Selecting the Proper Form of Business
Ownership and Exploring Mergers and
Acquisitions
Chapter 4
Sole Proprietorships
Partnerships
Corporations
Sole Proprietorship:Business owned by a single individual
Unlimited Liability: Legal condition under which any business damages
or debts can also be attached to the owner because the two have no separate legal identity
Advantages Easy to establish
Owner has control & independence
Owner reaps all profits
Income is taxed at individual rates
Company plans & financial performace remain private
Disadvantages Limited financial
resources
Owner may lack managerial skills
Owner is liable for business debts & damages
Business may cease with death of owner
Partnership:Unincorporated business owned and operated by two or
more persons under a voluntary legal association
General Partnership:Partnership in which all partners have the right to
participate as co-owners and are individually liable for the business's debts
Limited Partnership:Partnership composed of one or more general partners and
one or more partners whose liability is usually limited to the amount of their capital investment
Advantages Easy to establish
Owners have control & independence
Owners reap all profits
Income is taxed at lower individual rates
Strength in numbers
Disadvantages Owners are liable for
business debts & damages
Potential interpersonal problems
Corporation: Legally chartered enterprise having most of the
legal rights of a person, including the right to conduct business, to own and sell property, to borrow money, and to sue or be sued-owners of the corporation enjoy limited liability
Shareholders: Owners of a corporation
Stock: Shares of ownership in a corporation
Stock Certificate: Document that proves stock ownership
Common Stock: Shares whose owners have voting rights and
have the last claim on distributed profits and assets
Preferred Stock: Shares that give their owners first claim on a
company's dividends and assets after paying all debts; usually pays fixed dividends
Dividends: Distributions of corporate assets to shareholders
in the form of cash or other assets
Ele
cts
Ele
cts
AppointsAppoints
ShareholdersOwners can be: Individuals Other Companies Not-for-Profit
Organizations Pension Funds
Mutual Funds
Board of DirectorsGroup of people elected by the shareholders who have the ultimate authority in guiding the affairs of a corporation
Proxy:Proxy:Document authorizing Document authorizing another person to vote on another person to vote on behalf of a shareholder in a behalf of a shareholder in a corporationcorporation
OfficersChief Executive Officer (CEO)
Chief Financial Officer (CFO)
Chief Operating Officer (COO)Persons appointed by the board of directors to carry out the board's policies and supervise the activities of the corporation
Merger: Combination of two companies in which one company purchases the other and assumes control of its property and liabilities
Consolidation:Combination of two or more companies in which the old companies cease to exist and a new enterprise is created
Advantages Economies of scale
Efficiencies
Synergies: sum is greater than individual parts
Disadvantages Culture clashes
Create a burden of high-risk corporate debt
Distract managers from day-to-day operations
Trusts: Monopolistic arrangements established when one company
buys a controlling share of the stock of competing companies in the same industry
Horizontal Mergers: Combinations of companies that compete directly in the
same industry
Vertical Mergers: Combinations of companies that participate in different
phases of the same industry (i.ematerials. production. distribution
Conglomerate Mergers: Combinations of companies that are in unrelated
businesses. Designed to augment a company's growth and diversify risk
Leveraged Buyouts (LBOs): Situation in which individuals or groups of investors
purchase companies primarily with debt secured by the company's assets
Hostile Takeovers: Situations in which an outside party buys enough stock in a
corporation to take control against the wishes of the board of directors and corporate officers
A hostile takeover can be launched in two ways:A hostile takeover can be launched in two ways:Tender Offer:
Invitation made directly to shareholders by an outside party who wishes to buy a company's stock at a price above the current market price
Proxy Fight: Attempt to gain control of a takeover target by
urging shareholders to vote for directors favored by the acquiring party
Schemes to avoid hostile takeovers:Schemes to avoid hostile takeovers:
PoisonPill
Golden Parachute
Shark Repellant
White Knight
Poison pill-showing the company less valuable . Special sale of newly issued stock tocurrent
stockholders at prices below the market price İncreases the number of shareholders and
makes the company more expensive to overtake.
The golden parachute-benefit the company’s top execurives by guaranteeing them generous compensation packages if they ever leave or forced out after a takeover .
The shark repellent-stokeholders must approve the takeover.
The white knight –uses a friendly buyer to take over the company before a raider does.
White knights agree to leave the current management tean inplace and let the company operate in an independent fashion.
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