Types of Organizations Forms of Business Ownership Your family’s involvement in business / 3 forms of ownership Pharmaceutical company Rug & upholstery Real estate company Vermont Banker’s Association Jewelry manufacturing and imports Advertisement company EMC Technology Dairy farm Law firm Experian Information Solutions (worldwide) Apartment management company / boat cruises Telephone Internet device company company Trading company Bicycle & Sports company Car dealership 3 major forms of business 1. Sole / single proprietorship One owner Source of investment: personal funds Examples: bakery, flowershop, meat market 2. Partnership 2+ owners, general partners, limited partners Source of investment: personal funds of partners Examples: law / accounting firms, medical / dental practices Combination: Cooperatives a combination of several sole proprietorships and/or partnerships for greater production and marketing power 3 major forms of business (cont’d) Corporation Owned by the shareholders = investors Under control of the Board of Directors, which is elected by the stockholders Source of investment: stock issues Proportions of U.S. Firms in Terms of Type of Business and Sales Revenue 3 Sole Proprietorship/Partnership Advantages Disadvantages Freedom Unlimited Liability Limited resources Simple to form Limited fundraising Low start up costs Tax benefits capability Lack of continuity Unlimited Liability Legal principle holding owners responsible for paying off all debts of a business Stock: A share of ownership in a corporation Two types: Common Stock & Preferred Stock How a corporation issues Stock IPO issues (= sells) stock (= shares) Corporation XYZ Shareholders of Corporation XYZ (Investment firms) Other Investors Transfer of ownership in a corporation Corporation XYZ Shareholders of Corporation XYZ Exchange stock (= shares) Other investors Corporation Advantages Disadvantages Limited financial liability Double taxation Ease of transfer of Complicated and ownership expensive to form and manage Legal entity Subject to disclosure Perpetual life requirements by the Easier access to $$$ / government ( the SEC = capital to grow the Securities & Exchange business (= stronger Commission) fundraising capability) The concept of Double Taxation Income Statement Corporation Sales $100 Expenses 80 Pre-tax income $ 20 Taxes (e.g. 50%) 10 Net income $ 10 Shareholder‘s Personal Income Statement Income from dividends $10 Taxes (e.g. 30%) Net income $3 $7 Role of the (common) Stockholders (= Owners) Rights Risks Elect the Board of Directors Benefit from stock appreciation (increase in value) Receive dividends Appoint auditors to judge the company’s financial statements Approve the issue of new shares / stocks or the repurchase of existing stocks The value of stock declines. Dividends are cut or not paid. In case of bankruptcy, the stockholders are last in line to receive compensation (usually nothing is left). Roles & Reporting Relationships Stockholders elect Board of Directors hires / appoints President / CEO Vice President of Production Vice President of Finance Vice President of Marketing Role of the Board of Directors Responsibilities: Represent the stockholders Fulfill objective: maximize shareholders’ wealth Make sure that management acts in the best interest of stockholders Hire the company president Declare dividends Set policy Focus on “big picture” issues, not day-to-day management o Strategic planning o Financial goal setting o Mergers and acquisitions Role of the President / CEO (Chief Executive Officer) Manage the day-to-day operations Hire and supervise other managers Limited Liability Company (LLC) A type of general partnership Partners taxed at personal level Provides limited liability for the partners Laws and liability protection vary by state Relatively new legal structure for a business Special forms of changes in ownership Merger: The union of two corporations to form a new corporation: Former companies cease to exist as independent companies. Acquisition: A larger company buying a smaller one: Old company ceases to exist as an independent entity. Divestiture A firm selling off one or more of its business units (often unrelated or underperforming) Spin-off Setting up one or more of the company’s units as new businesses (purpose: to raise capital): Giving a corporate business unit to shareholders who now own stock in the business unit as an independent company. They still own original company shares. Joint venture 2 companies setting up a new (outside) company for collaboration and joint ownership, often in another country: Both original companies continue to exist independently. In the news -Examples of changes in ownership 1. 2. 3. 4. United and Continental to merge. UAL Corp.'s United Airlines announced on Monday it will merge with Continental Airlines in a deal worth $3.2 billion, creating the world's largest airline. CNNMoney.com, 5/3/2010 Restructuring World: Major Spin-Offs From Major Companies. Motorola Inc. (NYSE: MOT) has restructured literally for almost the entire time I have covered equities. The mobile communications technology giant is about to be much different after its cell phone spin-off comes. 6/21/2010 BP, other oil companies divest less-significant properties BP's sale of oilfields and other energy assets to cover costs of the Gulf of Mexico oil spill has inspired other oil companies, including Royal Dutch Shell and ExxonMobil, to divest less important properties. Bloomberg Businessweek (1/13/2011) Nokia, Pearson Set Up Digital Education Joint Venture In China. Nokia and education company Pearson have formed a joint venture in China dubbed Beijing Mobiledu Technologies… The new joint venture company aims to deliver a wide range of services to meet the demand for digital education in China. TechCrunch, 2/1/2010 Stakeholders Anyone impacted by actions of a company (except for competitors) Key stakeholder groups: The company and its employees Customers Investors (debt and equity) Society How Does Type of Business Organization Impact Stakeholders? Investors as stakeholders: Risk varies by structure. Much lower risk for corporations and LLCs. May receive dividends with corporations, and have the chance for stock value to increase in a liquid trading market. The company as a stakeholder: Funding ability, and therefore the ability to grow, varies by structure. Much stronger for corporations. Society as a stakeholder: Greater growth potential enables corporations to provide more jobs, develop worldwide, invest more in R&D to develop new products, etc. However, society has seen the need to regulate corporate power and disclosure (for public corporations). Customers as stakeholders: Corporations may have greater capacity to develop and distribute products; smaller companies (sole proprietorships, partnerships) may have closer customer ties and provide customized service.