Lecture 05 [email protected]
Business Ownership Types.... •
Sole Proprietorship. –
A business that is owned and usually managed by one person. A legal form of business with two or more owners.
A legal entity with authority to act and have liability separate from its owners.
• Corporations make up 20% of the total number
of businesses. – They generate 81% of the total revenue.
• Sole proprietorships make up 72% of the total
number of businesses. – Generate 6% of the revenue.
Sole Proprietorships •
– – – –
Ease of starting and ending. Being your own boss. Pride of ownership. Retention of profit. No special taxes.
• Cons – Unlimited liability ~ define (?)
– Limited financial resources. – Difficulty in management. – Overwhelming time commitment. – Few fringe benefits. – Limited growth. – Limited time span.
Three main elements – – –
General partners –
Common ownership. Shared profit/loss. Right to participate in managing of the business operations. Have unlimited liability and are active in managing the company.
Limited Partners –
Have limited liability and do not participate in management of the company.
Unlimited liability –
Sole proprietors and general partners must pay all debts and damages caused by their company. Personal possessions may have to be sold to pay these costs.
Limited liability –
Corporate owners (stock holders) and limited partners are only responsible for the amount they invest. Personal property is not at risk.
• Pros – Greater availability of financial resources.
– Shared management & pooled knowledge. – Longer survival chance.
• Cons – Unlimited liability.
– Division of profits. – Disagreements among partners. – Difficulty of termination.
A corporation is a state chartered entity with authority to act and have liability separate from its owners. Reason for people incorporating? – –
Special tax advantages. Limited liability.
• Pros – Greater amount of money for investment.
– Limited liability. – Size. – Perpetual life. – Ease of ownership change. – Ease of drawing talented employees.
• Cons – High initial cost.
– Large amount of paperwork. – Difficulty of terminations. – Size. – Double taxation. – Conflict with board of directors.
S Corporations. •
A unique government creation that looks like a corporation but is taxed like sole proprietorships/partnerships. (single Tax for shareholders and business). Conditions to be eligible – – –
Fewer than 75 stock holders Stockholders must be individuals or estates & U.S. citizens or permanent residents. Company cannot have more than 25% of income derived from passive sources (rents, royalties, interest etc).
Limited liability Companies •
A company that is similar to the S corporation but without the special eligibility requirements. Pros – – – – –
Limited liability. Choice of taxation. Flexible ownership rules. Flexible distribution of profit and loss. Operating flexibility.
• Cons – No stock.
– Limited life span. – Fewer incentives. – Taxes. – Paperwork.
• Comparison of types of business ownership. – Chapter 5 , Book I, pg.155
Mergers & Acquisitions •
One company's purchase of the property and obligations of another company.
Vertical Merger – –
The result of two firms forming a company.
The joining of two companies involved in different stages of related businesses. Examples?
Horizontal Merger – –
The joining of two firms in the same industry. Examples?
• Conglomerate merger – The joining of firms in completely unrelated
• Leveraged buyout (LBO) – An attempt by employees, management, or a group
of investors to purchase an organisation. – Done primarily through borrowing.
An arrangement to buy the rights to use the business name and sell its products or services in a given territory. Pros – – – –
Nationally recognised name and reputation. A proven management system. Promotional assistance. Pride of ownership.
• Cons – High franchise fees.
– Managerial regulation. – Shared profits. – Transfer of adverse effects if other franchisees fail.
Co-operatives • • • •
Organisations are organisations that are owned by the members/customers themselves. Controlled by the people who use it – producers, consumers or workers with similar needs who pool their resources for mutual gain. Some people form co-operatives to give members more economic power than they would have as individuals. Small businesses often form co-operatives to gain purchasing, marketing or product development strength.