BUSN 3rd kelly mcgowen chapter6

• Why have corporations become the dominant form of business ownership?... 6 Business Ownership Options: The Big FourSole Proprietorship – the business is owned by a single individual

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6 Choosing the Form that Fits

• What are the four basic forms of business and their

characteristics?

• What are the advantages and disadvantages of a sole

proprietorship?

• What are the pros and cons of partnerships?

• Why have corporations become the dominant form of

business ownership?

6 Business Ownership Options: The Big Four

Sole Proprietorship – the business is owned by a single

individual

Partnership – two or more people serve as co-owners

of the business

Corporation – the business is a separate legal entity

Limited Liability Company – a hybrid with

characteristics of both a corporation and partnership

6 Business Ownership Options: The Big Four

6 Advantages and Disadvantages of Sole

 Lack of Continuity

6 Partnerships: General vs Limited

6 Partnerships:

Two Heads (and Bankrolls) Can Be Better Than One

Limited Partnership –

includes at least one

general partner and at

least one limited partner

Limited Liability Partnership –

all partners are actively involved but they have some form of limited liability The amount of liability differs

per state.

Limited partners have

limited liability.

6 Keeping It All in The Family:

Family Limited Partnerships (FLIPS)

• Parents transfer assets to limited partners while still

maintaining control, this strategy:

• Reduces gift and inheritance taxes

• Protects family assets from creditors and lawsuits

• Parents as general partners

• Children as limited partners

• Watch out for the IRS – Family Limited Partnerships can

attract tax auditors!

6 Corporations: The Advantages and Disadvantages of

Being an Artificial Person

• A corporation is a legal entity, separate and distinct

from its owners.

• Corporations are owned by stockholders.

• The Board of Directors establishes the mission and

objectives.

• The Board is elected by the stockholders to represent their interests.

6 Corporations: The Advantages and Disadvantages of

Being an Artificial Person

Disadvantages:

• Expense/complexity of formation and operation

• Easy to Transfer Ownership

• Ability to Raise Capital

• Specialized Management

6 Corporations: The Role of Board of Directors

• Oversee the operation of corporation and protect investors’

interest

• Establish mission and set objectives

• Rarely get involved in day-to-day management

• Responsible for monitoring the performance of the corporate

officers

6 Other Types of Corporations: Same but Different

• S Corporation

• Closed Corporation

• Nonprofit Corporation

6 This TARP Has Executive Pay Covered

• CEO pay of 12 major corporations totaled $1.26 billion while the

firms lost $330 billion in shareholder value

• Executive pay issues have been amplified as the economy spirals into recession

• Government bailout (TARP) limits CEO compensation

• Board of Directors are supposed to protect the interest of

stockholders

• But many of the CEOs have clauses that provide lucrative severance

6 Corporations: Characteristics

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S Corp. • IRS does not tax earnings

separately

• Stockholders have limited liability

• No more than 100 stockholders

• Stockholders must be U.S

citizens or permanent residents

• Limited number of stockholders

• Stockholders must offer shares to owner first before selling publicly

• Not all states allow this corporation type

Nonprofit

Corp. • Earnings are exempt from federal and state income taxes

• Members/directors have limited liability

• Contributions made by individuals are tax-deductible

• May have dues paying members but no stockholders

• Can’t distribute dividends

• Can’t make political donations

• Must keep accurate records to

6 Corporate Restructuring: Mergers & Acquisitions

Corporations look for:

6 Types of Mergers & Acquisitions

Type of

Merger Definition Objective Example

Horizontal Combine firms in

same industry • Increase size

• Increase market power

• Gain efficiency

AT&T and SBC

Vertical Combine

companies with buyer-seller relationship

• Provide tighter integration and increase control

Time Warner and Turner Broadcasting

Conglomerate Combination of

unrelated companies

• Increase company’s diversity GE acquiring RCA

6 Divestitures: When Less is More

Divestitures allow the firm to streamline their

operations and focus

•Spin-off – setting up the division or part of the

business as a separate company

Sell stock to existing stockholders

•Carve-out – setting up a separate business from an

operation

6 Breakin’ Up Is Hard to Do—Even in the Corporate

World

• The 1998 Daimler acquisition of Chrysler ended in 2007

• The strategy was to build a global automobile brand

• But, the corporate cultures were not compatible and the product mix

was not focused

• Daimler had huge expenses

• Daimler sold Chrysler and many analyst believe they paid to get rid

of the company

6 The Limited Liability Company:

The New Kid on the Block

6 Franchising: Proven Methods for a Price

• Not a form of ownership but an operation option

• Build-a-Bear

• Subway

• Jiffy Lube

• McDonald’s

• The franchisee uses the brand

name, trademark and practices of

the franchisor.

6 Franchising: Proven Methods for a Price

6 Some Franchisees Are Quite Happy When They Don’t

Earn Profit

 Many customers like doing

business with nonprofit franchisees.

 Nonprofit franchising is a good

way for companies to be socially responsible and build goodwill.

 Nonprofits can boost their

fundraising efforts.

6 Franchising in Today’s Economy

• Franchising has been expanding into foreign markets.

• McDonald’s has slightly more franchises abroad than

in the U.S.

• The number of women franchisees and franchisors is growing.

• Minority participation in franchising is low.

The International Franchising Association has launched an initiative to recruit minority franchisees.

6 Franchising in Today’s Economy

6 Entering Into A Franchise Agreement

• Know all the facts before signing the dotted line

• Franchisors must provide a Franchise Disclosure

Document (FDD)

• The Federal Trace Commission (FTC) require:

 The FDD Must be written in plain English

 The franchisor must be give 14 days to review the FDD

 The Franchisee should have a lawyer review the

• What are the pros and cons of partnerships?

• Why have corporations become the dominant form of