Chapter 5

the three major forms of business ownership

(1) sole proprietorships (2) partnerships (3) corporations

types of partnership

-general partnership -limited partnership -master limited partnership

disadvantages to corporations

-initial cost -paperwork and complexity -Double taxation (and returns): Corporate income is taxed twice. First the corporation pays tax on its income before it can distribute any, as dividends, to stockholders. Then the stockholders pay income tax on the dividends they receive. States often tax corporations more heavily than other enterprises, and some special taxes apply only to corporations -size: too inflexible and tied down in red tape to respond quickly to market changes -difficult to end -conflict between stockholders and board

limited liability partnership (LLP)

-limits partners' risk of losing their personal assets to the outcomes of only their own acts and omissions and those of people under their supervision -If you are a limited partner in an LLP, you won't be punished if your partner makes a mistake -this personal protection does not extend to contract liabilities such as bank loans, leases, and business debt the partnership takes on; loss of personal assets is still a risk if these are not paid

coperative

A business owned and controlled by the people who use it—producers, consumers, or workers with similar needs who pool their resources for mutual gain -give members more economic power as a group than they have as individuals

partnerships

When two or more people legally agree to become co-owners of a business

corporations

a legal entity with authority to act and have liability apart from its owners. -make up only 20 percent of all businesses, but they earn 81 percent of total U.S. business receipts

limited partnership

has one or more general partners and one or more limited partners

An acquisition is

one company's purchase of the property and obligations of another company

conglomerate merger

unites firms in completely unrelated industries in order to diversify business operations and investments. A soft drink company and a snack food company would form a conglomerate merger

disadvantages to a franchise

-Large start-up costs: Most franchises demand a fee for the rights to the franchise -Shared profit. The franchisor often demands either a large share of the profits in addition to the start-up fees or a percentage commission based on sales -Management regulation. Management "assistance" has a way of becoming managerial orders, directives, and limitations. Franchisees feeling burdened by the company's rules and regulations may lose the drive to run their own business. -Coattail effects: The actions of other franchises have an impact on your future growth and profitability -Restrictions on selling: face restrictions on the resale of their franchises -Fraudulent franchisors

advantages of a franchise

-Management and marketing assistance: an established product to sell, help choosing a location, and assistance in all phases of promotion and operation -Personal ownership: incentives and profit as any sole proprietor would -Nationally recognized name: you get instant recognition and support from a product group with established customers around the world. -Financial advice and assistance: assistance and periodic advice from people with expertise in these areas. -Lower failure rate

disadvantages of limited liability company

-No stock:LLC ownership is nontransferable. LLC members need the approval of the other members in order to sell their interests in the company. In contrast, regular and S corporation stockholders can sell their shares as they wish. -Limited life span. LLCs are required to identify dissolution dates in the articles of organization (no more than 30 years in some states). The death of a member can cause LLCs to dissolve automatically. Members may choose to reconstitute the LLC after it dissolves. -Fewer incentives. Unlike corporations, LLCs can't deduct the cost of fringe benefits for members owning 2 percent or more of the company. And since there's no stock, they can't use stock options as incentives to employees. -Taxes: LLC members must pay self-employment taxes—the Medicare/Social Security taxes paid by sole proprietors and partnerships—on their profits. In contrast, S corporations pay self-employment tax on owners' salaries but not on the entire profits. -Paperwork: While the paperwork required of LLCs is not as great as that required of corporations, it is more than required of sole proprietors.

advantages of limited liability company

-Personal assets are protected -Choice of taxation: taxed as partnerships or as corporations -Flexible ownership rules: LLCs do not have to comply with ownership restrictions as S corporations do. Owners can be a person, partnership, or corporation. -Flexible distribution of profits and losses. Profits and losses don't have to be distributed in proportion to the money each person invests, as in corporations. LLC members agree on the percentage to be distributed to each member. -Operating flexibility: LLCs do have to submit articles of organization, which are similar to articles of incorporation, but they are not required to keep minutes, file written resolutions, or hold annual meetings. An LLC also submits a written operating agreement, similar to a partnership agreement, describing how the company is to be operated

Individual Incorporation

-Truckers, doctors, lawyers, plumbers, athletes, and small-business owners -do not issue stock to outsiders; therefore, they do not share all the advantages and disadvantages of large corporations (such as size and more money for investment) -limited liability -possible tax benefits -fee and time varies by state

A conventional (C) corporation

-a state-chartered legal entity with authority to act and have liability separate from its owners(stockholders) -Stockholders are not liable for the debts or other problems of the corporation beyond the money they invest in it by buying ownership shares, or stock, in the company -share in the ownership (and profits) of a business without working there or having other commitments to it -Corporations may choose whether to offer ownership to outside investors or remain privately held.

S corporation

-a unique government creation that looks like a corporation but is taxed like sole proprietorships and partnerships - S corporations have shareholders, directors, and employees, and the benefit of limited liability, but their profits are taxed only as the personal income of the shareholders—thus avoiding the double taxation of C corporations. 1) Have no more than 100 shareholders. (All members of a family count as one shareholder.) 2) Have shareholders that are individuals or estates, and who (as individuals) are citizens or permanent residents of the United States. 3) Have only one class of stock 4) Derive no more than 25 percent of income from passive sources (rents, royalties, interest). -An S corporation that loses its S status may not operate under it again for at least five years.

master limited partnership (MLP)

-acts like a corporation -is traded on the stock exchanges like a corporation -taxed like a partnership and thus avoids the corporate income tax. -normally found in the oil and gas industry (For example, Sunoco Inc. formed the MLP Sunoco Logistics Partners (SXL) to acquire, own, and operate a group of crude oil and refined-product pipelines and storage facilities. Income received by SXL is not taxed before it is passed on to investors as dividends as it would be if SXL were a corporation)

advantages of sole proprietorship

-being your own boss -easy to start and end (i.e. buying equipment) -pride and credit -leaving a legacy -retention of profits -No special taxes. All the profits of a sole proprietorship are taxed as the personal income of the owner, and the owner pays the normal income tax on that money. However, owners do have to pay the self-employment tax (for Social Security and Medicare). They also have to estimate their taxes and make quarterly payments to the government or suffer penalties for nonpayment.

advantages of a partnership

-easier to manage -additional money, support, and expertise -cover for you when you are sick or on vacation -longer survival -No special taxes. All profits of partnerships are taxed as the personal income of the owners, who pay the normal income tax on that money. Similarly, partners must estimate their taxes and make quarterly payments or suffer penalties for nonpayment

advantages to corporations

-limited liability -Ability to raise more money for investment (sell shares of its stock) -borrow money: obtaining loans from financial institutions like banks. They can also borrow from individual investors by issuing bonds, which involve paying investors interest until the bonds are repaid sometime in the future -size: expand facilities, update equipment, hire experts or specialists, and diversify -perpetual life (death of owners is sad but doesn't impact) -ease of ownership change -ease of attracting employees -separation of ownership and management: The owners/stockholders elect a board of directors, who hire the officers of the corporation and oversee major policy issues. The owners/stockholders thus have some say in who runs the corporation but have no real control over the daily operation

disadvantages of sole proprietorship

-unlimited liability -limited financial funds -Management difficulties. All businesses need management; someone must keep inventory, accounting, and tax records -time commitment -few benefits (sick days, health insurance etc.) -limited growth -limited time span

disadvantages of a partnership

-unlimited liability (general partners) -division of profits -disagreement among partners -difficulty of termination (and splitting up resources)

sole proprietorships

A business that is owned, and usually managed, by one person

general partnership

all owners share in operating the business and in assuming liability for the business's debts

franchise agreement

an arrangement whereby someone with a good idea for a business (the franchisor) sells the rights to use the business name and sell a product or service (the franchise) to others (the franchisees) in a given territory.

leveraged buyout (LBO)

an attempt by employees, management, or a group of private investors to buy out the stockholders in a company, primarily by borrowing the necessary funds (buy the company to have more control by making it private)

general partner

an owner (partner) who has unlimited liability and is active in managing the firm. Every partnership must have at least one general partner.

limited partner

an owner who invests money in the business but does not have any management responsibility or liability for losses beyond his or her investment

unlimited liability

any debts or damages incurred by the business are your debts and you must pay them, even if it means selling your home, your car, or whatever else you own

horizontal merger

joins two firms in the same industry and allows them to diversify or expand their products. A soft drink company and a mineral water company that merge can now supply a variety of beverage products.

vertical merger

joins two firms operating in different stages of related businesses.18 A merger between a soft drink company and an artificial sweetener maker would ensure the merged firm a constant supply of an ingredient the soft drink manufacturer needs

Limited liability

the limited partners' liability for the debts of the business is limited to the amount they put into the company; their personal assets are not at risk.

merger

the result of two firms joining to form one company