Forms of Ownership (ch5) PDF

LE: Forms of Ownership (ch5) Week # of sessions year 1.1.1 Lecture course MTP Sole propietorship Business owned by one person farms retail establishments small service businesses home-based businesses If you’re paid for performing any kind of service without being on a company’s payroll, you’re...

LE: Forms of Ownership (ch5) Week # of sessions year 1.1.1 Lecture course MTP Sole propietorship Business owned by one person farms retail establishments small service businesses home-based businesses If you’re paid for performing any kind of service without being on a company’s payroll, you’re legally classified as a sole propietor Advantages of Sole Propietorships Simplicity Easy to establish and far less paperwork than other structures Single layer of taxation Income tax. Federal government doesn’t recognize the company as a taxable entity Privacy Generally are’t required to report anything to anyone Flexibility & Control You aren’t requirede to get approval to change any aspects of your business strategy or tactics LE: Forms of Ownership (ch5) 1 Fewer limitations on personal income You keep all the after-tax profits the business generates Personal satisfaction Satisfaction of working for themselves Disadvantages of Sole Propietorships Financial Liability Owner and the business are legally inseperable, which gives propietor unlimited liability Unlimited liability Legal condition under which any damages or debts incurred by a business are the owner’s personal responsibility Any legal damages or debts incurred by the business are the owner’s personal responsibility Demands on the owner You often have the stress of making all the major decisions, solving all the major problems 💡 Business owners can feel isolated and unable to discuss problems with anyone Limited managerial perspective Running a business requires expertise in accounting, marketing, information technology, business law, and many other fields. Resource limitations Have fewer financial resources and fewer ways to get additional funds from lenders or investors Lack of capital limits its ability to expand, hire the best employees, and to survive rough economic periods. No employee benefits for the owner No paid vacation time, sick leave, health insurance, and other benefits that many employers offer Finite life span Owner’s death may mean the demise of the business LE: Forms of Ownership (ch5) 2 Partnerships Unincorporated company owned by two or more people 💡 Appropiate for firms that need more resources and leadership talent than a sole propietorship but don’t need the fundings of a corporation General Partnerships Limited Partnerships Partnership in which all partners have joint authority to make decisions for the firm and joint liability for the firm’s financial obligations Partnership in which one or more people act as general partners who run the business and have the same unlimited liability as sole propietors Master Limited Partnership (MLP) Limited Liability Partnership (LLP) Partnership that is allowed to raise money by selling units of ownership to the general public Partnership in which each partner has unlimited liability only for his own actions and at least some degree of limited liability for the partnership as a whole Advantages of Partnerships Simplicity Easy to establish Single layer of taxation Profit is split between the owners based on whatever percentages they have agreed on. Each owner treats his share as personal income More resources Increase the amount of money you have to launch, operate, and grow the business Potentially raise more money since partners’ personal assets support a larger borrowing capacity Cost sharing Opportunity to share costs. Broader skill & experience base Pooling the skilss and experience of two or more professionals can overcome one of the major shortcomings of the sole propietorship LE: Forms of Ownership (ch5) 3 Longevity Increase the chances that the organization will endure because new partners can be drawin into the business Disadvantages of Partnerships Unlimited liability Face same unlimited liability as sole propietors. However, risk of financial wipeout can be greater since more people are making decisions that could end in a catastrophe Potential for conflict Partners can disagree over business strategy, the division of profits,and hiring and firing of employees. Expansion, sucession, and termination issues Handling issues as expanding by bringing an additional partner, replacing a partner who wants to sell, and temrinating a partner who is unable or unwilling to meet the expectations in the organization. Said issues can destroy partnerships if the owners don’t have clear plans and expectations for addressing them Keeping It Together: Partnership Agreement Carefully written partnership agreement can maximize the advantages of the partnership structure and minimize the potential disadvantages. Should address… Investment percentages Profit-sharing percentages Management responsibilities Decision making stategies Succession and exit strategies Criteria for admitting new partners Dispute resolution procedures LE: Forms of Ownership (ch5) 4 Corporations Legal entity, distinct from any individual people, that has the power to own property and conduct business Owned by shareholders and investors Shareholders Investors who purchase shares of stock in a corporation Public Corporation Private Corporation Stock of public corporation is sold to anyone who has the means to buy it— Stock of private corporation is owned by only a few individuals or companies and individuals, investment companies, not- is not made available for purchase by for-profit organizations, other companies. the public. 💡 Companies can change from private to public as their financial needs and strategic interests change Advantages of Corporations Ability to raise capital Ability to pool money by selling shares of stock outside investors Potential for raising vast amount gives corporations an unmatched ability to invest in, reseacrh, marketing, facilities, acquisitions, and other growth strategies Liquidity Investors can easily and quickly convert their stock into cash by selling it on the open market. LE: Forms of Ownership (ch5) 5 Liquidity Measure of how easily and quickly and asset such as corporate stock can be converted into cash by selling it -Helps make corporate stocks an attractive investment, which increases the number of people willing to invest in such companies 💡 A corporation could use its own stock to acquire other companies Longevity Finding willing buyers for a corporation’s stock is generally much easier than in any form of ownership Limited liability Corporation itself has unlimited liability but the shareholders face only limited liability— their maximum potential loss is only as great as the amount they’ve invested in the company Disadvantages of Corporations Cost & Complexity More expensive and more complicated than any other form of ownership Reporting requirements Government agencies require publicly traded companies to publish extensive and detailed financial reports Reports can take off a lot of management time, and can expose strategic info that might benefit competitors and discourage investors Managerial demands Top executives must devote considerable time and energy to meeting wiht shareholders, financial analysts, and the news media Possible loss of control Outside investors can acquire enough of a company’s stock can begin exerting their influence on company management. -Can take complete control and even replace the compay founders LE: Forms of Ownership (ch5) 6 Double taxation Must pay federal and state corporate income tax on its profits, and individual shareholders on their share of the company’s profits received Short term orientation of the stock market Release financial results every quarter can have a damaging effect on the way companies are managed. Special types of Corporations S corporation Benefit corporation Combines the capital- Limited liability company (LLC) raising options and limited Combines limited liability or enviornmental goal that liability of a corporation with the federal taxation advantages with the pass through taxation benefits of a partnership the company must pursue in addition to profit Corporations seeking # of shareholders is “S” status must include 100 investors not restricted recommended for most small companies Charter specifies a social set up a nonfinancial goal Even if entrepeneurs lose give up, the company is still legally required to pursue it’s nonfinancial goal Corporate Governance Broad sense: All the policies, procedures, relationships, and systems inplace to oversee the succesful and legal operation of the enterprise Narrow sense: Responsibilities and performance of the board of directors specifically LE: Forms of Ownership (ch5) 7 Shareholders who own common stock elect a board of directors to represent them Directors select the corporation’s top officers, who actually run the company Shareholders 💡 Don’t have any direct involvement in company management All shareholders who own common stock are invited to an annual meeting where top executives present the previous year’s results and plans for the upcoming year. Shareholders vote on various resolutions that may be before the board. Those who are not able to vote on the meeting, do it through proxy Proxy A document taht authorizes another person to vote on behalf of a shareholder of a corporation Shareholder activism Activities undertaken by shareholders to influence executive decision making in areas ranging from strategic planning to social responsibility Board of Directors Members of the board of directors are responsible for selecting corporate officers guiding corporate affairs reviewing long term plans making major strategic decisions overseeing financial performance LE: Forms of Ownership (ch5) 8 Typically compsoed by major shareholders, philanthropists, and executives from other corporations 💡 Directors are often paid a combination of an annual fee and stock options Board-related issues Composition Ideal board is a balanced group of seasoned executives who can bring something to the table, whether it be contacts, manufacturing experience, insight into global issues… Education Members are expected to understand everything from government regulations to financial management to executive compensation strategies. Liability Potential for directors to be legally and financially liable for misdeeds of the companies they oversee Independent board chairs The board chair oversees the other members of the board of directors but leading critics to ask how effectively can they oversee management. Recruiting challenges Well chosen board memebers are more vital than ever so corporate and government leaders have no choice but to solve these challenges Corporate Officers Corporate officers are top executives who run a corporation Make major board decisions Mane numerous business decisions Ensure compliance with a range of regulations Perform other essential tasks The highest ranking offices is the chief executive officer (CEO) LE: Forms of Ownership (ch5) 9 Corporate officers are hired by the board and generally have legal authority to conduct the company’s business, from hiring the rest of the employees to launching new products. Mergers & Acquisitions Mergers Acquisitions Action taken by two companies to combine as a single entity Action taken by company to buy a controlling interest in the voting stock of Can merge by… another company Pooling their resources One company purchasing the assets of the other Consolidation happens when two companies create a new, third entity Hostile take over Acquisition of another company against the wishes of management Leverage buyout (LBO) Acquisition of company’s publicly traded stock, using funds that are primarily borrowed; with an intent of using acquired assets to pay back the loans Advantages of Mergers & Acquisitions Strategic tool to expand Increase their buying power Increase revenue Increase market share Gain access to new expertise Replace or improve inept management Reduce overlapping investments LE: Forms of Ownership (ch5) 10 Disadvantages of Mergers & Acquisitions Executives have to agree on how the merger will be financed Managers need to decide who will be in charge once joint forces Marketing departments need to figure out how to blend product lines and branding strategies Incompatible information system may cause rebuilding in order to operate together seamlessly Layoffs, transfers, and changes in job titles Harmonized organizational structures, can result in clashes between different values, managemnet styles, practices… Tender offer Proxy fight Buyer offers to buy a certain Buyer launches a public number of shares of stock for relations battle for shareholder an incredible higher price than votes, hoping to enlist enough the actual current stock, so votes to oust the board and shareholders are motivated to management sell. Hopes to get enough shares to take control of the corp and replace the existing board of directors Strategic Alliances and Joint Ventures Strategic Alliances Joint Ventures Long term partnership between Separate legal entity established by two companies to jointly develop, produce or sell products or more companies to pursue shared business objectives LE: Forms of Ownership (ch5) 11 Help gain credibility in a new field Expand its market presence Gain access to technology Diversify offerings Share best practices without forcing partner to be permanently entangled LE: Forms of Ownership (ch5) 12