Lecture 05emad@iqraisb.edu.pk

Business Ownership Types....

• Sole Proprietorship.– A business that is owned and usually

managed by one person.

• Partnership.– A legal form of business with two or

more owners.

• Corporation.– A legal entity with authority to act and

have liability separate from its owners.

• Corporations make up 20% of the total number of businesses.– They generate 81% of the total revenue.

• Sole proprietorships make up 72% of the total number of businesses.– Generate 6% of the revenue.

Sole Proprietorships

• Pros– Ease of starting and ending.– Being your own boss.– Pride of ownership.– Retention of profit.– No special taxes.

• Cons– Unlimited liability ~ define (?)– Limited financial resources.– Difficulty in management.– Overwhelming time commitment.– Few fringe benefits.– Limited growth.– Limited time span.

Partnerships

• Three main elements– Common ownership.– Shared profit/loss.– Right to participate in managing of the

business operations.

• General partners – Have unlimited liability and are active in

managing the company.

• Limited Partners– Have limited liability and do not participate

in management of the company.

Liability

• Unlimited liability– Sole proprietors and general partners

must pay all debts and damages caused by their company. Personal possessions may have to be sold to pay these costs.

• Limited liability– Corporate owners (stock holders) and

limited partners are only responsible for the amount they invest. Personal property is not at risk.

• Pros– Greater availability of financial resources.– Shared management & pooled knowledge.– Longer survival chance.

• Cons– Unlimited liability.– Division of profits.– Disagreements among partners.– Difficulty of termination.

Corporations

• A corporation is a state chartered entity with authority to act and have liability separate from its owners.

• Reason for people incorporating?– Special tax advantages.– Limited liability.

• Pros– Greater amount of money for investment.– Limited liability.– Size.– Perpetual life.– Ease of ownership change.– Ease of drawing talented employees.

• Cons– High initial cost.– Large amount of paperwork.– Difficulty of terminations.– Size.– Double taxation.– Conflict with board of directors.

S Corporations.

• A unique government creation that looks like a corporation but is taxed like sole proprietorships/partnerships. (single Tax for shareholders and business).

• Conditions to be eligible– Fewer than 75 stock holders– Stockholders must be individuals or estates

& U.S. citizens or permanent residents.– Company cannot have more than 25% of

income derived from passive sources (rents, royalties, interest etc).

Limited liability Companies

• A company that is similar to the S corporation but without the special eligibility requirements.

• Pros– Limited liability.– Choice of taxation.– Flexible ownership rules.– Flexible distribution of profit and loss.– Operating flexibility.

• Cons– No stock.– Limited life span.– Fewer incentives.– Taxes.– Paperwork.

• Comparison of types of business ownership.– Chapter 5 , Book I, pg.155

Mergers & Acquisitions

• Merger– The result of two firms forming a company.

• Acquisition– One company's purchase of the property and

obligations of another company.

• Vertical Merger– The joining of two companies involved in different

stages of related businesses.– Examples?

• Horizontal Merger– The joining of two firms in the same industry.– Examples?

• Conglomerate merger– The joining of firms in completely unrelated

industries.

• Leveraged buyout (LBO)– An attempt by employees, management, or

a group of investors to purchase an organisation.

– Done primarily through borrowing.

Franchise

• An arrangement to buy the rights to use the business name and sell its products or services in a given territory.

• Pros– Nationally recognised name and

reputation.– A proven management system.– Promotional assistance.– Pride of ownership.

• Cons– High franchise fees.– Managerial regulation.– Shared profits.– Transfer of adverse effects if other

franchisees fail.

Co-operatives

• Organisations are organisations that are owned by the members/customers themselves.

• Controlled by the people who use it – producers, consumers or workers with similar needs who pool their resources for mutual gain.

• Some people form co-operatives to give members more economic power than they would have as individuals.

• Small businesses often form co-operatives to gain purchasing, marketing or product development strength.