(BUS 150) Chapter 5: Forms of Ownership

Private Corporation

A corporation in which all the stock is owned by only a few individuals or companies and is not made available for purchase by the public.

Public Corporation

A corporation in which stock is sold to anyone who has the means to buy it. A public company is able to raise substantial amounts of capital in the public capital markets, trading ownership shares as well as control of the company. At the same time, public companies are subject to higher levels of costly reporting, regulations, and public scrutiny.

Proxy

A document that authorizes another person to vote on behalf of a shareholder in a corporation.

Board of directors

A group of professionals elected by the shareholders as their representatives, with responsibility for the overall direction of the company and the selection of top executives.

Corporation

A legal entity, distinct from any individual persons, that has the power to own property and conduct business

Acquisition

An action taken by one company to buy a controlling interest in the voting stock of another company.

LBO (Leveraged Buyout)

An aggressive move, an acquisition of a company's publicly traded stock, using funds that are primarily borrowed, usually with the intent of using some of the acquired assets to soy back the loans used to acquire the company.

Partnership

An unincorporated company owned by two or more people.

Education (Board of Directors)

Board members are expected to be educated in a wide spectrum of areas from government regulations, to financial management, to executive compensation strategies, in order to be able to make such impactful decisions in the company. Some companies offer special training programs or orientation sessions for directors in such areas as financial reporting, compliance challenges, product research, manufacturing and human resources issues.

Sole Proprietorship

Business (generally small) owned by one person, however, it may have many employees. Sole proprietors are paid for goods or for performing a service, without being on the company's payroll. Example: local grocery store, consulting company, art studio, etc.

Disadvantages of Corporations

Cost and complexity: Establishing a corporation requires more money than any other type of partnership. In addition, taking an existing company public can also be very time consuming and expensive. Reporting requirements: According to government agency standards, a corporation is required to provide the investors with detailed financial reports in order to allow them to make informed decisions. Managerial demands: According to statistics, CEOs spend 40% of their time on meeting with shareholders, financial analysts, and the news media. Possible loss of control: Individuals on the board of directors have the ability to take complete control and even replace the company founders if they believe a change in leadership is needed. Double taxation: Responsible for paying federal and state corporate income tax on its profits, and individual shareholders are responsible for paying income taxes on their shares of the stock. Short-term orientation of the stock market: Executive compensation is closely tied to stock prices, giving the managers more incentive to compromise the long term health of the company in order to meet quarterly expectations. This causes corporate leaders to often choose to take the company private by buying out all of the publicly owned shares.

Liability (Board of Directors)

Directors can be legally and financially liable for misdeeds of the companies they oversee and for failing to investigate "red flags" in company financial reports.

Composition (Board of Directors)

Federal law requires that the majority of directors be independent, but have enough knowledge about inner workings of the organization to make informed decisions.

Disadvantages of Sole Proprietorships

Financial Liability: The sole proprietor hold unlimited liability for the the company, which means he or she is responsible for the entirety of debt, and all expenses. Demands on the owner: Due to the fact that a sole proprietor does not have anyone to take over in times of need, it can sometimes become impossible to take time off, etc. Limited managerial perspective: As there are no other partners to rely on for advice, the sole proprietor needs to possess enough skills to be able to make good decisions on his or her own. Resource limitations: Because the company has a single owner, there is limited capital for the launch, expansion and growth. No employee benefits for the owner: No paid vacation time, sick leave, health insurance, etc. Finite life span: In some cases, the owner's death may mean the demise of the business, if he or she does not have heirs to pass on the business to.

Unlimited liability

Partner is responsible for the entire portion of the debt/ any expenses.

Limited partnership

Partnership in which one or more persons act as general partners who run the business together and have the same unlimited liability as a sole proprietor would.

Proxy fight

Raider launches a public relations battle for shareholder votes, hoping to enlist enough votes to oust the board and management

Advantages of Sole Proprietorships

Simplicity: Obtaining a sole proprietorship is far more simple than other types of businesses, as it requires less paperwork. The main components required are the necessary permits and licenses. Single layer of taxation: All of the profit is taxed as personal income of the sole proprietor. Privacy: As a sole proprietor, one is not required to report the company's financial statements, etc. Flexibility and control: As a sole proprietor, one is in charge of all aspects of the company, without the necessity of receiving an approval from a business partner, etc. Fewer limitations on personal income: No agreements and compensation policies. All company profit after taxes goes to the owner. Personal satisfaction: self explanatory :)

Advantages of Partnerships

Simplicity: establishing a partnership is equally simple to establishing a sole proprietorship. Only difference, is that the partners are required to create an agreement between each other. Single layer of taxation: Similar to a sole proprietorship, the profit is taxed as personal income, however, the profit is then split equally between the partners. More resources: More partners= the amount of money available for launch, operate and grow is increased Cost sharing: The cost of facilities or any other expenses is split among the partners, therefore limiting the out of pocket expenses for each individual. Broader skill and experience base: Experience of multiple people > experience of one person Longevity: Partnerships have the potential of gaining new partners as a replacement to those who die or retire.

Independent Board Chairs (Board of Directors)

The board chair or chairman oversees the other members of the board of directors, who oversee the corporate officers (top management team), who are overseen by the CEO. However in most companies in the U.S., the CEO tends to hold both of the positions.

Tender offer

The buyer (or raider) offers to buy a certain number of shares of stock in the corporation at a specific price

Corporate officers

Top executives who run a corporation.

S Corporation

Type of corporation that combines the capital-raising options and limited liability of a corporation with the federal ntaxaion advantages of a partnership

Disadvantages of Partnerships

Unlimited liability: The risk of unlimited liability is much greater than that of a sole proprietorship, as there are many people involved, therefore multiple wrong decisions can turn into a catastrophic outcome. Potential for conflict: Disagreements between partners can take a toll on the performance of the company. Expansion, succession, and termination issues: Bringing in another partner, a partner retiring or wanting to sell out may cause issues that affect the performance of the company or even destroy a partnership as a whole.

Merger

When two companies take action to combine as a single entity.

LLC (Limited liability corporation)

A structure that combines limited liability with the pass-through taxation benefits of a partnership; the number of shareholders is not restricted, nor is member's participation in management.

Poison pill

A targetted company invokes some move that makes it less valuable to the potential raider, with the hope of discouraging the takeover

White knight tactic

A third company is invited to acquire a company that is in danger of being swallowed up in a hostile takeover.

Advantages of Corporations

Ability to raise capital: By selling shares of stock to potential shareholders, a corporation has the ability to raise large amounts of money, which can then be used for investments in research, marketing, facilities, acquisitions and other growth strategies. Liquidity: Investors have the ability quickly convert their shares into cash by selling it on the open market. In addition, a corporation can use the value of the shares of its own stock established on the open market to acquire other companies. Longevity: When shares are sold, they are passed on from one generation to another, therefore providing the corporation with a long life span. Limited liability: The potential loss for each shareholder equals to the amount invested.

Hostile Takeover

Acquisition of another company against the wishes of company management.

Shareholder activism

Activities undertaken by shareholders (individually or in groups) to influence executive decision making in areas ranging from strategic planning to social responsibility.

Corporate governance

In a broad sense, all the policies, procedures, relationships and systems in place to oversee the successful and legal operation of the enterprise; in a narrow sense, the responsibilities and performance of the board of directors specifically.

Strategic alliance

A long-term partnership between companies to jointly develop, produce or sell products.

General partnership

A partnership in which all partners have joint authority to make decisions for the firm and joint liability for the firm's financial obligations. In other words, all of the partners are equally responsible for covering any debt, etc.

LLP (Limited liability partnership)

A partnership in which each partner has unlimited liability only for his or her own actions and at least some degree of limited liability for the actions of his or her partners/partnership as a whole.

MLP (Master limited partnership)

A partnership that is allowed to raise money by selling units of ownership to the general public.

Benefit corporation

A profit-seeking corporation whose charter specifies a social or environmental goal that the company must pursue in addition to profit.

Joint venture

A separate legal entity established by two or more companies to pursue shared business objectives.

Recruiting Challenges (Board of Directors)

Good candidates are less likely to accept dictatorships. Well chosen board members force corporate and government leaders to solve the challenges that occur.

CEO (Chief Executive Officer)

Highest ranking officer of a corporation, who is generally responsible for the success or failure of the company.

Shareholders

Investors who purchase shares of stock in a corporation

Limited liability

Limited partners have limited liability for example you give what you invested so if you're 15% in it. If company owes 1,000,000 you would owe 15% of that 1,000,000.