Chapter 05 Options for Organizing Business

Summary

 

Objectives:

 

Chapter Outline:

  1. Define and examine the advantages and disadvantages of the sole proprietorship form of organization.
    1. Sole proprietorships are businesses owned by one person
      1. Advantages
        1. Ease and cost of formation
        2. Secrecy
        3. Distribution and use of profits
        4. Flexibility and control of the business
        5. Freedom from much government regulation
        6. Taxation limitations
        7. Ease of dissolution
      2. Disadvantages
        1. Unlimited liability
        2. Limited sources of funds
        3. Limited owners skills
        4. Lack of continuity
        5. Lack of qualified employees
        6. Taxation

     

  2. Identify three types of partnership and evaluate the advantages and disadvantages of the partnership form of organization
    1. Three types of partnerships:
      1. General partnership – partners sharing completely the management of a business and the liability.
      2. Limited partnership – general partner(s) who assumes unlimited liability and other partner(s) whose liability is limited to the investment
      3. Joint venture –established to accomplish a specific project or to operate for a limited time.
    2. Advantages of Partnerships
      1. Ease of organization
      2. Availability of capital and credit
      3. Combined knowledge and skills
      4. Decision making
      5. Regulatory controls
    3. Disadvantages of Partnerships
      1. Unlimited liability
      2. Business responsibility
      3. Life of partnership
      4. Distribution of profits
      5. Limited sources of funds
      6. Taxation of partnerships

     

     

  3. Describe the corporate form of organization and cite the advantages and disadvantages of corporations.
    1. Corporation – legal entity with assets and liabilities distinct from those of the owner of the corporation
    2. Owners of corporation own shares of the firm called stock. These stockholders are entitled to all profits that are left after the corporation’s other obligations have been paid.
    3. Types of Corporations
      1. Private
      2. Public
      3. Subsidiary
      4. Holding company
      5. Quasi-public
      6. Nonprofit
    4. Advantages of Corporation
      1. Limited liability
      2. Ease of ownership transfer
      3. Perpetual life
      4. External funds sources
      5. Potential for expansion
    5. Disadvantages of Corporation
      1. Double taxation
      2. Formation costs
      3. Information disclosure requirements
      4. Employee-owner separation

     

     

  4. Define and debate the advantages and disadvantages of mergers, acquisitions, and leveraged buyouts
    1. Mergers
      1. Occurs when two companies combine to form a new company
        1. Horizontal
        2. Vertical
        3. Conglomerate
    2. Acquisitions
      1. Occurs when one company purchases another usually by buying its stock.
        1. Friendly – both companies agree to deal
        2. Hostile – when company does not want to be taken over
    3. Leveraged Buyout (LBO)
      1. Purchase of a company by a group of investors with borrowed money, using the assets of the company to guarantee repayment of the loan.
    4. Advantages of mergers, acquisitions, and buyouts
      1. Boost corporations’ stock prices
      2. Boost market value
      3. Enhance a company’s ability to meet competition
      4. Gain technological competence
      5. Streamline operations through cutting costs
    5. Disadvantages of mergers, acquisitions, and buyouts
      1. Force management’s focus away from effectiveness and profitability
      2. Heavy debt to avoid takeover
      3. Damage employee morale and productivity
      4. Affects product quality