3 major forms of business ownership 1 Sole proprietorship a business that is owned and usually managed by 1 person cid 127 Most common form of ownership 2 Partnerships A legal form of business with 2 or more owners 3 Corporation A legal entity with authority to act and have liability apart from its owners just because a business starts off in one type of ownership does not mean they have to stay in that form Advantages of Sole Proprietorship Ease of starting and ending the business Being your own boss Pride of ownership Leaving a legacy ongoing business for generations Retention of company profits No special taxes normal income tax Disadvantages to Sole Proprietorship Unlimited liability the risk of personal losses Limited financial resources cid 127 Management difficulties cid 127 Overwhelming time commitment not a job a way of life Few fringe benefits no paid health care pension vacation Limited growth Limited life span Partnerships Unlimited liability The responsibility of business owners for all of the debts of the business 1 General Partnership A partnership in which all owners share in operating the business and in assuming liability for the business s debts Limited Partnership A partnership with one or more general partners and one or more limited partners 1 General partner An owner partner who has unlimited liability and is active in managing the firm Limited Partner An owner who invests money in the business but does not have any management responsibility or liability for losses beyond the 1 Limited Liability THe responsibility of a business s owners for losses only up to the amount they invest limited partners and shareholders investment stockholders have limited liability is taxed like a partnership and thus avoids the corporate income tax 1 Found in the oil and gas industry i e Sunoco Master Limited Partnership MLP A partnership that looks much like a corporation in that it acts like a corporation and is traded on a stock exchange but 4 Limited Liability Partnership LLP A partnership that limits partners risk of losing their personal assets to only their own acts and omissions and to the acts and omissions of people under their supervision Uniform Partnership Act UPA adopted by all states EXCEPT Louisiana defines the three key elements of any general partnership as The right to participate in amazing the operations of the business Shared management and pooled complementary skills and knowledge No special taxes taxed as personal income of the owners Common ownership Shared profits and losses Advantages of Partnership cid 127 More financial resources Longer survival Disadvantages of Partnership Unlimited liability Divisions of profits Difficulty of termination Corporations the company Advantages to Corporations Disagreements among partners all terms of the partnership should be spelled out in writing to protect all parties and minimize misunderstandings Conventional corporation A state chartered legal entity with authority to act and have liability separate from its owners its stockholders Stockholders are not liable for the debts or other problems of the corporation beyond the money the invest in it by buying ownership shares or stocks in Limited Liability owners of a business are responsible for its losses only up to the amount the invest into it cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 Large sums of money are hard to raise any other way than selling shares of stock Ability to raise more money for investment Size Summarizes many of the advantages Raise large sums of money cid 127 modern factories w best technology buy other corps to diversify their risks Perpetual life Ease of ownership change Ease of attracting talented employees Separation of ownership from management Disadvantages to corporations Initial cost Extensive paperwork Double taxation First the corporation pays tax on its income before in can distribute any as dividends then the stockholders pay income tax on them Two tax returns both corporate tax return and individual tax return Size become too inflexible and tied down in red tape to respond quickly to market changes Difficulty of termination Possible conflict with stockholder and board of directors S corporation A unique government creation that looks like a corporation but is taxed like a sole proprietorships and partnership Limited liability company LLC A company similar to an S corporation but without the special eligibility requirements have special eligibility requirements avoiding double taxation Corporate Expansion Mergers and Acquisitions cid 127 Merger The result of two firms forming one company marriage making two individuals a family Acquisition One company s purchase of the property and obligations of another company cid 127 More like buying a house than getting married 3 types of corporate mergers Vertical merger the joining of two companies involved in different stages of related businesses i e between soft drink company artificial sweetener company Horizontal merger The joining of two firms in the same industry i e soft drink company and mineral water company to now supply a variety of drinking products Conglomerate merger The jointing of firms in completely unrelated industries in order to diversify business operations and investments i e A soft rink company and a snack food company Taking a firm private means that management or a group of stockholders obtain all of the firm s stock by buying back Leveraged buyout LBO An attempt by employees management or group of investors to purchase an organization primarily through borrowing Franchise agreement An arrangement whereby someone with a good idea for a business sells the rights to use the business name and sell a product or the franchisor A company that develops a product concept and sells others the rights to make and sell the products Franchise The right to use a specific business s name and sell its products or services in a given territory Franchises serve to others in a given territory Franchisee A person who buys a franchise Advantages of franchises cid 127 Management and marketing assistance Personal ownership Nationally recognized name Financial advice and assistance Lower failure rate Disadvantages of franchises Shared profit cid 127 Management regulation Restrictions on selling Large
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