 Lack of Continuity
 Frozen Investment
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Corporation
“…an artificial person created by law with
most of the legal rights of a real person,
including the rights to start and operate a
business, to buy or sell property, to borrow
money, to sue or be sued, and to enter into
binding contracts.”
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Corporate Ownership
 Stock- shares of ownership of a corporation
 Stockholder- person who owns a corporation’s
stock
 Closed corporation- a corporation whose stock
is owned by relatively few people and is not
sold to the general public
 Open corporation- a corporation whose stock
can be bought and sold by any individual
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Forming A Corporation
 Consult a lawyer
 Where to incorporate
 Cost of incorporating
 Advantages/disadvantages of each state’s corporate laws & tax
structure
 Corporate Location
 Domestic corporation- a corporation in state in which it is
incorporated
 Foreign corporation- a corporation in any state in which is does
business except the one in which it is incorporated
 Alien corporation- a corporation chartered by a foreign gov’t and
conducting business in the U.S.
 Organizational Meeting
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Corporate Charter
“…a contract between a corporation and
the state in which the state recognizes
the formation of the artificial person that
is the corporation.”
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Stockholders’ Rights
Common Stock- owned by individuals who vote
on corporate matters, whose claims on
profit/assets are subordinate to others
Preferred Stock- owned by individuals/firms
who do not have voting rights, whose claims on
dividends paid before those of common-stock
Dividend- a distribution of earnings to
stockholders
Proxy- legal form listing issues to be decided at
stockholders’ meeting and enabling
stockholders to transfer voting rights to other
individual(s)
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Corporate Structure
Board of Directors- top governing body of
corporation, members are elected by
stockholders
Corporate Officers- chairman of the board,
president, executive vice presidents, corporate
secretary, treasurer, and other top executive
appointed by board of directors
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Figure 5.4: Hierarchy
of Corporate Structure
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Charter and Article of
Incorporation Include:
Firm’s name and address
Incorporators’ names and addresses
Purpose of corporation
Maximum amount of stock and types of stock to
be issued
 Rights and privileges of stockholders
 Length of time corporation is to exist




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Board FAQ’s
• The average size of boards is 16
• Most boards pay members:
– Stock options
– Travel reimbursement
– Cash stipends
• Directors of top 250 companies average
$238,000 - $261,000 (over $1,000 per hour)
Source: Steven Hall & Associates 2008 study
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FAQ’s
• Most Boards organized into committees (i.e.
compensation committee)
• Many Boards have term limits and evaluations of
performance
• Boards generally meet every quarter
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Boards
• Pepsi Cola
• Microsoft
• Family Boards
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Advantages
of Corporation
 Limited Liability
 Ease of Raising Capital
 Ease of Transfer of Ownership
 Perpetual Life
 Specialized Management
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Disadvantages
of Corporations
 Difficulty and Expense of Formation
 Government Regulation and Increased
Paperwork
 Conflict within Corporation
 Double Taxation
 Lack of Secrecy
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Table 5.1: Largest U.S.
Industrial Corporations
Source: Fortune 500. Copyright © 2006 Time, Inc., the Fortune website at www.fortune.com; accessed October 2, 2006.
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Largest Private
Corporations (2004)
e = Forbes estimate
Rank
Name
Industry
Rev($M)
1
Cargill
Crops
$62,900
2
Koch Industries
Oil & Gas
$50,000e
3
Mars
Food Processing
$18,000e
4
Publix Super
Markets
Retail Grocery
$16,946
5
Bechtel
Const. Services
$16,337
“Largest Private Cos.”, Forbes.com,
http://www.forbes.com/lists/results.jhtml?passListId=21&passYear=2004&passListType=Company&searchParameter1=unset&searchParameter2=unset&results
Start=1&resultsHowMany=25&resultsSortProperties=%2Bnumberfield1%2C%2Bstringfield8&resultsSortCategoryName=rank&passKeyword=&category1=categ
ory&category2=category
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Table 5.2: 10 Aspect of Business
That May Require Legal Help
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Table 5.3: Advantages/Disadvantages
of Forms of Ownership
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S-Corporations
S Corporation taxed as partnership
S Criteria:
 No more than 100 stockholders
 Stockholders must be individuals, estates or
exempt organizations
 Only 1 class of stock
 Must be domestic corporation
 No nonresident-alien stockholders
 All stockholders must agree to S-corporation
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Limited-Liability
Companies (LLC)
 Provides limited liability protection, taxed like a
partnership
 Advantages:
 With 2 or more members = taxed as partnership
avoiding double taxation,1 member = taxed as sole
proprietorship
 Extends protection of personal assets
 More management flexibility when compared to
corporations
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Table 5.4: Advantages/Disadvantages
of Corporations and LLCs
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Not-for-Profit Corporations
“…a corporation organized to provide a
social, educational, religious, or other
service rather than to earn a profit.”
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Cooperatives, Joint
Ventures, and Syndicates
 Cooperative- association of individuals or firms,
purpose is to perform some business function
for members
 Joint Venture- agreement between 2 or more
groups to form business entity to achieve
specific goal or operate for specific period
 Syndicate- temporary association of individuals
or firms organized to perform specific task
requiring large amount of capital
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Corporate
Growth From Within
 Expand present
operations
 Introduce/sell new
related products
 Sale of present products
to new geographic
markets/groups of
consumers
 Has relatively little
adverse effect on firm
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Corporate Growth
Through Mergers/Acquisitions
 Merger- purchase of one corporation by another
 Hostile takeover- situation in which
management and board of directors of firm
targeted for acquisition disapprove of merger
 Corporate Raider
 Tender Offer
 Proxy Fight
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The Acquisition of
Jordan’s Furniture
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Types of Mergers
 Horizontal- between firms that make and sell
similar products/services in similar markets
 Vertical- between firms that operate at different
levels in the production and marketing of a
product
 Conglomerate- between firms in completely
different industries
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Biggest Telecom
Deals Each Year
Year
Value ($B)
2006
$67.0
AT&T bids for BellSouth
2005
$31.5
Telefonica buys 02
2004
$41.0
Cingular buys AT&T Wireless
2003
-----
2002
$29.2
[no major deals]
Comcast buys AT&T Broadband
“AT&T + BellSouth by the Numbers”, TeleGeography, March 15,2006, http://www.telegeography.com/wordpress/?m=200603
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Figure 5.5: Three Types
of Growth by Merger
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Current Merger Trends
o Takeover
o Pro- makes company more profitable
o Con- does not enhance profitability, only ones who
benefit are investment bankers, brokerage firms,
takeover “artists”
o Next Century
o Cash-rich companies acquire businesses to enhance
their position in the marketplace
o More foreign companies/investors
o Leveraged Buyout (LBO)- purchase arrangement
allowing firm’s managers, employees, investors
to purchase company, taking firm private
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