Learning Objectives

Identify the inquiries to questioning in picking the appropriate kind of ownership for a business.Describe the single proprietorship and partnership forms of organization, and also specify the benefits and disadvantages.Identify the different species of partnerships, and also explain the prestige of a partnership agreement.Explain exactly how corporations room formed and how they operate.Discuss the benefits and disadvantages of the corporate form of ownership.Examine special species of organization ownership, including limited-liability companies, and not-for-profit corporations.Define mergers and also acquisitions, and explain why companies are motivated to unify or acquire other companies.

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The ice cream Cream Men

Who would have thought it? two ex-hippies with solid interests in society activism would end up beginning one that the best-known ice cream cream providers in the country—Ben & Jerry’s. Maybe it was intended to be. Ben Cohen (the “Ben” the Ben & Jerry’s) constantly had a fascination through ice cream. Together a child, the made his very own mixtures by wrecking his favorite cookies and also candies into his ice cream. Yet it wasn’t until his an elderly year in high institution that he came to be an main “ice cream man,” happily driving his truck through communities filled with youngsters eager come buy his ice cream cream pops. ~ high school, Ben make the efforts college however it wasn’t for him. The attended Colgate university for a year and a half before that dropped out to go back to his real love: being an ice cream man. That tried university again—this time in ~ Skidmore, where he studied pottery and jewelry making—but, in spite of his choice of courses, still didn’t choose it.

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Figure 6.1: Ben Cohen and Jerry greenfield in 2010

In the meantime, Jerry green field (the “Jerry” that Ben & Jerry’s) was following a comparable path. He majored in pre-med at Oberlin college in the hopes of one day becoming a doctor. But he had actually to give up top top this goal when he was not welcomed into medical school. ~ above a positive note, though, his college education steered him into a more profitable field: the people of ice cream cream making. He gained his an initial peek in ~ the ice cream cream sector when he operated as a scooper in the student cafeteria in ~ Oberlin. So, fourteen year after they first met ~ above the small high college track team, Ben and Jerry reunited and also decided to enter ice cream making big time. They moved to Burlington, Vermont—a college town in require of an ice cream cream parlor—and perfect a $5 correspondence course from penn State on making ice cream cream. After acquiring an A in the course—not surprising, offered that the test were open book—they take it the plunge: through their life to save of $8,000 and also $4,000 of obtained funds they collection up an ice cream shop in a made-over gas station on a busy street edge in Burlington.1 The next huge decision to be which form of organization ownership was best for them. This chapter introduces you to their options.

Factors to Consider

If you’re beginning a new business, you need to decide which legal kind of property is best for you and also your business. Do you desire to very own the business yourself and also operate together a sole proprietorship? Or, carry out you want to share ownership, operation as a cooperation or a corporation? before we talk about the pros and cons of this three species of ownership, let’s resolve some the the questions that you’d probably ask you yourself in choosing the ideal legal kind for her business.

In setting up her business, perform you want to minimization the expenses of getting started? execute you hope to avoid complicated government regulations and reporting requirements?How much manage would girlfriend like? just how much obligation for running the business are you ready to share? What around sharing the profits?Do you want to prevent special taxes?Do you have actually all the skills needed to run the business?Are you most likely to get along with your co-owners over an extended period of time?Is it vital to you that the company survive you?What are your financing needs and how carry out you plan to finance her company?How much an individual exposure come liability room you ready to accept? do you feeling uneasy about accepting personal liability for the action of other owners?

No single kind of property will give you everything you desire. You’ll have to make part trade-offs. Due to the fact that each option has actually both benefits and disadvantages, your project is to decision which one supplies the attributes that space most essential to you. In the complying with sections we’ll compare 3 ownership choices (sole proprietorship, partnership, corporation) on these eight dimensions.

Sole Proprietorship and its Advantages

In a sole proprietorship, together the owner, girlfriend have finish control over her business. You do all crucial decisions and are generally responsible for every day-to-day activities. In exchange because that assuming every this responsibility, you gain all the income earned by the business. Profits earned are taxed as an individual income, so girlfriend don’t have to pay any type of special federal and also state earnings taxes.

Disadvantages of sole Proprietorships

For plenty of people, however, the sole proprietorship is not suitable. The flip side of enjoying complete control is having to supply every the various talents that might be vital to make the organization a success. And when you gone, the organization dissolves. You likewise have to depend on your own resources for financing: in effect, you space the business and any money borrowed by the company is loaned to you personally. Even more important, the single proprietor bear unlimited liability for any kind of losses incurred by the business. The principle of unlimited personal liability means that if the business incurs a blame or ill a catastrophe (say, getting sued for causing an injury come someone), the owner is personally liable. Together a single proprietor, you placed your personal assets (your bank account, her car, maybe even your home) at hazard for the services of her business. You deserve to lessen your threat with insurance, yet her liability exposure deserve to still be substantial. Provided that Ben and Jerry determined to start their ice cream organization together (and therefore the company was not owned by only one person), they might not collection their firm up as a sole proprietorship.

Partnership

A partnership (or general partnership) is a business owned jointly by two or more people. About 10 percent that U.S. Businesses room partnerships2 and also though the vast majority are small, some are quite large. Because that example, the large four public accountancy firms room partnerships. Setting up a partnership is more facility than setup up a sole proprietorship, but it’s still fairly easy and also inexpensive. The cost varies according to size and also complexity. It’s possible to type a simple partnership there is no the aid of a lawyer or one accountant, despite it’s usually a great idea come get experienced advice.

Professionals can aid you identify and resolve worries that may later develop disputes amongst partners.

The cooperation Agreement

The affect of problems can be reduced if the partners have actually executed a well-planned partnership agreement that mentions everyone’s rights and responsibilities. The covenant might administer such details as the following:

Amount the cash and other contributions to be made by each partnerdivision of partnership revenue (or loss)Partner responsibilities—who go whatConditions under i m sorry a partner have the right to sell an attention in the companyConditions because that dissolving the partnershipConditions because that settling disputes

Unlimited Liability and also the Partnership

A significant problem v partnerships, similar to sole proprietorships, is unlimited liability: in this case, each companion is personally responsible not only for his or her very own actions but likewise for the action of all the partners. If your companion in an architectural firm makes a wrong that causes a structure to collapse, the ns your company incurs effects you simply as much as it would him or her. And here’s the really poor news: if the organization doesn’t have actually the cash or other assets to cover losses, you deserve to be personally sued for the lot owed. In other words, the party who suffered a loss due to the fact that of the error deserve to sue you because that your an individual assets. Many people are understandably wake up to enter into partnerships because of unlimited liability. Details forms that businesses allow owners to limit your liability. This include limited partnerships and corporations.

Limited Partnerships

The legislation permits organization owners to form a limited partnership which has two varieties of partners: a solitary general partner who runs the business and is responsible because that its liabilities, and any number of restricted partners that have minimal involvement in the business and also whose accident are restricted to the lot of your investment.

Advantages and Disadvantages of Partnerships

The partnership has actually several advantages over the sole proprietorship. First, that brings with each other a diverse group the talented individuals who share obligation for running the business. Second, it renders financing easier: the company can attract on the financial resources of a variety of individuals. The partners no only add funds to the company but can likewise use an individual resources to secure financial institution loans. Finally, continuity needn’t it is in an issue because partners have the right to agree legally to permit the cooperation to make it through if one or an ext partners die.

Still, there room some negatives. First, as disputed earlier, partners space subject to countless liability. Second, gift a partner method that you have to share decision making, and also many human being aren’t comfortable v that situation. Not surprisingly, partners often have distinctions of opinion on just how to run a business, and also disagreements deserve to escalate come the point of dangerous the continue of the business. Third, in addition to sharing ideas, partners additionally share profits. This setup can work-related as lengthy as every partners feel that they’re being rewarded follow to their efforts and accomplishments, yet that isn’t always the case. If the partnership kind of ownership is regarded negatively by some, that was specifically appealing to Ben Cohen and also Jerry Greenfield. Starting their ice cream cream service as a partnership was inexpensive and let them combine their minimal financial resources and also use your diverse an abilities and talents. Together friends lock trusted each other and also welcomed shared decision making and also profit sharing. Lock were also not reluctant to be organized personally liable because that each rather actions.

Corporation

A corporation (sometimes dubbed a regular or C-corporation) different from a single proprietorship and also a partnership because it’s a legal entity that is completely separate from the next who own it. That can go into into binding contracts, buy and also sell property, sue and also be sued, be organized responsible because that its actions, and also be taxed. When businesses reach any considerable size, it is helpful to organize as a corporation so that its owners deserve to limit your liability. Corporations, then, often tend to be far larger, ~ above average, than businesses utilizing other develops of ownership. As number 6.2 shows, enterprise account because that 18 percent of every U.S. Businesses yet generate nearly 82 percent that the revenues.3 Most big well-known businesses space corporations, however so are many of the smaller firms with which likely you perform business.

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Figure 6.2: species of U.S. Businesses

Ownership and Stock

Corporations are owned by shareholders who invest money in the company by buying shares of stock. The section of the copy, group they very own depends top top the percent of stock they hold. Because that example, if a corporation has issued 100 share of stock, and you very own 30 shares, you very own 30 percent of the company. The shareholders elect a board of directors, a group of civilization (primarily from exterior the corporation) who room legally responsible because that governing the corporation. The board oversees the significant policies and also decisions make by the corporation, sets goals and also holds administration accountable because that achieving them, and also hires and evaluates the height executive, generally dubbed the CEO (chief executive, management officer). The board additionally approves the distribution of earnings to shareholder in the type of cash payments dubbed dividends.

Benefits the Incorporation

The corporate kind of organization uses several advantages, including restricted liability for shareholders, greater access to jae won resources, specialized management, and also continuity.

Limited Liability

The many important advantage of incorporation is the limited liability come which shareholders room exposed: they are not responsible because that the responsibilities of the corporation, and also they can lose no more than the amount the they have personally invested in the company. Limited liability would have been a big plus for the unfortunate individual whose business partner burned down your dry clean establishment. Had they to be incorporated, the coporation, group would have been liable because that the debts occurs by the fire. If the corporation didn’t have enough money to pay the debt, the separation, personal, instance shareholders would not have actually been obligated to pay anything. Castle would have lost every the money the they’d invest in the business, however no more.

Financial Resources

Incorporation additionally makes it feasible for businesses to raise funds by marketing stock. This is a huge advantage as a agency grows and also needs an ext funds come operate and also compete. Depending upon its size and also financial strength, the corporation likewise has an benefit over other creates of business in getting financial institution loans. An developed corporation can borrow its own funds, however when a small business demands a loan, the bank usually requires that it be guaranteed by its owners.

Specialized Management

Because that their size and capability to salary high sales commissions and also benefits, corporations are generally able come attract much more skilled and also talented employee than space proprietorships and partnerships.

Continuity and also Transferability

Another advantage of organization is continuity. Since the corporation has a legit life different from the lives of its owners, it can (at least in theory) exist forever.

Transferring ownership of a coporation, group is easy: shareholders simply sell their stock to others. Some founders, however, desire to border the transferability of their stock and also so pick to run as a privately-held corporation. The share in these corporations is held by just a couple of individuals, who are not permitted to market it come the general public.

Companies through no such restrictions on share sales are dubbed public corporations; stock is available for revenue to the basic public.

Drawbacks to Incorporation

Like sole proprietorships and partnerships, corporations have both optimistic and negative aspects. In sole proprietorships and also partnerships, because that instance, the people who own and manage a business are the very same people. That company managers, however, don’t necessarily very own stock, and shareholders nothing necessarily occupational for the company. This situation can be troublesome if the purposes of the two teams differ significantly.

Managers, for example, space often more interested in career advance than the in its entirety profitability of the company. Stockholders might care more about profits without regard for the well-being of employees. This instance is known as the agency problem, a dispute of interest inherent in a partnership in i beg your pardon one party is an alleged to plot in the finest interest of the other. It is frequently quite daunting to protect against self-interest indigenous entering into these situations.

Another drawback come incorporation—one that frequently discourages tiny businesses indigenous incorporating—is the reality that corporations are more costly to collection up. When you integrate filing and also licensing fees with audit and attorney fees, combine a company could set you back by $1,000 come $6,000 or an ext depending on the size and scope of your business.4 Additionally, corporations are subject to level of regulation and governmental oversight that deserve to place a load on small businesses. Finally, corporations space subject to those generally referred to as “double taxation.” Corporations room taxed through the federal and also state governments on your earnings. When these revenue are spread as dividends, the shareholder pay count on these dividends. Corporate earnings are therefore taxed twice—the corporation pays the count the first time and also the shareholder pay the taxes the second time.

Five year after beginning their ice cream cream business, Ben Cohen and also Jerry green field evaluated the pros and cons the the corporate kind of ownership, and also the “pros” won. The primary motivator was the must raise funds to construct a $2 million manufacturing facility. Not only did Ben and also Jerry decide to move from a partnership to a corporation, however they additionally decided to offer shares of share to the general public (and thus become a windy corporation). Their sale of share to the public was a little bit unusual: Ben and also Jerry want the ar to own the company, so rather of supplying the share to anyone interested in buying a share, they readily available stock to citizens of vermont only. Ben believed that “business has actually a obligation to give earlier to the community from which the draws its support.”5 He wanted the agency to be owned by those who lined up in the gas station to buy cones. The stock to be so well-known that one in every hundred Vermont family members bought share in the company.6 Eventually, as the company continued come expand, the stock was sold on a national level.

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Other types of business Ownership

In addition to the three commonly embraced forms of organization organization—sole proprietorship, partnership, and regular corporations—some organization owners pick other forms of company to fulfill their details needs. We’ll look at two of this options:

Limited-liability companiesNot-for-profit corporations

Limited-Liability Companies

How would you like a legal kind of organization that provides the attractive attributes of the three typical forms of organization (corporation, sole proprietorship and also partnership) and also avoids the unattractive functions of these three organization forms? The limited-liability company (LLC) accomplishes exactly that. This type provides organization owners with limited liability (a crucial advantage that corporations) and no “double taxation” (a crucial advantage of sole proprietorships and partnerships). Let’s look at the llc in much more detail.

In 1977, Wyoming became the first state to allow businesses to run as limited-liability companies. Twenty years later, in 1997, Hawaii came to be the last state to give its approval come the new organization form. Due to the fact that then, the limited-liability agency has boosted in popularity. The rapid development was sustained in component by changes in state statutes that permit a limited-liability firm to have just one member. The tendency to LLCs deserve to be observed by reading agency names ~ above the next of trucks or on shop in her city. It is typical to view names such together Jim Evans Tree Care, LLC, and For-Cats-Only vet Clinic, LLC. Yet LLCs room not limited to little businesses. Suppliers such together Crayola, domino Pizza, Ritz-Carlton Hotel Company, and iSold that (which helps human being sell their undesirable belongings top top eBay) space operating under the limited-liability kind of organization.

In a limited-liability company, owner (called members rather than shareholders) space not personally liable because that debts of the company, and its income are taxed only once, in ~ the an individual level (thereby eliminating dual taxation).

We have touted the benefits of minimal liability defense for an LLC. We now need to allude out some circumstances under i beg your pardon an llc member (or a shareholder in a corporation) could be organized personally liable for the debts of his or she company. A organization owner can be organized personally responsible if he or she:

Personally guarantees a company debt or bank loan i beg your pardon the company fails come pay.Fails to salary employment taxes come the government.Engages in cheat or illegal actions that harms the firm or who else.Does no treat the company as a separate legal entity, for example, uses firm assets for personal uses.

Not-for-Profit Corporations

A not-for-profit corporation (sometimes called a nonprofit) is one organization created to serve part public purpose rather than for financial gain. As lengthy as the organization’s task is because that charitable, religious, educational, scientific, or literature purposes, it have the right to be freed from paying earnings taxes. Additionally, individuals and other organizations that add to the not-for-profit corporation have the right to take a tax deduction because that those contributions. The types of teams that normally apply for nonprofit condition vary widely and include churches, synagogues, mosques, and other areas of worship; museums; universities; and also conservation groups.

There are much more than 1.5 million not-for-profit organizations in the unified States.7 part are incredibly well funded, such as the Bill and also Melinda entrances Foundation, which has an endowment of roughly $40 billion and also has offered away $36.7 billion due to the fact that its inception.8 Others are nationally recognized, together as unified Way, Goodwill Industries, Habitat because that Humanity, and the Red Cross. However the vast bulk is neither affluent nor famous, yet nevertheless makes significant contributions come society.

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Mergers and Acquisitions

The headline read, “Wanted: much more than 2,000 in Google rental Spree.”9 The largest web search engine in the world was expose its to plan to prosper internally and increase its workforce by much more than 2,000 people, with fifty percent of the rental coming from the united States and the other half coming from various other countries. The added employees will aid the firm expand into new markets and also battle for an international talent in the vain Internet information providers industry. As soon as properly executed, internal expansion benefits the firm.

An alternate approach to growth is to merge with or acquire an additional company. The reason behind expansion through merger or acquisition is that 1 + 1 = 3: the combined agency is more valuable than the amount of the two separate companies. This rationale is attractive come companies facing competitive pressures. To grab a bigger re-superstructure of the market and also improve profitability, service providers will want to become much more cost reliable by combine with various other companies.

Mergers and Acquisitions

Though they are frequently used as if castle synonymous, the terms merger and also acquisition average slightly different things. A merger occurs once two companies incorporate to type a new company. An acquisition is the acquisition of one firm by another. An instance of a mergers is the merging in 2013 of us Airways and also American Airlines. The an unified company, the biggest carrier in the world, flies under the surname American Airlines.

Another instance of an salvation is the purchase of Reebok by Adidas because that $3.8 billion.10 The transaction was meant to offer Adidas a stronger existence in north America and aid the company compete with rival Nike. Once this acquisition to be completed, Reebok together a company ceased come exist, though Adidas quiet sells shoes under the Reebok brand.

Motives behind Mergers and also Acquisitions

Companies are urged to unify or obtain other service providers for a variety of reasons, consisting of the following.

Gain security Products

Acquiring complementary products to be the motivation behind adidas acquisition that Reebok. Together Adidas CEO Herbert Hainer stated in a conference call, “This is a once-in- a-lifetime opportunity. This is a perfect fit for both companies, because the service providers are for this reason complementary…. Adidas is grounded in sporting activities performance with such commodities as a motorized to run shoe and also endorsement deals with such superstars as British soccer player David Beckham. Meanwhile, Reebok plays greatly to the mediate of sports and also entertainment v endorsement deals and products by Nelly, Jay-Z, and also 50 Cent. The combination could be deadly to Nike.” of course, Nike has ongoing to thrive, however one can not blame hyiner for his optimism.11

Attain brand-new Markets or distribution Channels

Gaining brand-new markets was a significant factor in the 2005 merger of united state Airways and America West. Us Airways to be a significant player top top the east Coast, the Caribbean, and Europe, when America West was solid in the West. The expectation were the combining the two carriers would produce an airline that could reach more markets than either carrier could do top top its own.12

Realize Synergies

The acquisition of Pharmacia corporation (a swedish pharmaceutical company) by Pfizer (a research-based pharmaceutical company based in the united States) in 2003 developed one that the world’s largest drug makers and also pharmaceutical companies, by revenue, in every significant market around the globe.13 The acquisition developed an industry large with more than $48 exchange rate in revenue and also a research-and-development budget plan of an ext than $7 billion. Each day, virtually forty million people about the globe are treated v Pfizer medicines.14 Its succeeding $68 billion purchase of rival drug an equipment Wyeth additional increased its existence in the pharmaceutical market.15

In pursuing this acquisitions, Pfizer most likely identified countless synergies: rather simply, a entirety that is better than the amount of the parts. There are countless examples that synergies. A merger typically results in a number of redundant positions; the combined agency does not likely need 2 vice-presidents of marketing, two chief gaue won officers, and also so on. Removed the redundancy positions leads to far-reaching cost save that would not be realized if the two carriers did no merge. Let’s say every of the companies was operation factories at 50% the capacity, and by merging, one factory can be closed and sold. The would likewise be an instance of a synergy. Companies bring different strengths and also weaknesses into the an unified entity. If the newly-combined firm can take advantage of the marketing capability of the stronger entity and also the circulation capabilities of the other (assuming they space stronger), the brand-new company deserve to realize synergies in both of these functions.

Hostile Takeover

What happens, though, if one company wants come acquire another company, however that firm doesn’t want to it is in acquired? The outcome could be a hostile takeover—an action of assuming control that’s resisted by the target company’s management and also its plank of directors. Ben Cohen and Jerry Greenfield found themselves in one of these situations: Unilever—a very large Dutch/British firm that owns 3 ice cream brands—wanted to buy Ben & Jerry’s, against the founders’ wishes. Many of the Ben & jerry stockholders sided v Unilever. They had tiny confidence in the capability of Ben Cohen and Jerry greenfield to proceed managing the firm and to be frustrated through the this firm social-mission focus. The stockholders favored Unilever’s offer to buy their Ben & Jerry’s share at practically twice its current market price and also wanted come take your profits. In the end, unilater won; Ben & jerry was acquired by unilever in a hostile takeover.16 in spite of fears the the company’s social mission would certainly end, it no happen. Though neither Ben Cohen no one Jerry green field are connected in the current management that the company, they have actually returned to your social work roots and also are heavily associated in plenty of social initiatives sponsored by the company.

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Chapter Video: business Structures 

Here is a short video providing a basic and straightforward recap the the an essential points the each form of organization ownership.