Topic 3 (Chapter 4) Options for Organising Business PDF

Topic 3 (Chapter 4 in text book ) Options for Organising Business © 2023 McGraw Hill, LLC. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the...

Topic 3 (Chapter 4 in text book ) Options for Organising Business © 2023 McGraw Hill, LLC. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw Hill, LLC. ©McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education.  Introduction If you are setting a business, would you want to own the business on your own? Or you want other people share to contribute capital? Would you want your business to have shares? One of the most basic decision you must make when starting a business is selecting a form of business ownership Why? A business’s legal form of ownership affect how it operates, how much it pays in taxes, and how much control its owners have. In this chapter, we will discuss three(3) main forms of business ownership – 1. sole proprietorship , 2 partnership, 3 corporation And weighs the advantages and disadvantages of each. ©McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education.  Forms of business ownership(short note) Business firms/business organisation Owner of the business 1Sole proprietorship Sole proprietor 2Partnership Partners 3Corporation - Bhd, Sdn Bhd Shareholders ©McGraw-Hill Education.  Short notes 3 main form of business ownership 1.) Sole proprietorship – one owner, no shares, owner have unlimited liability, lack continuity 2.) partnership – 2 to 20 or 50 owners, generally no shares, owners have unlimited liability, lacks continuity 3) Corporation – shares, (Sdn Bhd , Bhd ) , owners have limited liability , perpetual life ©McGraw-Hill Education.  Unlimited liability vs Limited liability Unlimited Liability ( Sole propretorship &partnership) if the business owe bank or creditor RM 1 million , THE OWNER of sole propretorship must pay back to bank or creditor RM 1 million. if the owner cannot payback , he or she need to declare bankruptcy Limited liability ( corporation) if the business owe bank or creditor RM1 million , THE BUSINESS must payback to bank or creditor RM1 million. if the business cannot payback, THE COMPANY need to declare bankruptcy, not the shareholder. ©McGraw-Hill Education.  Learning Objectives 4-1 Define and analyze the advantages and disadvantages of the sole proprietorship form of organization. 4-2 Identify two types of partnership and evaluate the advantages and disadvantages of the partnership form of organization. 4-3 Describe the corporate form of organization and cite the advantages and disadvantages of corporations. ©McGraw-Hill Education. Private sector vs Public sector ©McGraw-Hill Education.  Examples of business organisation in private sector and public sector Organisation owned by public Examples of business sector organisation in Private sector Maybank General Hospital Samsung Kementerian Kewangan Apple University Malaya , all public McDonald univeristy Grand Kampar Hotel LRT Utar Permodalan Nasional Berhad Tarc UMT ©McGraw-Hill Education.  Private Sector vs. Public Sector. A.Private Sector Firms in the private sector are owned by individuals or a group of individuals. Most basic goal – produce a profit for its owners. ©McGraw-Hill Education. Public Sector. The public sector’s commercial activities (traditionally power, transportation and communications) were normally undertaken by public corporoations. (***Organisations owned by government) Other states activities – the provision of education, defense, and aid to industry or local services are provided by central or local government administrative units ©McGraw-Hill Education.  Forms of ownership/business Owned and managed Owned by by One 2 – 20 2 to person people unlimited Sole people Partnership proprietorship Corporation ©McGraw-Hill Education.  The essential feature of public corporation is that the assets of an industry have been taken over by the state so that the industry is owned, managed and controlled by the community. The public corporation’s objectives are far more complex. While public corporations were nationalized so as to ensure that certain goods and services were provided efficiently, they did at the same time have to pursue non-commercial goals. ©McGraw-Hill Education. Structure Ownership Taxation Liability Use (debt) Individual Owned by a single individual/ Sole One owner income taxed Unlimited easiest way to conduct Proprietorship (personal tax) business General Individual partners – Two or more owners’ unlimited Easy way for two individuals Partnership owners income taxed Limited to conduct business (personal tax) partners - limited Double Any number of taxation – shareholders corporate tax Private corporation : Legal entity with shareholders Corporation and Limited 1 to 50 or stockholders Public corporate :2 to shareholder unlimited pay personal tax Legal entity with tax Up to 100 Taxed as a S Corporation Limited advantages for restricted shareholders partnership number of shareholders Limited Unlimited number Taxed as a Liability Limited Avoid personal lawsuits of shareholders partnership Company ©McGraw-Hill Education.  Business - Sole proprietorship :a business owned and usually managed by one person Sole proprietor ©McGraw-Hill Education.  Sole Proprietorships 1 Businesses owned and operated by one individual Most common form of business organisation. Sole proprietorships are typically small businesses employ fewer than 50 people ©McGraw-Hill Education.  Sole Proprietorships 2 Advantages of Sole Proprietorships 1Ease and cost of formation did not have many legal procedures and start-up costs are low 2Secrecy They make possible the greatest degree of secrecy; minimizes the possibility of competitors gaining trade secrets. 3Distribution and use of profits All profits belong to the owner directly ©McGraw-Hill Education. 4Flexibility and control of the business The owner has complete control over the business allowing them to respond quickly to changing business conditions. 5 Government regulation Sole proprietorships have the most freedom from government regulation. ©McGraw-Hill Education.  Quiz(True/False) 1) The sole proprietor has to go through a lot of legal steps to set up the business (T/F) 2) It is difficult for competitors to get the information and account of the sole proprietor (T/F) 3) If Chong Ah Mun help his father to manage the sole proprietorship which is registered under his father Chong Ah Kow, the son and the father together owned the business 4) The sole proprietor has to discuss with other parties to make decision for his business ©McGraw-Hill Education. 6.Taxation pay tax at personal tax , lower than the tax paid by corporations 7.Closing the business No need to go through many legal procedures to close down the business ©McGraw-Hill Education.  Disadvantages of Sole Proprietorships 1Unlimited liability The owners has to be fully liable towards the business firm’s debt. The owner may have to sell his own assets to pay for the business’ firm debt. 2 Limited sources of funds difficult to find the extra capital to expand or start a sole proprietorship 3 Limited skills owner must expertise in many skills such as management, accounting & finance. ©McGraw-Hill Education.  Disadvantages of sole Proprietorships ( cont) 4Lack of continuity When the owner die or bankrupt, , the business firms has to be closed. 5Lack of qualified employees difficult to find qualified employees because small company cannot pay to high salary and benefits like corporations. 6Taxation In certain countries that set progressive tax rate, rich sole proprietors may have to pay higher tax rate than a corporation ©McGraw-Hill Education.  Quiz 1) Chong Ah Mun is helping his father Chong Ah Kow to run the sole proprietorship Ah Kow Trading, one day Chong Ah Kow die, can Chong Ah Mun continue to own the business ? Why _________ ©McGraw-Hill Education.  Partnerships 1 A form of business organisation defined as “an association of two or more persons who carry on as co-owners of a business for profit” Least used form of business (typically for Professional group , lawyer ) Typically larger than sole proprietorships but smaller than corporations ©McGraw-Hill Education. Two (2) types of partners: General partners – have unlimited liability, Can manage the business (can make decision to run the business) Limited partner – have limited liability (no need use own money to pay for the business firm’s debt) and Cannot manage the business (cannot make decision to run the business), they just share profit and loss ©McGraw-Hill Education.  Partners Business - Partnership ©McGraw-Hill Education.  TWO(2) Types of partnership 1)General partnership – all partners are general partners. All partners can manage the business , and they have unlimited liability -If there are 10 partners , ALL 10 are general partners 2) Limited partnership – There are some general partners and some limited partners in the limited partnership. At least one partner is general partner. General partners have _unlimited______ liability and _can___ manage the business. Limited partners have __limited____ liability and _cannot_____ manage the business Eg 10 partners – 2 limited partners, and 8 general partners ©McGraw-Hill Education.  Quiz(True/False) 1) General partnership have one type of partners 2) All partners in a general partnership can manage the business 3) All partners in a limited partnership have limited liability 4) There must be at least one general partner in a limited partnership (T/F) Why? ©McGraw-Hill Education.  General Lee & Lim Clinic partnership Dr. Lee Dr. Lim (works in (works in the clinic) the clinic) General partner General partner (Unlimited (unlimited liability) liability) ©McGraw-Hill Education.  Muthu & Ali Limited partnership Clinic Muthu Ali (works in (provides financial resources) the clinic) ( do not participate in the management of business) General partner (unlimited Limited partner liability) (Limited liability) ©McGraw-Hill Education.. (iv) - Articles of partnership are legal documents that set forth the basic agreement between partners. Most states require articles of partnership, but even if they are not required, it makes good sense for partners to draw them up. ©McGraw-Hill Education.  Advantages of Partnerships 3 1. Ease of organization easy to be form and start-up costs are low. 2.Availability of capital and credit - can pool financial resources of the partnership. - have higher credit ratings due to the partner’s combined wealth. 3.Combined knowledge and skills Partners can specialize in their particular areas of expertise such as marketing, production, accounting or service. ©McGraw-Hill Education. 4.Decision making - Small partnership can react more quickly to changes in the business conditions than corporations. 5.Regulatory controls - Only few rules set by government to control partnership. ©McGraw-Hill Education. 6.Tax Benefit –Pay tax at personal tax, lower than the tax paid by corporations. ©McGraw-Hill Education.  Disadvantages of partnership 1) Unlimited liability -general partners has to fully liable for the business debt. 2) Business responsibility - one partner make a bad decision can put the other partner’s personal resources at risk 3) Life of the partnership (Lack of _continuity) When one of the partners __die or bankrupt, , the partnership has to be _end ©McGraw-Hill Education.  Disadvantages of partnership 4) Distribution of profits -The sharing of profits between partners may not be according to the workload or effort of each partner. -Some partners may not contribute much to the business but may still share the same profit as other partners who contribute more 5) Limited sources of funds - difficult to borrow capital (money)from bank. ©McGraw-Hill Education.  Corporation owner legal entity Boon Siew Sdn Bhd (private) ©McGraw-Hill Education.  Corporations 1 A legal entity, created by the state, whose assets and liabilities are separate from its owners (separate legal identity) Characteristics:- ✔ Has many of the rights, duties, and powers of a person. E.g. provide safe products ✔ Can own and transfer property ✔ Can enter into contracts ✔ Can sue and be sued in court ©McGraw-Hill Education.  Corporations -Has separate legal identity from its owner -(EG: ABC Sdn Bhd- shareholder Mr A, Mr B, Mr C. From Legal aspect, ABC Sdn Bhd and Mr A, Mr B, Mr C are different parties – just like Mr A cannot represent ABC Sdn Bhd) -Can Mr A (shareholder) sue ABC Sdn Bhd? Can ABC sue Mr A? ©McGraw-Hill Education.  Corporations owned by many individuals and organisations who own shares of the business( shareholders ). Shareholders are entitled to all profits that are left after all the corporation’s other obligations have been paid. These profits may be distributed in the form of cash payments called dividends. ©McGraw-Hill Education.  Bursa Malaysia is the country’s stock exchange and operates as a platform which offers a range of exchange-related products and services for companies, groups and governments to sell securities to the public ©McGraw-Hill Education.  2 types of corporation Public Private corporation corporation -Sdn Bhd( LWD Industry Sdn Bhd) -_Bhd___(Tenaga -Limited to ___50__ National Berhad) shareholders -No limit no of -- _Cannot_____ sell shareholder share to the public -__can__ sell share to the public ©McGraw-Hill Education.  Type of Corporations 4 Private corporation - Owned by just one or a few people closely involved in managing the business No stock is sold to public Not required to disclose financial information publicly May become public via initial public offering (becoming a public corporation by selling stock so that it can be traded in public markets ©McGraw-Hill Education.  Types of Corporations 5 Public corporation A corporation whose stock anyone may buy, sell, or trade (can sell shares in the share market). Publicly owned corporations must disclose financial information to the public under specific laws that regulate the trade of stocks and other securities(quartely report&annual report) A public corporation can become private if it buys back all its shares from the market. ©McGraw-Hill Education.  Public Corporation ©McGraw-Hill Education.  Corporations 6 Elements (parts)of a Corporation The board of directors (group of directors) Elected (Selected) by shareholders to manage the general operation of the corporation Sets long-range objectives of the corporation Ensures objectives are met on schedule Hires corporate officers (CEO, CFO, COO) Outside directors ( Non executive director) Cannot oversee/manage the operation of the company Inside directors ( executive director) Can oversee/manage the operation of the company ©McGraw-Hill Education.  HOW OWNERS AFFECT * MANAGEMENT LG3 * 5-46 ©McGraw-Hill Education.  Elements of a Corporation Corporations issue 2 types of shares : 1)preferred and 2)common Stock ownership 1Preferred stock(Preference Shares) shareholders who own preferred stock _cannot____ vote to make decision for the company – only share profits or loss. But when corporation issues dividend (sharing of profit with shareholders) preference shareholders will get it first 2Common stock (Ordinary Shares) shareholders who own common stock __can___ vote to make decision for the company. But they do not always get the dividend issued by the company May vote by proxy -a written authorization by which shareholders assign their voting privilege to someone else, who then votes for his or her choice at the shareholder’ s meeting. Have preemptive rights -gives current shareholders the first opportunity to buy more shares before new investors can. ©McGraw-Hill Education.  Proxy ©McGraw-Hill Education.  quiz 1) Private corporations cannot sell shares to the public (T/F) 2) All the decision in a corporations has to be approved by the highest authority _____________. CEO reports to the board of director 3) Public corporations can raise capital easier because they can sell shares to the public (T/F) 4) Preference stockholder do not have voting rights 5) Common stockholders will get the dividend before preference shareholders get (T/F) ©McGraw-Hill Education.  Advantages of corporations 1Limited liability – Shareholders do not have to be fully liable for the corporation’s debt. - They only will lose up to the total amount of money they invested. Eg , if a shareholder have RM10,000 shares , if the corporation bankrupt he will lose __RM10K_____ 2) Ease of transfer of ownership – for public corporation, it is easy to buy and sell shares, they can buy the corporations shares in the share market. 3) Perpetual life – Corporation did not affected by the shareholder. If the shareholders die or bankrupt, the corporation no need to dissolved. ©McGraw-Hill Education. ©McGraw-Hill Education. 4) External sources of funds -easy raising money than other forms of business. -Public corporations can sell shares to the public 5) Expansion potential - easy to expand into new businesses because of ability of the company expand into national and international markets. ©McGraw-Hill Education.  Disadvantages of corporation 1) Double taxation - corporations need to pay corporate tax on profit. - shareholders must pay personal tax when received dividend. 2Expensive to form -has to go through many legal Procedures to set up a corporations. -Need to prepare many documents. -Take a longer time to form a corporation ©McGraw-Hill Education. 3 Disclosure of information - corporations must submit their financial information to the public. - competitors can easy to access the financial information. 4) Employee-owner separation - if employees did not owned shares they are still employee - but if directors do not own the shares, they are not the owner of the corporations - they may think that they are working hard just to get profit for the shareholders. ©McGraw-Hill Education.  Other Types of Ownership Joint Ventures 2 business organisations have a cooperation relationship to run a project , they may set up a new company which is owned by these 2 companies. S Corporations A type of corporation which does not need to pay __corporate_____ tax. Profits are distributed to shareholders, shareholders pay __personal___ tax. Shareholders have __limited_______ liability. But the number of shareholders are limited to 100_ persons ©McGraw-Hill Education.  ExtraOther Types of Ownership 2 Limited Liability Companies (LLCs) A corporation that does not have to pay corporate tax. Shareholders pay personal tax and have limited liability. They can have ___unlimited_____ number of shareholders Example: Google LLC ©McGraw-Hill Education.  Cooperatives (co-ops) A cooperative is formed by many_small businesses that band together (eg many sole proprietorship and partnership band together to form) to get benefits for their members. Example, they can buy large quantity to enjoy discounts. ©McGraw-Hill Education. 1930 - Three cranberry growers who wanted to expand their market for cranberries. 1976- extend membership to grapefruit growers. ©McGraw-Hill Education.