Chapter 6

What are the three main forms of business organization, and what factors should a company’s owners consider when selecting a form?

What are the advantages and disadvantages of sole proprietorships?

Why would a new business venture choose to operate as a partnership, and what downside would the partners face?

How does the corporate structure provide advantages and disadvantages to a company and what are the major types of corporations?

Does a company have any business organization options besides sole proprietorship, partnership, and corporation?

Why is franchising growing in importance? Why would a company use mergers and

acquisitions to grow? What trends will affect business organization

in the future?

What are the three main forms of business organization, and what factors should a company’s owners consider when selecting a form?

Sole proprietor • Partnership • CorporationSole proprietor • Partnership • CorporationChoose a form of organization by evaluating:

Owner’s liability for firm’s debtsThe ease and cost of forming the businessThe ability to raise fundsThe taxesThe degree of operating control the operator can retainThe ability to attract employees

Number Sales Profits

Sole proprietorshipsPartnershipsCorporations

• What are the advantages and disadvantages of sole proprietorships?

AdvantagesAdvantageseasy and inexpensive

to form & dissolveprofits all go to ownerdirect control of

businessfreedom from

government regulations

no special taxation

DisadvantagesDisadvantageshard to raise capitalunlimited liability &

potential losslimited expertise in all

areastrouble finding

employeeslarge personal time

commitmentunstable business life

Advantages of Advantages of PartnershipsPartnerships Ease of formation Availability of capital Diversity of managerial

expertise Flexibility to respond to

changing business conditions Relative freedom from

government control

Disadvantages of Disadvantages of PartnershipsPartnerships Unlimited liability for general

partners Potential for conflict between

partners Limited life Sharing of profits Difficulty in leaving a

partnership

• Why would a new business venture choose to operate as a partnership, and what downside would the partners face?

AdvantagesAdvantageseasy and inexpensive

to formdiverse skills and

expertiseflexibilityrelative freedom from

government regulations

no special taxation

DisadvantagesDisadvantagespotential conflicts

between partnersunlimited liability &

potential losssharing profitshard to leave or end

partnership

Purpose & duration of partnershipRoles, responsibilities, compensationContributionsProcedures for adding/removing

partnersBuy-out proceduresDispute resolutionFinancial arrangementsDissolving the partnershipValuation

Source: American Express Small Business Exchange, home3.americanexpress.com/smallbusiness

CorporationCorporation::A legal entity with an existence and life separate from its owners, who therefore are not personally liable for its debts; it can own property, enter into contracts, sue and be sued, and operate under terms of its state charter.

• Why does the corporate structure provide advantages and disadvantages to a company, and what are the major types of corporations?

AdvantagesAdvantageslimited liabilityeasy to get financingeasy to transfer

ownershipunlimited life-spantax deductions

DisadvantagesDisadvantagesdouble taxation of

profitscostly & complex to

formgovernment

restrictions

How does the corporate structure provide advantages and disadvantages to a company, and what are the major types of corporations? StockholdersStockholders

Own the corporation Can sell or transfer shares at any time Entitled to receive profits in the form of dividends

Board of DirectorsBoard of Directors Elected by stockholders Govern the firm

OfficersOfficers Carry out the goals and policies set by the board

C Corporations, S Corporations & Limited Liability C Corporations, S Corporations & Limited Liability CompaniesCompanies

Major types of corporations

1.1. Select company’s name2. 2. Write and file Articles of

Incorporation paperwork3. 3. Pay fees and taxes4. 4. Hold organizational meeting5. 5. Adopt bylaws, elect directors,

pass operating resolutions

Organizational Structure of Organizational Structure of CorporationsCorporations

Stockholders

Directors

Officers (Top Management)

President Vice Treasurer Secretary President

elect

elect

1.1. S corporationsS corporationsorganized like a corporation, but avoids double taxation of profits by routing income and losses through stockholders

2.2. Limited liability companies (LLC)Limited liability companies (LLC)offers same limited liability as a corporation, but may be taxed as either a partnership or corporation

ProsProsProtection of

personal assetsAvoid double-

taxation of profitsFlexible

management & organization

Good for foreign investors

ConsCons

• Often required to have a limited life (< 30 years)

• Not corporations, so can not issue stock

Source: The Company Corporation, www.incorporate.com

Does a company have any business organization options besides sole proprietorship, partnership, and corporation? Limited Liability CompanyLimited Liability Company

Provides limited liability for its owners Taxes like a partnership

CooperativesCooperatives Collectively owned by individuals or businesses with similar interests Combine to achieve more economic power

Joint ventureJoint venture An alliance of two or more companies Formed to undertake a special project

FranchisesFranchises Business arrangement between a franchisor and franchisee Franchisee uses business name and logo of franchisor

1. 1. Cooperatives

2. 2. Joint ventures

3. 3. Franchises

Formed by people with similar interests, such as customers and suppliers lower costs increased economic power share in profits

Members/owners pay annual fees Common in:

agriculturehardware/lumbergrocery

Joint Venture:Joint Venture:2 or more companies form an alliance to pursue a specific project, usually for a specific time period

Why is franchising growing in importance?Business owner does not have to start from

scratchBuys a business concept with a proven product

and operating methodsFranchisor provides:

Management training and assistanceUse of a recognized brand name, product, and

operating conceptFinancial assistance

Franchising:Franchising:business organization in which a franchisor supplies the product concept to the franchisee, who sells the goods or services

AdvantagesAdvantagesincreased opportunity to

expand (franchisor)recognized name,

product, and operating concept (franchisee)

management training and assistance (franchisee)

financial assistance (franchisee)

DisadvantagesDisadvantagesloss of control

(franchisor)costs of franchisingrestricted operating

freedom (franchisee)

Why would a company use mergers and acquisitions to grow?Companies use mergers and acquisitions for

strategic reasons such asGrowth or diversification of product linesIncreased market shareEconomies of scaleFinancial restructuring to increase company value

to stockholders

Merger:Merger:The combination of 2 or more firms to form a new company, which often takes a new corporate identity

Acquisition:Acquisition:The purchase of a corporation by another corporation or investment group

Reduced:Reduced: costs overlap in

operations competition

Increased:Increased: purchasing

power market share

1. Horizontal mergersHorizontal mergerssame industry, same stage of production

2. Vertical mergersVertical mergerssame industry, different stages of production

3. Conglomerate mergersConglomerate mergersdifferent industries

4. Leveraged buyoutsLeveraged buyoutscorporate takeovers with borrowed money

What trends will affect business organization in the future?Service sector is growing to meet demand for

convenience from working women and two-income familiesProviding service for children and senior citizensResale shops and other specialty markets

Established franchisors are remaining competitive byOffering multiple conceptsNew types of outlets and expanded products

Increases in:Increases in: Niche markets Variety in franchises

Expect more franchised goods & services that ease consumers’ busy lives (Source: Entrepreneur, Jan. 2000, p. 157)

Consolidation through mergers & acquisitions

Mergers across national borders