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.