Chapter 4

Mergers

The purchase of one corporation by another. An acquisition is essentially the same thing as a merger, but the term usually is used in reference to a large corporation's purchases of other corporations.

Not For profit Corporation

is a corporation organized to provide a social, educational, religious, or other service rather than to earn a profit. Not-for-profit corporations must meet specific Internal Revenue Service guidelines in order to obtain tax-exempt status.

Proxy

is a legal form listing issues to be decided at a stockholders' meeting and enabling stockholders to transfer their voting rights to some other individual or individuals.

tender offer

is an offer to purchase the stock of a firm targeted for acquisition at a price just high enough to tempt stockholders to sell their shares.

open corporation

is one whose stock can be bought and sold by any individual.

The decision on where to incorporate usually is based on two factors:

the cost of incorporating in one state compared with the cost in another state and the advantages and disadvantages of each state's corporate laws and tax structure.

Disadvantages of Partnership

1. Unlimited Liability (Each partner is legally and personally responsible for the debts, taxes, and actions of any other partner conducting partnership business, even if that partner did not incur those debts or do anything wrong.)(imited-liability partnership (LLP), in which a partner may have limited-liability protection from legal action resulting from the malpractice or negligence of the other partners.) (Note the difference between a limited partnership and a limited-liability partnership. A limited partnership must have at least one general partner that has unlimited liability. On the other hand, all partners in a limited-liability partnership may have limited liability for the malpractice of the other partners) 2. Management Disagreements 3. Lack of Continuity (Partnerships are terminated if any one of the general partners dies, withdraws, or is declared legally incompetent.) 4. Frozen Investment (It is easy to invest money in a partnership, but it is sometimes quite difficult to get it out. )

Corporate Structure

Stock holders vote for ->The board of directors ->Officers->Employees

Types of Partnership

General Partners, Limited Partners.

Disadvantages of Sole Proprietorship

One person can only do so much 1. Unlimited Liability (Unlimited liability is a legal concept that holds a business owner personally responsible for all the debts of the business.) 2. Lack of Continuity (can't run a business if your sick) 3. Lack of Money (Banks don't like to give too much money to Sole Owners because they lack assets and due to Lack of Continuity. In other words, Who will repay a loan if the sole proprietor dies? ) 4. Limited Management Skills (one man can't handle all the different aspects of a business) 5. Difficulty in Hiring Employees (people don't want to work for a sole Prop. because they think it will not grow.)

Corporate

officers are appointed by the board of directors

Advantages Of Sole Proprietorship

simplicity and individual control 1. Easy to start up and closure 2. Pride of Ownership 3. Retention of All Profits (all profits are managed by one person) 4. No Special Taxes (taxed as the personal income of the owner) 5. Flexibility of Being Your Own Boss (you make the rules)

Domestic Corporation

the state in which it is incorporated.

Sole Proprietorship

is a business that is owned (and usually operated) by one person. (Sole proprietorship is the simplest form of business ownership and the easiest to start.)(Sole proprietorships are most common in retailing, service, and agriculture.)

closed corporation

is a corporation whose stock is owned by relatively few people and is not sold to the general public.

alien corporation

A corporation chartered by a foreign government and conducting business in the United States

S-corporations

S-corporation is a corporation that is taxed as though it were a partnership. the corporation's income is taxed only as the personal income of its stockholders. Corporate profits or losses "pass through" the business and are reported on the owners' personal income tax returns. (S-corporations avoid double taxation and maintain limited liability)

three common forms of business ownership are:

sole proprietorships, partnerships, and corporations

Corporation

"is an artificial person, invisible, intangible, and existing only in contemplation of the law." In other words, a corporation sometimes referred to as a regular or C-corporation) is an artificial person created by law, with most of the legal rights of a real person. These include: 1. The right to start and operate a business 2. The right to buy or sell property 3. The right to borrow money 4. The right to sue or be sued 5. The right to enter into binding contracts

Disadvantages of corporations

1. Difficulty and Expense of Formation (to form a corp. is expensive and time consuming) 2. Government Regulation and Increased Paperwork (lots of paperwork) 3. Conflict Within the Corporation (Because a large corporation may employ thousands of employees, some conflict is inevitable) 4. Double Taxation or taxed twice (Corporations must pay a tax on their profits)(stockholders must pay a personal income tax on profits received as dividends) 5. Lack of Secrecy (cannot keep their operations confidential)

Advantages of Partnership

1. Ease of Start-Up 2. Availability of Capital and Credit (banks are more willing to give out lanes more assets) 3. Personal interest (a team is better then a single person) 4. Combined Business Skills and Knowledge () 5. Retention of Profits 6. No Special Taxes (partnership pays no income tax) (Ultimately each partner's share of the partnership profit is taxed in the same way a sole proprietor is taxed.)

Advantages of corporations

1. Limited Liability (One of the most attractive features of corporate ownership is limited liability. With few exceptions, each owner's financial liability is limited to the amount of money he or she has paid for the corporation's stock. ) 2. Ease of Raising Capital (Like sole proprietorships and partnerships, corporations can borrow from lending institutions. However, they also can raise additional sums of money by selling stock.) 3. Ease of Transfer of Ownership (practically no restrictions apply to the sale and purchase of stock issued by an open corporation.) 4. Perpetual life ("person," a corporation exists independently of its owners and survives them. ) 5. Specialized Management (Typically, corporations are able to recruit more skilled, knowledgeable, and talented managers than proprietorships and partnerships. )

qualify for the special status of an S-corporation, a firm must meet the following criteria:

1. No more than 100 stockholders are allowed. 2. Stockholders must be individuals, estates, or certain trusts. 3. There can be only one class of outstanding stock. 4. The firm must be a domestic corporation eligible to file for S-corporation status. 5. There can be no partnerships, corporations, or nonresident-alien stockholders. 6. All stockholders must agree to the decision to form an S-corporation.

Forming a Corporation

A business is allowed to incorporate in any state that it chooses. Once a home state has been chosen, the incorporator(s) submits articles of incorporation to the secretary of state. When the articles of incorporation are approved, they become a contract between a corporation and the state in which the state recognizes the formation of the artificial person that is the corporation. Usually, the articles of incorporation include the following information: 1. The firm's name and address 2. The incorporators' names and addresses 3. The purpose of the corporation 4. The maximum amount of stock and types of stock to 5 .be issued 6 .The rights and privileges of stockholders 7 .The length of time the corporation is to exist As the last step in forming a corporation, the incorporators and original stockholders meet to adopt corporate by-laws and elect their first board of directors.

General Partners

A general partnership is a business co-owned by two or more general partners who are liable for everything the business does. A person who assumes full or shared responsibility for operating a business. He or she also assumes unlimited liability for all debts, including debts incurred by any other general partner without his or her knowledge or consent. To avoid future liability, a general partner who withdraws from the partnership must give notice to creditors, customers, and suppliers.

Partnerships

The U.S. Uniform Partnership Act defines a partnership as a voluntary association of two or more persons to act as co-owners of a business for profit. (Note, however, that this form of ownership is much less common than the sole proprietorship or the corporation.) (a partnership often represents a pooling of special managerial skills and talents; at other times, it is the result of a sole proprietor taking on a partner for the purpose of obtaining more capital.)

hostile takeover

is a situation in which the management and board of directors of a firm targeted for acquisition disapprove of the merger.

board of directors

is the top governing body of a corporation and is elected by the stockholders

Foreign Corporation

in all other states where it does business

Types of stocks

Common Stock: may vote on corporate manners Preferred Stock: usually have no voting rights, but their claims on dividends are paid before those of common-stock owners (Other rights include receiving information about the corporation, voting on changes to the corporate charter, and attending the corporation's annual stockholders' meeting, where they may exercise their right to vote.)

Corporate Ownership

The shares of ownership of a corporation are called stock. The people who own a corporation's stock—and thus own part of the corporation—are called stockholders.

Pass through taxation

This means that owners report their share of profits or losses in the company on their individual tax returns and avoid the double taxation imposed on most corporations.

Dividends

a sum of money paid regularly by a company to it shareholders out of its profits (is a distribution of earnings to the stockholders of a corporation)

limited-liability company (LLC)

is a form of business ownership that combines the benefits of a corporation and a partnership while avoiding some of the restrictions and disadvantages of those forms of ownership. 1. Enjoys pass through taxation 2. provides limited-liability protection for acts and debts of the LLC. 3. LLC type of organization provides more management flexibility when compared with corporations Different from S-corporation in that: 1. Not restricted to a 100 stocks 2. owner flexibility

proxy fight

is a technique used to gather enough stockholder votes to control a targeted company

syndicate

is a temporary association of individuals or firms organized to perform a specific task that requires a large amount of capital. The syndicate is formed because no one person or firm is willing to put up the entire amount required for the undertaking. Like a joint venture, a syndicate is dissolved as soon as its purpose has been accomplished.

Types of merger

1. A horizontal merger is a merger between firms that make and sell similar products or services in similar markets. 2. A vertical merger is a merger between firms that operate at different but related levels in the production and marketing of a product. 3. A conglomerate merger takes place between firms in completely different industries

The Partnership Agreement should include

1. Who will make the final decisions 2. What each partner's duties will be 3. The investment each partner will make 4. How much profit or loss each partner receives or is responsible for 5. What happens if a partner wants to dissolve the partnership or dies

Limited Partners

A limited partnership is a business co-owned by one or more general partners who manage the business and limited partners who invest money in it. A limited partner is a person who invests money in a business but who has no management responsibility or liability for losses beyond his or her investment in the partnership. Typically, the general partner or partners collect management fees and receive a percentage of profits. Limited partners receive a portion of profits and tax benefits. prospective partners in a limited partnership must file a formal declaration, usually with the secretary of state, that describes the essential details of the partnership and the liability status of each partner involved in the business. One general partner must be responsible for the debts of the limited partnership. A master limited partnership (MLP) (sometimes referred to as a publicly traded partnership, or PTP) is a limited partnership that has units of ownership that can be traded on security exchanges much like shares of ownership in a corporation. This special ownership arrangement has two major advantages. First, units of ownership in MLPs can be sold to investors to raise capital. Second, income from MLPs is generally reported as the personal income of the owners. MLPs thus avoided the double taxation paid on corporate income.

Business Growth

One reason for seeking growth has to do with profit: A larger firm generally has greater sales revenue and thus greater profit. Another reason is that in a growing economy, a business that does not grow is actually shrinking relative to the economy. A third reason is that business growth is a means by which some executives boost their power, prestige, and reputation.

joint venture

is an agreement between two or more groups to form a business entity in order to achieve a specific goal or to operate for a specific period of time. (Both the scope of the joint venture and the liabilities of the people or businesses involved usually are limited to one project. Once the goal is reached, the period of time elapses, or the project is completed, the joint venture is dissolved.)

Cooperative

is an association of individuals or firms whose purpose is to perform some business function for its members. Cooperatives purchase goods in bulk and distribute them to members; thus, the unit cost is lower than it would be if each member bought the goods in a much smaller quantity.