Businesses Categories

Sole Proprietorship Partnership Limited Liability Company Limited Liability Partnership Corporations

1

Sole Proprietorship

A business which legally has no separate existence from its owner

Only one owner The most numerous form of business

organization

2

Advantages

Total control over all aspects of running the business

No legal formalities in forming or dissolving a business

Simplified tax reporting requirements Limited government regulation Owner receives the entire profit

3

Disadvantages

Difficult to finance startup Difficult to borrow Life span of business directly tied to

the proprietor The proprietor has unlimited liability,

i.e. no distinction is made between business and personal assets

4

Partnerships

A business with two or more co-owners

The second most common business formation

5

Advantages

Minimal legal formalities in forming or dissolving a business

Simplified tax reporting requirements Limited government regulation Owners receive the entire profit Greater startup capital Easier to borrow money Partners can pool resources, expertise, and

strengths

6

Disadvantages All partners are personally liable for

business debts and liabilities. Partners may have different visions or goals

for the business. There may be unequal commitment in

terms of time and finances. Each partner may also be liable for debts

incurred, decisions made, and actions taken by the other partner or partners.

Life span of business directly tied to cooperation between the partners.

7

Partnerships - Individuals

General Partnership Limited Partnership

8

General Partnership

A partnership in which each general partner shares in the administration, profits and losses of the operation.

9

Limited Partnership

A partnership run by one or more general partners and funded by limited or silent partners who are legally responsible for losses based only on the amount of their investment

10

Partnerships - Businesses

Joint Venture Strategic Alliance

11

Joint Venture

Two or more businesses joining under a contractual agreement to create a separate business enterprise with each party sharing profits and losses.

12

Joint Venture - Example

BP and D1 Oils plc announced today that they are to form a 50/50 joint venture, to be called D1-BP Fuel Crops Limited, to accelerate the planting of Jatropha curcas – a drought resistant, inedible oilseed bearing tree which does not compete with food crops for good agricultural land or adversely impact the rainforest – in order to make more sustainable biodiesel feedstock available on a larger scale.

13

Strategic Alliance A Strategic Alliance is a partnership in

which businesses combine resources. This can involve anything from getting a better price for goods by buying in bulk or tapping markets with each entity providing unique products or services. The basic idea is to minimize risk while maximizing leverage in the marketplace.

14

Strategic Alliance - Example Diversified industrial manufacturer Eaton Corporation and

Linde Hydraulics, a division of KION Group GmbH, today announced they have entered into a global strategic alliance.

The agreement strengthens product lines, market distribution channels and regional coverage for both companies. Customers worldwide in construction, agriculture, vocational vehicles, civil engineering, processing and other industrial markets will benefit from expanded access to hydraulic system technologies and services through the new alliance. Eaton will add Linde's comprehensive range of high-pressure piston pumps, motors and valves to its portfolio, and Linde will offer Eaton's medium-pressure piston products.

15

Limited Liability Company

Small business owners and entrepreneurs may prefer LLC's because they combine the limited liability protection of a corporation with the "pass through"" taxation of a sole proprietorship or partnership.

16

Limited Liability Partnership Essentially the same thing as a LLC, except

that an LLP is specifically designed for use by certain professions (for example, accountants, lawyers or architects).

Run like general partnerships and has a similar degree of management flexibility. Income, losses and gains are passed through to the general partners according to the partnership agreement.

17

Corporation

A corporation is a legal entity (technically, a juristic person) which has a separate legal identity from its members

A firm becomes a corporation by obtaining a charter of incorporation from a state

18

Advantages Owners' personal assets are protected from

business debt and liability Unlimited life extending beyond the illness or

death of the owners Transfer of ownership facilitated by sale of

stock Change of ownership need not affect

management Easier to raise capital through sale of stocks

and bonds

19

Disadvantages

More expensive to form than proprietorship or partnerships

More legal formality More state and federal rules and

regulations Possibility of double taxation – profits

and dividends

20

Legal Issues

The ability to sue and be sued The right to enter into contracts

21

Types of Corporations

C Corporations S Corporations Close Corporations Professional Corporations

22

C Corporations

Most common type of corporation C corporations can have an unlimited

number of shareholders Structure of choice for companies

planning to have a large shareholder base or publicly traded stock

23

S Corporations Taxed as a "pass-through" entity (as if the

owners were sole proprietors or partners) All corporate profits and stock dividends are

reported by the owners as personal income. Blends the tax advantages of a sole

proprietorship or partnership with the limited liability of a corporation.

The number of shareholders may not exceed 75

24

Close Corporations

Resembles the traditional C corporation

A company with a sole owner or a small group of owners, usually not to exceed 30 to 35 shareholders.

25

Professional Corporations

Formed for the purpose of conducting a profession requiring a license to practice, i.e. doctors, lawyers, etc.

Allowed to operate with a single director, who is a professional

Does not provide a shield for liability for any professional malpractice

26

Corporate Governance

The principal players in a corporation are:

Shareholders Board of Directors Management

27

Stockholders (Shareholders)

Corporation’s owners Elect the Board of Directors Vote on questions affecting the

company as a whole

28

Board of Directors Keeps the organization’s mission, values, and vision out

front. Long range planning for the organization. Monitors fiscal management and maintains accountability to

funders and donors. Review and approves the annual budget, major program

plans, and organizational policies. Ensure the adequate resources are available to the

organization. Evaluates the organizational effectiveness. Hires and evaluates the executive director. Represents public need and interest within the organization. Represents the organization to the public, especially to

sources of financial support. Head of the Board – Chairman or Chairwoman

29

Management

Head manager is the CEO or presidentThe four basic functions of management

are: Planning Organizing Leading Coordinating resources

30

Corporate Structures

Vertical Integration Horizontal Integration Conglomerate Franchise Multinational

31

Vertical Integration

Vertical integration describes a company’s control over several or all of the production and/or distribution steps involved in the creation of its product or service.

32

Horizontal Integration

Control of one level of a production or distribution chain

Other firms must use the goods or services of this firm in order to get their goods/services to market

Standard Oil (refineries) and Microsoft (PC operating software) are examples

33

Conglomerate A corporation consisting of several

companies in different businesses. Such a structure allows for diversification of business risks, but the lack of focus can make managing the diverse businesses more difficult.

Examples – GE, Textron, ITT (1960’s)

34

Franchise

A business relationship in which an owner (the franchisor) licenses others (the franchisees) to operate outlets using business concepts, property, trademarks and trade names owned by the franchisor.

Example – McDonald’s

35

Multinational

A multinational corporation (MNC) is a corporation or enterprise that manages production establishments or delivers services in at least two countries.

Examples – Nike, Coca Cola, Wal-Mart, BMW

36

Stock

A share of stock represents part ownership in a corporation. There are two basic types of shares:

Common stock – gives shareholder voting rights but does not guarantee dividends.

Preferred stock – guarantees dividends but does not give shareholder voting rights.

37

Stock, cont. Stocks are originally sold by corporations to

investment firms known as Underwriters. This is the only time the corporation gets paid for the sale of stock.

Underwriters then sell stock to public through an IPO (Initial Public Offering) – Primary Market.

Public can then buy and sell the stock at will in the Secondary Market.

38

Secondary Market – the Stock Exchanges

The two most important US stock exchanges are:

The New York Stock Exchange (NYSE) – a physical market

The NASDAQ – a virtual market

39

A corporation’s capitalization determines on which exchange its stock will be traded.

Capitalization equals a corporation’s stock price times the number of shares outstanding.

Capitalization

40

Stock Exchange IndexesNYSE is tracked by several indexes, the two

most important being: The DJIA or “the Dow” consists of the stock

of 30 corporations The S&P 500 consists of the stock of 500

corporations and is viewed as a more accurate indicator of market performance

NASDAQ is tracked by: The NASDAQ composite – consists of the

stock of all corporations (3113)traded on the NASDAQ exchange

41