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Business Studies

Business Studies. Chapter 5: Forms of ownership. Liability . Liability—the responsibility for debts or legal actions (damages) taken against a business. Unlimited liability—a legal condition that makes the owner personally responsible for the business’s debts and damages.

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Business Studies

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  1. Business Studies Chapter 5: Forms of ownership

  2. Liability • Liability—the responsibility for debts or legal actions (damages) taken against a business. • Unlimited liability—a legal condition that makes the owner personally responsible for the business’s debts and damages. • Limited liability—a legal condition that limits the amount an individual owner is liable for damages and debts. The limit is equal to the amount that owner has invested in the business.

  3. Types of business ownership • Sole proprietorship—a business owned by a single person • Partnership—two or more owners • General partnership • Limited partnership • Corporation—a legal entity, distinct from any individual persons, with the power to own property and conduct business • Shareholders • Private corporation • Public corporation

  4. Sole proprietorships • A business owned by a single person • Home based • Consultants • Caterers • Farms • Retail establishments • Nike shop in a shopping mall • 7/11 • McDonalds

  5. Sole proprietorships Advantages Disadvantages Simplicity Single tax (personal income) Privacy Flexibility & control Few limitations on personal income Personal satisfaction Financial liability (personal responsibility) Unlimited liability Demands on the owner Limited managerial view Resource limitations No employee benefits Limited life span

  6. Partnerships • An unincorporated company owned by two or more people • General partnership • All partners have authority to make decisions • Partners share liability for the firm’s obligations • Limited partnership • One or more persons act as general partners who run the business and have unlimited liability • Other partners are limited partners who’s liability is limited to the amount they invest in the business

  7. Partnerships • Master Limited Partnership (MLP)—allowed to raise money by selling units of its ownership to the public • Energy industry • Limited Liability Partnership (LLP)—provides some liability protection to people in certain professions from major mistakes (e.g., doctors, lawyers, accountants) • Unlimited liability for their investment but limited liability for the partnership as a whole

  8. Partnerships Advantages Disadvantages Simplicity Single layer taxation More resources Cost sharing Broader skill set & experience Longevity (PWC 1849) Unlimited liability Potential for conflict Expansion, succession, termination issues

  9. Corporations • A legal entity (a legal person) distinct from any individuals that can own property and conduct business • Shareholders own the corporation by purchasing shares of stock in the corporation • Private corporation—all the stock is owned by a few individuals or companies and not made available for sale to the public • Public corporations—stock may be sold to anyone who has the means to buy it

  10. Corporations Advantages Disadvantages Ability to raise capital Liquidity Longevity Limited liability Cost and complexity Reporting requirements Managerial demands Possible loss of control Double taxation Short-term focus of the stock market

  11. Special types of corporations • S corporation—combines the ability to raise capital with limited liability and federal tax advantages. • Number of shareholders limited to 100 • Limited liability company (LLC)—combines limited liability with the pass through benefits of a partnership. • No restriction on the number of partners • Member’s role in management not restricted as in limited partnerships, ex. BMW of North America

  12. Corporate governance

  13. Corporate growth strategies • New products, new markets, or M&A • Merger—two companies agree to combine to make one larger company • Pool assets, or • One company buys the assets of another • Acquisition—one company buys controlling interest in the voting stock of another company • Managers agree to a price and encourage shareholders to vote for the acquisition • Managers don’t want to be taken over and discourage shareholders from voting for the takeover—hostile takeover • LBO—leveraged buyout—when someone buys a company with borrowed funds

  14. M&A Advantages Disadvantages Increase buying power Cross-selling Increase market share Gain access to expertise Reduce overlapping investments & costs MS has acquired 130 companies since 1987 Agreement on financing Management structure after the merger Combining marketing efforts MIS issues – compatibility Staffing Organizational culture issues

  15. Strategic alliances & JVs • Strategic alliance—a long-term partnership to jointly develop, produce, or sell products • Joint venture—a separate legal entity established by 2 or more companies

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