Chapter Five Options for Organizing Business

Chapter FiveOptions forOrganizing BusinessThe Three Basic Types of Business OrganizationsThe Sole Proprietorship: Bill’s Barber ShopThe Partnership: Johnson & Wiley, CPA’sThe Corporation: Boeing, MicrosoftComparison of Sole Proprietorships, Partnerships, and CorporationsSource: U.S. Bureau of the Census, Statistical Abstractof the U.S., 2000, 120th edition (Washington,DC: U.S.Government Printing Office, 2000), p. 535.Sales ($billions)Net Income ($billions)NumberCorporationsProprietorshipsPartnershipsThe Sole ProprietorshipA business owned and operated by one individual.Advantages and Disadvantagesof the Sole ProprietorshipAdvantagesEase and cost of formationSecrecyDistribution and use of profitsControl of the businessGovernment regulationEasy to close the businessDisadvantagesUnlimited liabilityLimited sources of fundsLimited skillsLack of continuityLack of qualified employeesThe PartnershipAn association of two or more persons who carry on as co-owners of a business for profit.Types of PartnershipsGeneral partnership: Partners completely share in the management of the business.Limited partnership: One general partner with unlimited liability and one limited partner with limited liability.Joint venture: A partnership established for a specific project or a limited time.Advantages and Disadvantages of PartnershipsAdvantagesEase of organizationAvailability of capital and creditCombined knowledge and skillsDecision makingRegulatory controlsDisadvantagesUnlimited liabilityBusiness responsibilityLife of the partnershipDistributions of profitsLimited sources of fundsTaxationThe CorporationA legal entity created by the state, whose assets and liabilities are separate from its owners.The Board of DirectorsThe StockholdersThe Articles of IncorporationName and address of the corporationObjectives of the corporationClasses of stock (common, preferred, voting, nonvoting) and the number of shares for each class of stock to be issued.Expected life of the corporation (usually forever).Financial capital required at the time of incorporation.The Articles of Incorporation6. Provisions for transferring shares of stock between owners.7. Provisions for the regulation of internal corporate affairs.8. Address of the business office registered with the state of incorporation.9. Names and addresses of the initial board of directors.10. Names and addresses of the incorporators.Types of CorporationsDomestic Does business in the state in which it is charteredForeign Does business in states other than the state where it is chartered Alien Does business outside of the nation where it is incorporated Types of CorporationsPrivate Corporation owned by only one person or a few people closely involved in its management.Public Corporation whose stock anyone may buy, sell, or trade.Types of CorporationsQuasi-public Owned and operated by a federal, state, or local government Nonprofit Focus is on providing a service not making a profit America’s Top 10The Largest US CorporationsCompanyExxon MobilWal-Mart StoresGeneral MotorsFord MotorGeneral ElectricRevenues$210,329 million$193,295 million$184,632 million$180,598 million$128,853 millionSource: Fortune 500 Custom Search, Fortune.com (accessed July 27, 2001).The Elements of a CorporationThe Board of DirectorsInside directorsOutside directorsStock OwnershipPreferred stockCommon stockAdvantages and Disadvantages of CorporationsAdvantages:Limited liabilityTransfer of ownershipPerpetual lifeExternal sources of fundsExpansion potentialDisadvantages:Double taxationForming a corporationDisclosure of informationEmployee-owner separationOther Types of OwnershipThe S-corporationThe Limited Liability Company (LLC)The Cooperative (Co-op)How Do Corporations Grow?Expanding operationsNew Product DevelopmentMarket ExpansionMergersAcquisitionsLeveraged Buyouts (LBO)MergerMerger The combination of two companies (usually corporations) to form a new company. - Horizontal merger - Vertical merger - Conglomerate mergerAcquisitionAcquisition The purchase of one company by another, usually by buying its stock. That company may become a subsidiary of the buyer.Leveraged Buyout (LBO)A purchase in which a group of investors borrow money from banks and other institutions to acquire a company (or division of one) using the assets of the purchased company to guarantee repayment of the loan.FAST FACT:Worldwide LBOs are on the decline.More LBOs occur in Europe than in U.S.The Jargon of the Merger, Acquisition, and LBOThe Corporate RaiderThe Tender OfferThe Poison PillShark RepellantThe White KnightSolve the DilemmaWhat are some of the advantages and disadvantages of Thomas and Bryan forming a corporation?What are the advantages and disadvantages of their forming a partnership?Which organizational form do you think would be best for Thomas and Bryan’s company and why?Explore Your Career OptionsAre salary and advancement opportunities the most important considerations in evaluating a job offer?Additional Discussion Questions and Exercises1. Which form of ownership is the most popular in the United States? Which form accounts for the highest percentage of total business sales?2. What is meant by “double taxation” for corporate income?3. What is the difference between a foreign corporation and an alien corporation?Additional Discussion Questions and Exercises4. What is the difference between quasi-public corporations and nonprofit corporations?5. In a leveraged buyout (LBO), what assets or collateral do the investors use to guarantee repayment of the loan to the banks or other institutions from which they borrowed money?Chapter 5 Quiz1. A corporation doing business in the state in which it is chartered is known as a. an alien corporation. b. a domestic corporation. c. a foreign corporation.  d. a quasi-public corporation.2. Which one of the following is considered an advantage of the sole proprietorship form of organization? a. ease of business dissolution b. unlimited liability c. limited sources of funds d. limited life of the businessChapter 5 Quiz3. At one time, the Ford family owned all of the stock in the Ford Motor Company. Such family ownership of a corporation is typical of a  a. public corporation. b. quasi-public corporation. c. private corporation.  d. nonprofit corporation.4. Owners of common stock a. have a claim to any profits before any stockholders do. b. carry a cumulative claim to dividends. c. have no say in running the company. d. elect the board of directors.Multiple Choice Questions about the Video1. What was a consequence of Ben & Jerry’s incorporation? a. The business developed only in Vermont. b. The business’s expansion was limited. c. Cohen’s and Greenfield’s involvement in the corporation diminished.  d. None of the above. e. All of the above.2. Ben & Jerry’s “caring capitalism” is a. detrimental to its stockholders. b. required by law. c. encouraged by the founders of the company. d. risky. e. self-serving.