Types of Organizations Forms of Business Ownership

Types of Organizations

Forms of Business Ownership

Pharmaceutical company

Rug & upholsteryReal estate companyCar dealershipVermont Banker’s AssociationJewelry manufacturing and importsAdvertisement companyEMC TechnologyDairy farmLaw firmExperian Information Solutions (worldwide)Apartment management company / boat cruisesTelephone device companyInternet companyTrading companyBicycle & Sports company

Your

family’s

involvement in business / 3 forms of ownership

3 major forms of business

Sole / single proprietorshipOne ownerSource of investment: personal fundsExamples: bakery, flowershop, meat marketPartnership2+ owners, general partners, limited partnersSource of investment: personal funds of partnersExamples: law / accounting firms, medical / dental practicesCombination: 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 = investorsUnder control of the Board of Directors, which is elected by the stockholdersSource of investment: stock issues

3

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

Sole Proprietorship/Partnership

AdvantagesFreedomSimple to formLow start up costsTax benefitsDisadvantagesUnlimited LiabilityLimited resourcesLimited fundraising capabilityLack of continuityUnlimited 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 Investorsissues (= sells) stock (= shares) pay $$$IPO

Transfer of ownership in a corporation

Corporation XYZShareholders of Corporation XYZOther investorsExchange stock (= shares)

Corporation

AdvantagesLimited financial liabilityEase of transfer of ownershipLegal entityPerpetual lifeEasier access to $$$ / capital to grow the business (= stronger fundraising capability)DisadvantagesDouble taxationComplicated and expensive to form and manageSubject to disclosure requirements by the government (the SEC = Securities & Exchange Commission)

The concept of Double Taxation

Income StatementCorporationSales $100Expenses 80Pre-tax income $ 20Taxes (e.g. 50%) 10Net income $ 10Shareholder‘s Personal Income StatementIncome from dividends $10Taxes (e.g. 30%) $ 3Net income $ 7

Role of the (common) Stockholders (= Owners)

RightsElect the Board of DirectorsBenefit from stock appreciation (increase in value)Receive dividendsAppoint auditors to judge the company’s financial statementsApprove the issue of new shares / stocks or the repurchase of existing stocksRisksThe 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

Relationshipselecthires / appoints

Role of the Board of Directors

Responsibilities:Represent the stockholdersFulfill objective: maximize shareholders’ wealthMake sure that management acts in the best interest of stockholdersHire the company presidentDeclare dividendsSet policyFocus on “big picture” issues, not day-to-day managementStrategic planningFinancial goal settingMergers 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-offSetting 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 ownershipUnited 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, 5/3/2010Restructuring 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. 6/21/2010BP, 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

Stakeholders

Anyone impacted by actions of a company (except for competitors)Key stakeholder groups:The company and its employeesCustomersInvestors (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.