© Prentice Hall, 2007 Excellence in Business, 3e Chapter 5 - 1

Forms of Forms of Business OwnershipBusiness Ownership

© Prentice Hall, 2007 Excellence in Business, 3e Chapter 5 - 2

Business OwnershipBusiness Ownership

Three Common FormsThree Common Forms

SoleProprietorships

SoleProprietorships PartnershipsPartnerships CorporationsCorporations

© Prentice Hall, 2007 Excellence in Business, 3e Chapter 5 - 3

Ease of establishment

Self-satisfaction

Privacy

Tax advantages

Unlimited liability

Personal pressure

Difficult to get funding

Limited life

Sole ProprietorshipSole Proprietorship

Advantages Disadvantages

© Prentice Hall, 2007 Excellence in Business, 3e Chapter 5 - 4

Business Business PartnershipsPartnerships

General PartnershipsGeneral Partnerships Limited PartnershipsLimited Partnerships

UnlimitedUnlimitedLiabilityLiability

UnlimitedUnlimitedLiabilityLiability

Equal Equal PartnersPartners

Equal Equal PartnersPartners

ShareShareOwnershipOwnership

ShareShareOwnershipOwnership

LimitedLimitedLiabilityLiability

LimitedLimitedLiabilityLiability

UnequalUnequalPartnersPartners

UnequalUnequalPartnersPartners

PassivePassiveInvestorsInvestors

PassivePassiveInvestorsInvestors

© Prentice Hall, 2007 Excellence in Business, 3e Chapter 5 - 5

Easy to EstablishEasy to EstablishEasy to EstablishEasy to Establish Tax AdvantagesTax AdvantagesTax AdvantagesTax Advantages

Strength in NumbersStrength in NumbersStrength in NumbersStrength in Numbers Diversity of SkillsDiversity of SkillsDiversity of SkillsDiversity of Skills

Extended LifeExtended LifeExtended LifeExtended LifeIncreased CapitalIncreased CapitalIncreased CapitalIncreased Capital

Partnership AdvantagesPartnership Advantages

© Prentice Hall, 2007 Excellence in Business, 3e Chapter 5 - 6

Partnership Partnership DisadvantagesDisadvantages

UnlimitedLiability

UnlimitedLiability

InterpersonalProblems

InterpersonalProblems

UnproductivePartners

UnproductivePartners

ManagingPartner

ManagingPartnerLaw SuitsLaw SuitsDebtsDebts

© Prentice Hall, 2007 Excellence in Business, 3e Chapter 5 - 7

Partnership AgreementPartnership Agreement

Decision-MakingAuthority

DisputeResolution

Divisionof Profits

ExpectedContributions

© Prentice Hall, 2007 Excellence in Business, 3e Chapter 5 - 8

CorporationsCorporations

Enter Into ContractsEnter Into Contracts

Buy and Sell PropertyBuy and Sell Property

Sue and Be SuedSue and Be Sued

Face Limited LiabilityFace Limited Liability

© Prentice Hall, 2007 Excellence in Business, 3e Chapter 5 - 9

Ownership of CorporationsOwnership of Corporations

Shareholders Shareholders

Shareholders

Shareholders

Shareholders

Shareholders

Last Claim on DistributedProfits and Assets

Cash or Stock Dividends

Full Voting Rights

Common Stock

First Claim on Dividendsand Assets

Cash or Stock Dividends

Minimal Voting Rights

Preferred Stock

© Prentice Hall, 2007 Excellence in Business, 3e Chapter 5 - 10

Public Versus Private Public Versus Private OwnershipOwnership

PublicPublicCorporationCorporation

PublicPublicCorporationCorporation

PrivatePrivateCorporationCorporation

PrivatePrivateCorporationCorporation

Not PubliclyNot PubliclyTradedTraded

Not PubliclyNot PubliclyTradedTraded

FewFewShareholdersShareholders

FewFewShareholdersShareholders

PubliclyPubliclyTradedTradedPubliclyPubliclyTradedTraded

ManyManyShareholdersShareholders

ManyManyShareholdersShareholders

© Prentice Hall, 2007 Excellence in Business, 3e Chapter 5 - 11

Advantages Advantages of “Going Public”of “Going Public”

• Ready supply of capital

• Increased liquidity

• Enhanced visibility

• Independent market value

• Increased flexibility

© Prentice Hall, 2007 Excellence in Business, 3e Chapter 5 - 12

Disadvantages Disadvantages of “Going Public”of “Going Public”

• High cost

• SEC filing requirements

• Reduced ownership control

• Demands of public exposure

• Pressure for quarterly results

© Prentice Hall, 2007 Excellence in Business, 3e Chapter 5 - 13

CorporationsCorporations

Access to capital

Limited liability

Increased liquidity

Unlimited life span

Excess paperwork

Burdensome costs

Double taxation

Disclosure requirements

Advantages Disadvantages

© Prentice Hall, 2007 Excellence in Business, 3e Chapter 5 - 14

Types of CorporationsTypes of Corporations

Subchapter SCorporation

Limited Liability Company

SubsidiaryCorporation

© Prentice Hall, 2007 Excellence in Business, 3e Chapter 5 - 15

Corporate GovernanceCorporate Governance

CommonShareholders

•Individuals

•Companies

•Non-profits

•Pensions

•Mutual Funds

Boardof Directors

•Dividends

•Corporate Affairs

•Strategic Plans

•Select Officers

•Finances

CorporateOfficers

•Chief Executive

•Chief Financial

•Chief Operations

Employees ofthe Company

•Operations

•Finance

•Marketing

•Personnel

•Engineering

Elect Appoint Hire

© Prentice Hall, 2007 Excellence in Business, 3e Chapter 5 - 16

Reform: Board-Related Reform: Board-Related IssuesIssues

CompositionComposition

EducationEducation

LiabilityLiability

RecruitingRecruiting

© Prentice Hall, 2007 Excellence in Business, 3e Chapter 5 - 17

Business CombinationsBusiness Combinations

MergersMergersMergersMergers Consolidations Consolidations Consolidations Consolidations

Leveraged Leveraged Buy-OutsBuy-Outs

Leveraged Leveraged Buy-OutsBuy-OutsAcquisitionsAcquisitionsAcquisitionsAcquisitions

© Prentice Hall, 2007 Excellence in Business, 3e Chapter 5 - 18

Types of Business Types of Business MergersMergers

VerticalVertical

HorizontalHorizontal

ConglomerateConglomerate

Market ExtensionMarket Extension

Product ExtensionProduct Extension

© Prentice Hall, 2007 Excellence in Business, 3e Chapter 5 - 19

Mergers and Mergers and AcquisitionsAcquisitions

AdvantagesAdvantagesAdvantagesAdvantages

Economies of ScaleEconomies of ScaleEconomies of ScaleEconomies of Scale

EfficienciesEfficienciesEfficienciesEfficiencies

SynergiesSynergiesSynergiesSynergies

DisadvantagesDisadvantagesDisadvantagesDisadvantages

High-Risk Corporate DebtHigh-Risk Corporate DebtHigh-Risk Corporate DebtHigh-Risk Corporate Debt

Management DistractionsManagement DistractionsManagement DistractionsManagement Distractions

Culture ClashesCulture ClashesCulture ClashesCulture Clashes

© Prentice Hall, 2007 Excellence in Business, 3e Chapter 5 - 20

Trends in Mergers and Trends in Mergers and AcquisitionsAcquisitions

Year Number Value (in billions)

1970

1975

1980

1985

1990

1995

2000

2003

5,152

2,297

1,889

3,001

2,074

3,510

11,123

8,232

$16

$12

$44

$180

$108

$356

$1,269

$530

© Prentice Hall, 2007 Excellence in Business, 3e Chapter 5 - 21

Defenses AgainstDefenses AgainstMergers and AcquisitionsMergers and Acquisitions

White KnightWhite KnightWhite KnightWhite Knight

Shark RepellentShark RepellentShark RepellentShark Repellent

Poison PillPoison PillPoison PillPoison Pill

Hostile Hostile TakeoversTakeoversHostile Hostile

TakeoversTakeovers

Tender OffersTender OffersTender OffersTender Offers

Proxy FightsProxy FightsProxy FightsProxy Fights

© Prentice Hall, 2007 Excellence in Business, 3e Chapter 5 - 22

Strategic Alliances Strategic Alliances and Joint Venturesand Joint Ventures

Gain CredibilityGain Credibility

Expand MarketsExpand Markets

Access TechnologyAccess Technology

Diversity OfferingsDiversity Offerings

Share Best PracticesShare Best Practices