BADM1103F07Ch05

Basic Forms of Business OwnershipSole Proprietorship•A business owned, and usually managed, by one person•the most common form Sole Proprietorship (cont.)•Advantages•Ease of starting and ending the business•Working for yourself•Pride of ownership•Legacy•Retention of profits•Taxed as personal incomeSole Proprietorship (cont.)•Disadvantages•Unlimited liability•Limited financial resources•No one with whom to share the burden•Management issues•No fringe benefits•Limited growth•Limited lifespan Partnership•A legal form of business with two or more owners Partnership (cont.)•Types of partnerships•General Partnershipall owners share in operating the business and in assuming liability for the business’s debts Partnership (cont.)•Limited Partnershipone or more general partners and one or more limited partners •General partnerowner (partner) who has unlimited liability and is active in managing the firm Partnership (cont.)•Limited partnerowner who invests money in the business but does not have any management responsibility or liability for losses beyond the investment •Limited liabilitythe responsibility of a business’ owners for losses only up to the amount they investPartnership (cont.)•Master Limited Partnership (MLP)much like a corporation (in that it acts like a corporation and is traded on a stock exchange) but is taxed like a partnership•avoids the corporate income tax Partnership (cont.)•Limited Liability Partnershiplimits partners’ risk of losing their personal assets to only their own acts and omissions and the acts and omissions of the people under their supervision Partnership (cont.)•Uniform Partnership Actenforced in all states except Louisianacommon ownershipshared profits and lossesthe right to participate in managing the operations of the business Partnership (cont.)•Advantages of Partnershipsmore financial resourcesshared managementlonger survivalno special taxesPartnership (cont.)•Disadvantagesunlimited liability•General partners liable for the debts of the firm, no matter who was responsible for causing those debts division of profitspossible disagreementsdifficult to terminateCorporations•A legal entity with authority to act and have liability separate from its owners Corporations (cont.)•Conventional “C” Corporation•State-chartered legal entity with authority to act and have liability separate from its ownersowners (stockholders) are not liable for the debts of the corporation beyond the money they invest lets many people to share in the ownership of a business without working there Corporations (cont.)•Advantages•Limited liability•most significant advantage •More money for investmentstocksbondsCorporations (cont.)•Sizeability to raise large amounts of money buy other corporationshave the size and resources to take advantage of opportunities anywhere in the world •Perpetual life•Ease of ownership changeCorporations (cont.)•Ease of ownership change•Ease of drawing talented employees•Separation of ownership from managementCorporations (cont.)•Disadvantages of Corporations•Extensive paperwork•Double taxationstates often tax corporations more harshly than other enterprises•Size•Difficulty of termination•Management conflictsCorporations (cont.)•Initial costs•Individuals can incorporate•Doctors and lawyers can save on taxes and receive other benefits•Small corporations do not issue stockCorporations (cont.)•S Corporations•Unique government creationlooks like a corporation but is taxed like sole proprietorships and partnerships•No more than 100 shareholders •Shareholdersindividuals or estates and are citizens or permanent residents of the U.S. Corporations (cont.)•Limited Liability Corporations (LLC)•Company similar to an S corporation but without the special eligibility requirements•More than half of new business registrations in some states today are LLCsCorporations (cont.)•Advantages•Personal assets are protected •Can choose to be taxed as partnerships or as corporations •Do not have to comply with ownership restrictions as S corporations do Corporations (cont.)•Profit and losses don’t have to be distributed in proportion to the money each person invests •Reporting requirements are less than for a corporation Corporations (cont.)•Disadvantages•Ownership is nontransferable •Have to identify dissolution dates in the articles of organization •Can’t deduct the cost of fringe benefits or use stock options •Members must pay self-employment taxes on profits •More paperwork than for sole proprietors Mergers and Acquisitions•Merger•two firms forming one company •Acquisition•one company’s purchase of the property and obligations of another companyMergers and Acquisitions (cont.)•Vertical•Joining of two companies involved in different stages of related businesses •Horizontal•Joins two firms in the same industry•Conglomerate•Completely unrelated industries Mergers and Acquisitions (cont.)•Leveraged buyout•An attempt by employees, management, or a group of investors to purchase an organization primarily through borrowingFranchising•Advantages•Assistanceestablished product help in choosing a location assistance in all phases of operation Franchising (cont.)•Personal ownership•Recognized name•Financial advice and assistance•Lower failure rateFranchising (cont.)•Disadvantages•Last start-up costs•Shared profit•Management regulation•Coattail effect•Restrictions on selling•FraudsFranchising (cont.)•Home-based franchising•E-commerce franchising•Technology in franchisingFranchising (cont.)•Franchising in international markets•Costs of franchising are high •Less competition and rapidly expanding consumer base •Smaller franchises expand (Rug Doctor Pro and Merry Maid)•Cooperatives•A business owned and controlled by the people who use it •47,000 cooperatives in the U.S. •Farm cooperatives