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Types of Organizations Forms of Business Ownership

Types of Organizations Forms of Business Ownership. Your family’s involvement in business / 3 forms of ownership. 3 major forms of business. Sole / single proprietorship One owner Source of investment: personal funds Examples : bakery, flowershop, meat market Partnership

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Types of Organizations Forms of Business Ownership

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  1. Types of OrganizationsForms of Business Ownership

  2. Your family’s involvement in business / 3 forms of ownership

  3. 3 major forms of business • Sole / single proprietorship • One owner • Source of investment: personal funds • Examples: bakery, flowershop, meat market • Partnership • 2+ owners, general partners, limited partners • Source of investment: personal funds of partners • Examples: law / accounting firms, medical / dental practices Combination: Cooperatives • a combination of several sole proprietorships and/or partnerships for greater production and marketing power

  4. 3 major forms of business (cont’d) Corporation • Owned by the shareholders = investors • Under control of the Board of Directors, which is elected by the stockholders • Source of investment: stock issues

  5. Proportions of U.S. Firms in Terms of Type of Business and Sales Revenue 3

  6. Advantages Freedom Simple to form Low start up costs Tax benefits Disadvantages Unlimited Liability Limited resources Limited fundraising capability Lack of continuity Sole Proprietorship/Partnership Unlimited Liability Legal principle holding owners responsible for paying off all debts of a business

  7. Stock: A share of ownership in a corporation Two types: Common Stock & Preferred Stock

  8. How a corporation issues Stock IPO issues (= sells) stock (= shares) Corporation XYZ Shareholders of Corporation XYZ (Investment firms) pay $$$ Other Investors

  9. Transfer of ownership in a corporation Corporation XYZ Shareholders of Corporation XYZ Exchange stock (= shares) Other investors

  10. Advantages Limited financial liability Ease of transfer of ownership Legal entity Perpetual life Easier access to $$$ / capital to grow the business (= stronger fundraising capability) Disadvantages Double taxation Complicated and expensive to form and manage Subject to disclosure requirements by the government (the SEC = Securities & Exchange Commission) Corporation

  11. The concept of Double Taxation Shareholder‘s Personal Income Statement Income from dividends $10 Taxes (e.g. 30%) $ 3 Net income $ 7 Income Statement Corporation Sales $100 Expenses 80 Pre-tax income $ 20 Taxes (e.g. 50%) 10 Net income $ 10

  12. Rights Elect the Board of Directors Benefit from stock appreciation (increase in value) Receive dividends Appoint auditors to judge the company’s financial statements Approve the issue of new shares / stocks or the repurchaseof existing stocks Risks The value of stock declines. Dividends are cut or not paid. In case of bankruptcy, the stockholders are last in line to receive compensation (usually nothing is left). Role of the (common) Stockholders (= Owners)

  13. Roles & Reporting Relationships elect hires / appoints

  14. Responsibilities: Represent the stockholders Fulfill objective: maximize shareholders’ wealth Make sure that management acts in the best interest of stockholders Hire the company president Declare dividends Set policy Focus on “big picture” issues, not day-to-day management Strategic planning Financial goal setting Mergers and acquisitions Role of the Board of Directors

  15. Manage the day-to-day operations Hire and supervise other managers Role of the President / CEO (Chief Executive Officer)

  16. Limited Liability Company(LLC) • A type of general partnership • Partners taxed at personal level • Provides limited liability for the partners • Laws and liability protection vary by state • Relatively new legal structure for a business

  17. Special forms of changes in ownership • Merger: • The union of two corporations to form a new corporation: Former companies cease to exist as independent companies. Acquisition: • A larger companybuying a smaller one: Old company ceases to exist as an independent entity. Divestiture • A firmselling off one or more of its business units (often unrelated or underperforming) Spin-off • Setting up one or more of the company’s units as newbusinesses(purpose: to raise capital): Giving a corporate business unit to shareholders who now own stock in the business unit as an independent company. They still own original company shares. Joint venture • 2 companies setting up a new(outside)companyfor collaboration and joint ownership, often in another country: Both original companies continue to exist independently.

  18. In the news --Examples of changes in ownership • United and Continental to merge. UAL Corp.'s United Airlines announced on Monday it will merge with Continental Airlines in a deal worth $3.2 billion, creating the world's largest airline. CNNMoney.com, 5/3/2010 • Restructuring World: Major Spin-Offs From Major Companies. Motorola Inc. (NYSE: MOT) has restructured literally for almost the entire time I have covered equities.  The mobile communications technology giant is about to be much different after its cell phone spin-off comes. 6/21/2010 • BP, other oil companies divest less-significant propertiesBP's sale of oilfields and other energy assets to cover costs of the Gulf of Mexico oil spill has inspired other oil companies, including Royal Dutch Shell and ExxonMobil, to divest less important properties. Bloomberg Businessweek (1/13/2011) • Nokia, Pearson Set Up Digital Education Joint Venture In China. Nokia and education company Pearson have formed a joint venture in China dubbed Beijing Mobiledu Technologies… The new joint venture company aims to deliver a wide range of services to meet the demand for digital education in China. TechCrunch, 2/1/2010

  19. Stakeholders • Anyone impacted by actions of a company (except for competitors) • Key stakeholder groups: • The company and its employees • Customers • Investors (debt and equity) • Society

  20. How Does Type of Business Organization Impact Stakeholders? • Investors as stakeholders: • Risk varies by structure. Much lower risk for corporations and LLCs. • May receive dividends with corporations, and have the chance for stock value to increase in a liquid trading market. • The company as a stakeholder: • Funding ability, and therefore the ability to grow, varies by structure. Much stronger for corporations. • Society as a stakeholder: • Greater growth potential enables corporations to provide more jobs, develop worldwide, invest more in R&D to develop new products, etc. • However, society has seen the need to regulate corporate power and disclosure (for public corporations). • Customers as stakeholders: • Corporations may have greater capacity to develop and distribute products; smaller companies (sole proprietorships, partnerships) may have closer customer ties and provide customized service.

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