Chapter 02: Forms of Business
Ownership
Layout of Chapter:
1.
What type of business is right for you?
2.
Sole Proprietorship.
3.
Partnership.
4.
Other Unincorporated Forms of Business.
5.
Corporations.
6.
Mergers.
7.
Other Incorporated Forms of Business.
1.
What type
of business is right for you?
A
person thinking about owning a business should examine the following factors:
A)
Capital Requirements: The amount of funds
necessary to finance the operation.
B)
Risk: The amount of personal property a
person is willing to lose by starting the business.
C)
Control: The amount of authority the owner
exercises.
D)
Management Abilities: The skills needed to
plan, organize, and control the business.
E)
Time Requirements: The time needed to
operate the business and provide guidance to the employees.
F)
Tax Liability: What taxes a business
must pay to various governments on earnings of the business.
Each
of these factors should be considered along with your own personal Values and Philosophy.
2.
Sole
Proprietorship.
A business owned and managed by one
individual.
That person may seek help from
others to conduct the business, but is the only boss; the sole proprietor is the company. E.g. hardware store, a
bakery or a restaurant.
Advantages
of a Sole Proprietorship:
·
Ease of starting - Sole
Proprietorship is the easiest way to start a business. It involves a minimum
number of problems.
·
Control - You can be your own boss.
·
Sole participation in profits and losses.
·
Use of owner’s abilities - Largely
dependent on owner’s efficient use of abilities, managerial expertise for the
success of the business.
·
Tax breaks - Business pays no income tax.
·
Secrecy - Not easily available information to the public.
·
Ease of dissolving.
Disadvantages
of a Sole Proprietorship:
·
Unlimited liability[1].
·
Difficulty in raising capital.
·
Limitations in managerial ability.
·
Lack of stability.
·
Demands on time.
·
Difficulty in hiring and keeping
high-achievement employees.
3.
Partnership.
A business owned by two or more
people.
An association of two or more
persons to carry on as co-owners of a business for profit. A partnership can be
based on a written contract or a voluntary and legal oral agreement, but oral
contracts are not recommended.
Other than the difference in the
number of owners, a partnership is similar in many respects to a sole proprietorship.
Types of
Partnerships: Three (3) Kinds.
General
Partnership: A partnership in which at least one partner has unlimited
liability for the debt of the business; a general partner has authority to act
and make binding decisions as an owner.
Limited Partnership: A
partnership with at least one general partner, and one or more limited partners
who are liable for loss and up to the amount of their investment.
Joint
Venture: The joining/ unification of two or more individuals and
businesses to accomplish a specific purpose or objective or to complete a
single transaction.
The
Partnership Contract: A contractual agreement is called Articles of Partnership. A written
partnership agreement includes the following main features:
·
Name of the partnership business.
·
Types of business.
·
Location of business.
·
Expected life of the partnership.
·
Names of the partners and the amount of
each one’s investment.
·
Procedures for distributing profits and
covering losses.
·
Amount that partners will withdraw for
services.
·
Procedure for withdrawal of funds.
·
Duties of each partner.
·
Procedures for dissolving the partnership.
Advantages
of a Partnership:
·
More capital
·
Combined managerial skills
·
Ease of starting
·
Clear legal status
·
Tax advantages.
Disadvantages
of a Partnership:
·
Unlimited liability.
·
Potential disagreement.
·
Investment withdrawal difficulty.
·
Limited capital availability.
·
Instability.
4.
Other
Unincorporated Forms of Business.
A)
Syndicates: Two or more businesses joined
together to accomplish specific business goals; a popular form in underwriting
large amounts of corporation stocks.
Unlike a joint venture, a syndicate
need not be dissolved after the transaction is completed. The members of a
syndicate can sell their ownership interest to buyers of their choice. But in a
partnership, the remaining partners can veto a new partner.
B)
Business Trusts: A business used to hold
securities for investors; allows the transfer of legal title to a property of
one person for the use and benefit of another.
Under the business trust, a trustee
or group of trustees is legally permitted to do business. The trustees issue
shares, called trust certificates, to
investors. These shares show that the holder has transferred funds to a trustee
and has the legal right to benefit from the success of the trust investment. Shareholders
have no right to vote or manage the business. They can sell their trust
certificates to buyers of their choice.
5.
Corporations.
A business that is a legal entity
separated from its owners.
The owners of a corporation are
spread over a wide geographical are and can hire professional managers to
operate the business. In the eyes of law, the corporation is an artificial being. It has legal rights of
an individual: it can own property, purchase goods and services, and sue other
persons or corporations.
Forming a
corporation:
The legal status of a corporation
stems from a charter, so it is a state issued document authorizing its
formation.
Charter: A state’s written agreement
giving a corporation the right to operate as a business.
The individuals forming the
corporation are called the incorporators.
·
Domestic Corporation: An enterprise
organized under the laws of one state or country and doing business within that
state or country.
·
Foreign Corporation: A business
incorporated in one state or country and doing business within that state or
country.
After the charter has been granted,
the incorporators and all subscribers or the owners of the stock of the
business meet and elect a Board of Directors. They also approve the bylaws of
the corporation. The board of directors then meets to select the professional
managers, and to make any other decisions needed to start the business.
The actual owners of the business
are the shareholders, those who have invested their money. The corporation is
run by professional managers who plan, organize, control, and direct the
activities needed to sell goods and/or services to customers. The managers also
decide what property to purchase, what employees to hire, and where to borrow
required funds.
Types of
Corporation:
·
Non-profit corporations - An
enterprise (e.g. University, Charity, Church, Mosque, religious or government
organization) that is not driven by a profit-seeking motive.
Corporate
Policy Makers:
A Corporation’s policy is
established by a Board of Directors,
which is elected by the shareholders, or owners.
·
Directors make judgments in the interest of
all owners/ shareholders.
·
Directors are elected by shareholders.
(usually for their business abilities).
·
Each share of common stock entitles the
shareholder one vote.
Proxy:
A written statement signed by a
shareholder of a corporation, allowing someone else to cast his/ her number of
votes.
Advantages
of a Corporation:
·
Limited liability.
·
Skilled management team.
·
Transfer of ownership.
·
Greater capital base.
·
Stability.
·
Legal entity status.
Disadvantages
of a corporation:
·
Difficulty and expense of starting.
·
Lack of control.
·
Multiple taxation: Businesses must pay an
annual fee for the right to operate as a corporation. There is also a corporate
income tax. The shareholders must pay income tax on the dividends they receive
through ownership. This is referred to as double taxation.
·
Government involvement.
·
Lack of secrecy.
·
Lack of personal interest.
·
Credit limitations.
6.
Mergers:
Combining two or more business enterprises
into a single entity.
Mergers have always been a concern
in government policy because of increased market share and reduced competition.
HORIZONTAL MERGER:
A merger involving competitive firms
in the same market. (e.g. Republic steel and Jones & Laughlin Steel merged
to for LTV Steel.)
VERTICAL MERGER:
A merger in which a firm joins with
its supplier. (e.g. General Motors purchased Electronic Data Systems).
CONGLOMERATE MERGER:
A merger involving firms selling
goods in unrelated markets. (e.g. Xerox Corporation purchased and insurance
firm, Crum and Foster.)
7.
Other
Incorporated Forms of Business.
·
S Corporation
·
Cooperatives (Co-op)
·
Savings and Loan Association
·
Professional Service Associations
1.
S Corporation: A corporation with 35 or fewer owners that
files an income tax return as a partnership to take advantage of lower tax
rates.
2.
Cooperatives (Co-op): An organization in which people
collectively own and operate a business in order to compete with bigger
competition.
Co-ops are often found where a large number of small
producers can band together to become more competitive. E.g. Milk vita dairy
products.
Dividends are paid to co-op members in proportion to the
amount of goods that each member has bought or sold through the co-op. These
patronage dividends are considered a refund of overpayment rather that a
distribution of profits.
3.
Savings and Loan Association: A corporation that operates in
much the same manner as a savings bank. The owner of an account is given a
passbook in which deposits and withdrawals are noted.
In a mutually owned S&L, both savers and borrowers are
members. They elect a board of directors to manage the association. Most
S&L capital is invested in local home mortgages.
4.
Professional Service Associations: An organization of professional
people, organized under professional association laws and treated as a
corporation for tax purposes. (e.g. PSA of Doctors, lawyers, dentists etc.)
PSAs are treated as corporations for tax purposes. Thus
members could have the tax advantages of profit sharing and pension plans, not
available to private persons and partnerships.
[1] Unlimited Liability: Obligation
of investors to use personal assets, when necessary, to pay off debts to
business creditors; A disadvantage of sole proprietorships and partnerships.
No comments:
Post a Comment