Chapter 4
Choosing a Form
of Business
Ownership
Learning Objectives
1. Describe the advantages and disadvantages of sole
proprietorships.
2. Explain the different types of partners and the importance of
partnership agreements.
3. Describe the advantages and disadvantages of partnerships.
4. Summarize how a corporation is formed.
5. Describe the advantages and disadvantages of a corporation.
6. Examine special types of corporations, including S-corporations,
limited-liability companies, and not-for-profit corporations.
7. Discuss the purpose of a cooperative, joint venture, and
syndicate.
8. Explain how growth from within and growth through mergers can
enable a business to expand.
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Chapter 4 | Slide 2
Sole Proprietorship
…a business that is owned
(and usually operated) by one person.
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Chapter 4 | Slide 3
Reasons People Go into
Business for Themselves
Source: Timothy S. Hatten, Small Business Management: Entrepreneurship and Beyond, 3rd ed. Copyright © 2006 by
Houghton Mifflin Company. Used by permission. Data from A Small Business Primer.
Copyright © Cengage Learning. All rights reserved.
Chapter 4 | Slide 4
SBA Online
The Small Business Administration website
 explores topics important to new and established
businesses
 answers questions such as
• Which legal form is best?
• How to get financing?
 offers SBA answer desk where you can submit
questions about specific concerns
http://www.sbaonline.sba.gov
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Chapter 4 | Slide 5
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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Chapter 4 | Slide 6
Figure 4.1: Relative Percentages of Sole Proprietorships,
Partnerships, and Corporations in the U.S.
Source: U.S. Bureau of the Census, Statistical Abstract of the United States, Washington,
D.C., 2009, p. 483 (www.census.gov).
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Chapter 4 | Slide 7
Figure 4.2: Total Sales Receipts
of American Businesses
Source: U.S. Bureau of the Census, Statistical Abstract of the United States,
Washington, D.C., 2009, p. 483 (www.census.gov).
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Chapter 4 | Slide 8
Advantages of
Sole Proprietorships
 Ease of Start-up and Closure
 Pride of Ownership
 Retention of All Profits
 Flexibility of Being Your Own Boss
 No Special Taxes
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Chapter 4 | Slide 9
Disadvantages of
Sole Proprietorships
 Unlimited Liability
 Lack of Continuity
 Lack of Money
 Limited Management Skills
 Difficulty in Hiring Employees
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Chapter 4 | Slide 10
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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Chapter 4 | Slide 11
Types of Partners
 General ─ person who assumes full or shared
responsibility for operating a business
 Is active in day-to-day business operations
 Can enter into contracts on behalf of other partners
 Assumes unlimited liability
 Limited ─ person who contributes capital to a
business but assumes no management
responsibility or losses beyond amount he/she
invested
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Chapter 4 | Slide 12
Types of Partnerships
 General ─ business co-owned by 2 or more
general partners who are liable for everything
the business does
 Limited ─ business co-owned by 1 or more
general partners who manage the business and
limited partners who invest money in it
 Master Limited ─ owned and managed like a
corporation but often taxed like a partnership
National Association of Publicly Traded Partnerships
www.naptp.org
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Chapter 4 | Slide 13
Articles of Partnership
…an agreement listing and explaining
the terms of the partnership.
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Chapter 4 | Slide 14
Figure 4.3: Articles of Partnership
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Chapter 4 | Slide 15
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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Chapter 4 | Slide 16
Disadvantages of Partnerships
 Unlimited Liability
 Management Disagreements
 Lack of Continuity
 Frozen Investment
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Chapter 4 | Slide 17
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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Chapter 4 | Slide 18
Table 4.1: The Seven Largest U.S.
Industrial Corporations
Source: Fortune website at www.fortune.com, accessed April 6, 2009.
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Chapter 4 | Slide 19
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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Chapter 4 | Slide 20
Forming a Corporation
 Consult a lawyer
 Decide where to incorporate
• Cost of incorporating
• Advantages/disadvantages of each state’s corporate laws and
tax structure
 Choose corporate location
• Domestic corporation ─ in state in which it is incorporated
• Foreign corporation ─ in any state in which it does business
except the one in which it is incorporated
• Alien corporation ─ chartered by a foreign government and
conducting business in the U.S.
 Hold organizational meeting
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Chapter 4 | Slide 21
Table 4.2: 10 Aspects of Business
That May Require Legal Help
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Chapter 4 | Slide 22
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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Chapter 4 | Slide 23
Charter and Articles of
Incorporation
 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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Chapter 4 | Slide 24
Stockholders’ Rights
 Common Stock
owned by individuals who vote on corporate matters and
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 are paid before those
of common-stock owners
 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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Chapter 4 | Slide 25
Corporate Dividends Paid to Stockholders
Spotlight
Source: U.S. Department of Commerce Bureau of Economic Analysis
website at www.bea.gov, accessed April 13, 2009.
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Chapter 4 | Slide 26
Corporate Structure
 Board of Directors
top governing body of corporation, members are
elected by stockholders
 Corporate Officers
chairman of the board, president, executive vicepresidents, corporate secretary, treasurer, and other
top executives appointed by board of directors
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Chapter 4 | Slide 27
Advantages of Corporations
 Limited Liability
 Ease of Raising Capital
 Ease of Transfer of Ownership
 Perpetual Life
 Specialized Management
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Chapter 4 | Slide 28
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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Chapter 4 | Slide 29
Table 4.3: Some Advantages and Disadvantages of a
Sole Proprietorship, Partnership, and Corporation
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Chapter 4 | Slide 30
S-Corporation
 Corporation taxed as partnership
 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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Chapter 4 | Slide 31
Limited-Liability
Company (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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Chapter 4 | Slide 32
Table 4.4: Some Advantages and Disadvantages of a Regular
Corporation, S-Corporation, and Limited-Liability Company
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Chapter 4 | Slide 33
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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Chapter 4 | Slide 34
Cooperatives, Joint
Ventures, and Syndicates
 Cooperative
association of individuals or firms organized 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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Chapter 4 | Slide 35
Corporate
Growth from Within
 Expand present operations
 Introduce/sell new related
products
 Sell present products to
new geographic markets /
groups of consumers
Growth from within has
relatively little adverse
effect on firm.
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Chapter 4 | Slide 36
Corporate Growth
Through Mergers/Acquisitions
 Merger
purchase of one corporation by another
 Hostile takeover
purchase 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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Chapter 4 | Slide 37
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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Chapter 4 | Slide 38
Figure 4.5: Three Types
of Growth by Merger
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Chapter 4 | Slide 39
Biggest Mergers
Target
Acquirer
Value
Date
($ billions)
Mannesmann
Vodafone Airtouch
172.2
2/2000
Time Warner
America Online
112.1
1/2001
Warner-Lambert
Pfizer
111.8
6/2000
Mobil
Exxon
85.6 12/1999
SmithKline
Glaxo Wellcome
79.6 12/2000
Ameritech
SBC Communications
76.2 10/1999
GTE
Bell Atlantic
74.9
6/2000
Aventis SA
Sanofi-Synthelabo
71.3
6/2004
Amoco
British Petroleum
64.3 12/1998
Source: MSNBC, www.msnbc.msn.com/id/6880681, February 15, 2009.
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Chapter 4 | Slide 40
Current Merger Trends
 Takeover
• Pro: makes company more profitable
• Con: does not enhance profitability; only ones who benefit
are investment bankers, brokerage firms, takeover
“artists”
 21st Century
• Cash-rich companies acquire businesses to enhance their
position in the marketplace
• More foreign companies/investors
 Leveraged Buyout (LBO)
• purchase arrangement allowing firm’s managers,
employees, investors to purchase company, taking firm
private
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Chapter 4 | Slide 41
Chapter Quiz
1. In the United States, the form of business ownership that
generates the largest amount of sales revenues is the
a)
b)
c)
d)
e)
sole proprietorship.
partnership.
corporation.
limited-liability company.
S-corporation.
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Chapter 4 | Slide 42
Chapter Quiz (cont.)
2. Which of the following is not an advantage of a sole
proprietorship?
a)
b)
c)
d)
e)
Flexibility
No special taxes
Pride of ownership
Retention of all profits
Unlimited liability
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Chapter 4 | Slide 43
Chapter Quiz (cont.)
3.
A business co-owned by one or more general partners who
manage the business and limited partners who invest money in
it is called a
a)
b)
c)
d)
e)
not-for-profit partnership.
limited partnership.
general partnership.
limited-liability company.
S-partnership.
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Chapter 4 | Slide 44
Chapter Quiz (cont.)
4.
A corporation that received its corporate charter in California
and is doing business in Oregon is called a(n)
____________corporation in Oregon.
a)
b)
c)
d)
e)
alien
domestic
visiting
international
foreign
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Chapter 4 | Slide 45
Chapter Quiz (cont.)
5.
A ____________ is a merger between firms that make and
sell similar products or services in similar industries.
a)
b)
c)
d)
e)
horizontal merger
vertical merger
conglomerate merger
hostile takeover
tender offer
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Chapter 4 | Slide 46