Types of Organizations

Forms of Business Ownership

Pharmaceutical company

Rug & upholstery

Real estate company

Car dealership

Vermont Banker’s Association

Jewelry manufacturing and imports

Advertisement company

EMC Technology

Dairy farm Law firm

Experian Information Solutions (worldwide)

Apartment management company / boat cruises

Telephone device company

Internet company

Trading company

Bicycle & Sports company

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

3 major forms of business1. Sole / single proprietorship

One owner Source of investment: personal funds Examples: bakery, flowershop, meat market

2. 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

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

3

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

Sole Proprietorship/Partnership

Advantages

Freedom

Simple to form

Low start up costs

Tax benefits

Disadvantages

Unlimited Liability

Limited resources

Limited

fundraising

capability

Lack of continuityUnlimited LiabilityLegal principle holding owners responsible for

paying off all debts of a business

Unlimited LiabilityLegal principle holding owners responsible for

paying off all debts of a business

Stock: A share of ownership in a corporation

Two types: Common Stock & Preferred Stock

How a corporation issues Stock

Corporation XYZShareholders of Corporation XYZ

(Investment firms)

Other Investors

issues (= sells) stock (= shares)

pay $$$

IPO

Transfer of ownership in a corporation

Corporation XYZ Shareholders of Corporation XYZ

Other investors

Exchange stock (= shares)

Corporation

Advantages Limited financial

liability Ease of transfer of

ownership Legal entity Perpetual lifeEasier 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)

The concept of Double Taxation

Income StatementCorporation

Sales$100

Expenses 80

Pre-tax income $ 20

Taxes (e.g. 50%) 10

Net income $ 10

Shareholder‘s Personal Income

Statement

Income from dividends $10

Taxes (e.g. 30%) $ 3Net income $ 7

Role of the (common) Stockholders (= Owners)

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 repurchase of 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).

Roles & Reporting Relationships

elect

hires / appoints

Role of the Board of Directors

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

managemento Strategic planningo Financial goal settingo Mergers and acquisitions

Role of the President / CEO (Chief Executive Officer)

Manage the day-to-day operationsHire and supervise other managers

Limited Liability Company(LLC)

A type of general partnershipPartners taxed at personal levelProvides limited liability for the partnersLaws and liability protection vary by stateRelatively new legal structure for a

business

Merger: The union of two corporations to form a new corporation: Former

companies cease to exist as independent companies.

Acquisition: A larger company buying a smaller one: Old company ceases to exist as

an independent entity.

Divestiture A firm selling 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 new businesses

(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) company for collaboration

and joint ownership, often in another country: Both original companies continue to exist independently.

Special forms of changes in ownership

In the news --Examples of changes in ownership

1. 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

2. 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

3. 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)

4. 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

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

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.