Learning Objectives

Identify the questions to ask in choosing the appropriate kind of ownership for a business.Describe the single proprietorship and also partnership forms of organization, and also specify the benefits and disadvantages.Identify the different species of partnerships, and also explain the importance of a cooperation agreement.Explain how corporations room formed and how castle operate.Discuss the benefits and disadvantages of the corporate type of ownership.Examine special varieties of company ownership, including limited-liability companies, and not-for-profit corporations.Define mergers and also acquisitions, and also explain why suppliers are motivated to merge or gain other companies.

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The ice Cream Men

Who would have thought it? two ex-hippies with strong interests in social activism would end up beginning one that the best-known ice cream service providers in the country—Ben & Jerry’s. Perhaps it was expected to be. Ben Cohen (the “Ben” the Ben & Jerry’s) constantly had a fascination with ice cream. As a child, that made his own mixtures by smashing his favorite cookies and also candies right into his ice cream cream. However it wasn’t until his an elderly year in high college that he became an main “ice cream man,” happily driving his van through communities filled with kids eager to buy his ice cream pops. After high school, Ben tried college but it wasn’t because that him. The attended Colgate university for a year and also a half before the dropped the end to return to his real love: gift an ice cream man. The tried university again—this time in ~ Skidmore, whereby he studied pottery and also jewelry making—but, regardless of his an option of courses, still didn’t choose it.

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Figure 6.1: Ben Cohen and also Jerry greenfield in 2010

In the meantime, Jerry green field (the “Jerry” that Ben & Jerry’s) was complying with a comparable path. He specialty in pre-med at Oberlin college in the hopes of one day becoming a doctor. However he had actually to provide up ~ above this goal once he was not embraced into medical school. On a hopeful note, though, his college education steered him right into a more lucrative field: the civilization of ice cream making. He gained his very first peek in ~ the ice cream market when he operated as a trowel in the college student cafeteria at Oberlin. So, fourteen year after they an initial met top top the junior high school track team, Ben and also Jerry reunited and decided to get in ice cream making large time. They moved to Burlington, Vermont—a college city in need of an ice cream cream parlor—and completed a $5 correspondence food from pen State on making ice cream cream. After getting an A in the course—not surprising, provided that the test were open book—they take it the plunge: v their life to save of $8,000 and also $4,000 of borrowed funds they collection up an ice cream cream shop in a made-over gas station on a liven street corner in Burlington.1 The next huge decision was which form of service ownership was finest for them. This thing introduces girlfriend to their options.

Factors to Consider

If you’re starting a brand-new business, you need to decide which legal form of property is ideal for you and also your business. Carry out you want to very own the business yourself and operate as a single proprietorship? Or, carry out you desire to re-publishing ownership, operating as a cooperation or a corporation? prior to we discuss the pros and also cons of these three types of ownership, let’s resolve some that the inquiries that you’d more than likely ask yourself in picking the ideal legal form for your business.

In setup up your business, execute you desire to minimization the costs of gaining started? execute you hope to avoid complex government regulations and also reporting requirements?How much regulate would girlfriend like? exactly how much duty for to run the organization are you ready to share? What about sharing the profits?Do you desire to stop special taxes?Do you have actually all the an abilities needed to operation the business?Are you likely to get along with your co-owners end an extended duration of time?Is it essential to you that the service survive you?What space your jae won needs and how carry out you setup to finance her company?How much an individual exposure come liability space you ready to accept? do you feeling uneasy around accepting an individual liability because that the actions of fellow owners?

No single type of ownership will provide you every little thing you desire. You’ll have to make some trade-offs. Because each option has both benefits and disadvantages, your job is to decision which one offers the features that are most necessary to you. In the complying with sections fine compare 3 ownership alternatives (sole proprietorship, partnership, corporation) on these eight dimensions.

Sole Proprietorship and its Advantages

In a sole proprietorship, together the owner, friend have finish control over your business. You make all essential decisions and also are normally responsible for every day-to-day activities. In exchange for assuming every this responsibility, you get all the earnings earned by the business. Revenues earned space taxed as an individual income, so friend don’t need to pay any special federal and state earnings taxes.

Disadvantages of sole Proprietorships

For countless people, however, the sole proprietorship is not suitable. The flip next of enjoying complete control is having actually to supply every the various talents that might be vital to do the service a success. And also when you gone, the business dissolves. You also have to rely on your very own resources because that financing: in effect, you room the business and also any money borrowed by the service is loaned to you personally. Even much more important, the single proprietor bear unlimited liability for any losses occurs by the business. The rule of unlimited personal liability means that if the service incurs a blame or sick a catastrophic (say, getting sued for bring about an injury come someone), the owner is personally liable. As a sole proprietor, you put your personal assets (your financial institution account, your car, maybe also your home) at threat for the benefits of your business. You deserve to lessen your risk with insurance, yet your liability exposure deserve to still it is in substantial. Given that Ben and also Jerry determined to begin their ice cream cream company together (and thus the service was not owned by only one person), they can not set their company up as a sole proprietorship.

Partnership

A partnership (or basic partnership) is a service owned jointly by two or an ext people. About 10 percent the U.S. Businesses are partnerships2 and also though the vast majority are small, some are rather large. Because that example, the huge four public bookkeeping firms are partnerships. Setup up a partnership is more complex than setup up a sole proprietorship, but it’s still fairly easy and inexpensive. The cost varies according to size and complexity. It’s feasible to type a simple partnership without the help of a lawyer or one accountant, despite it’s typically a great idea come get skilled advice.

Professionals can aid you identify and also resolve worries that may later develop disputes among partners.

The cooperation Agreement

The affect of conflicts can be minimized if the partners have actually executed a well-planned partnership agreement that specifies everyone’s rights and also responsibilities. The covenant might carry out such details together the following:

Amount of cash and also other contribute to be made through each partner division of partnership revenue (or loss)Partner responsibilities—who go whatConditions under which a partner can sell an interest in the companyConditions for dissolving the partnershipConditions because that settling disputes

Unlimited Liability and also the Partnership

A significant problem with partnerships, just like sole proprietorships, is unlimited liability: in this case, each partner is personally liable not only for his or her very own actions but also for the action of all the partners. If your partner in an architectural firm renders a mistake that reasons a structure to collapse, the loss your service incurs results you just as lot as it would certainly him or her. And also here’s the really negative news: if the organization doesn’t have actually the cash or other assets to cover losses, you can be personally sued for the quantity owed. In other words, the party who endured a loss since of the error can sue you for your personal assets. Many civilization are understandably reluctant to get in into partnerships due to the fact that of unlimited liability. Particular forms the businesses allow owners come limit their liability. These include minimal partnerships and corporations.

Limited Partnerships

The legislation permits organization owners to type a limited partnership which has two varieties of partners: a single general companion who operation the business and also is responsible for its liabilities, and any number of minimal partners that have restricted involvement in the business and also whose accident are restricted to the quantity of your investment.

Advantages and also Disadvantages that Partnerships

The partnership has several advantages over the single proprietorship. First, that brings with each other a diverse group that talented individuals who share obligation for to run the business. Second, it makes financing easier: the business can draw on the financial resources of a number of individuals. The partners no only add funds come the company but can also use personal resources to secure bank loans. Finally, continuity needn’t it is in an issue due to the fact that partners have the right to agree legally to allow the cooperation to endure if one or more partners die.

Still, there space some negatives. First, as disputed earlier, partners room subject to endless liability. Second, being a partner way that you have to share decision making, and many people aren’t comfortable with that situation. Not surprisingly, partners frequently have distinctions of opinion on just how to run a business, and disagreements deserve to escalate to the suggest of dangerous the keep going of the business. Third, in addition to share ideas, partners additionally share profits. This arrangement can work as lengthy as all partners feel the they’re gift rewarded follow to your efforts and accomplishments, however that isn’t always the case. While the partnership kind of property is regarded negatively through some, the was an especially appealing come Ben Cohen and Jerry Greenfield. Starting their ice cream cream business as a partnership was inexpensive and also let them combine their restricted financial resources and use your diverse skills and talents. Together friends they trusted every other and also welcomed mutual decision making and also profit sharing. They were likewise not wake up to be hosted personally liable because that each other’s actions.

Corporation

A corporation (sometimes dubbed a consistent or C-corporation) differs from a single proprietorship and a partnership due to the fact that it’s a legal reality that is completely separate native the parties who own it. The can enter into binding contracts, buy and also sell property, sue and be sued, be held responsible for its actions, and be taxed. Once businesses reach any considerable size, it is beneficial to organize as a coporation, group so that its owners can limit their liability. Corporations, then, have tendency to be far larger, top top average, 보다 businesses using other develops of ownership. As number 6.2 shows, corporations account because that 18 percent of every U.S. Businesses yet generate nearly 82 percent the the revenues.3 Most big well-known businesses room corporations, however so are many of the smaller sized firms with which likely you carry out business.

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Figure 6.2: types of U.S. Businesses

Ownership and also Stock

Corporations are owned by shareholders that invest money in the business by buying share of stock. The section of the copy, group they own depends ~ above the percentage of stock they hold. For example, if a corporation has issued 100 shares of stock, and also you own 30 shares, you own 30 percent the the company. The shareholders selected a board the directors, a group of civilization (primarily from external the corporation) who are legally responsible for governing the corporation. The plank oversees the major policies and also decisions do by the corporation, sets goals and also holds administration accountable because that achieving them, and hires and also evaluates the height executive, generally called the CEO (chief executive, management officer). The board additionally approves the distribution of revenue to shareholders in the type of cash payments called dividends.

Benefits of Incorporation

The corporate kind of organization provides several advantages, including restricted liability because that shareholders, greater access to jae won resources, devoted management, and also continuity.

Limited Liability

The most important advantage of incorporation is the limited liability to which shareholders space exposed: they space not responsible for the obligations of the corporation, and they deserve to lose no much more than the amount the they have actually personally invest in the company. Limited liability would have been a big plus for the unfortunate separation, personal, instance whose organization partner burned down your dry clean establishment. Had actually they been incorporated, the copy, group would have actually been liable for the debts occurs by the fire. If the corporation didn’t have sufficient money to salary the debt, the separation, personal, instance shareholders would not have been causing obligation to pay anything. Castle would have actually lost all the money that they’d invested in the business, but no more.

Financial Resources

Incorporation also makes it feasible for businesses come raise accumulation by selling stock. This is a big advantage together a agency grows and also needs more funds to operate and also compete. Depending upon its size and financial strength, the corporation also has an benefit over other forms of organization in getting financial institution loans. An developed corporation have the right to borrow its own funds, but when a small business demands a loan, the bank usually calls for that the be guarantee by the owners.

Specialized Management

Because the their size and capability to salary high sales commissions and also benefits, corporations are generally able to attract much more skilled and talented employee than are proprietorships and also partnerships.

Continuity and Transferability

Another benefit of organization is continuity. Since the corporation has a legitimate life different from the lives of that owners, it can (at least in theory) exist forever.

Transferring property of a corporation is easy: shareholders simply sell their stock come others. Some founders, however, want to border the transferability of their stock and also so choose to run as a privately-held corporation. The stock in this corporations is organized by just a couple of individuals, who space not enabled to sell it come the basic public.

Companies v no such constraints on share sales are dubbed public corporations; share is available for sale to the basic public.

Drawbacks to Incorporation

Like sole proprietorships and partnerships, corporations have both hopeful and negative aspects. In sole proprietorships and partnerships, because that instance, the individuals who own and also manage a service are the same people. That company managers, however, nothing necessarily own stock, and shareholders don’t necessarily work-related for the company. This case can be difficult if the goals of the two teams differ significantly.

Managers, for example, are often more interested in career development than the overall profitability that the company. Stockholders could care much more about profits without regard for the health of employees. This instance is known as the agency problem, a dispute of interest innate in a connection in which one party is claimed to action in the ideal interest of the other. The is frequently quite difficult to avoid self-interest native entering into these situations.

Another drawback come incorporation—one that regularly discourages little businesses native incorporating—is the fact that enterprise are more costly to set up. As soon as you combine filing and also licensing fees with accounting and lawyer fees, incorporating a company could set you earlier by $1,000 to $6,000 or much more depending top top the size and scope of your business.4 Additionally, corporations room subject to levels of regulation and governmental monitor that can place a burden on little businesses. Finally, corporations space subject to what’s generally called “double taxation.” Corporations room taxed by the federal and state federal governments on their earnings. As soon as these revenue are spread as dividends, the shareholder pay count on this dividends. Corporate profits are hence taxed twice—the corporation pays the taxes the first time and also the shareholders pay the count the second time.

Five years after starting their ice cream cream business, Ben Cohen and also Jerry greenfield evaluated the pros and cons that the corporate type of ownership, and the “pros” won. The major motivator to be the should raise accumulation to build a $2 million production facility. Not only did Ben and Jerry decide to move from a partnership to a corporation, however they additionally decided to sell shares of stock to the public (and thus become a windy corporation). Their sale of share to the general public was a little bit unusual: Ben and also Jerry wanted the community to very own the company, so rather of providing the stock to anyone interested in purchase a share, they available stock to inhabitants of vermouth only. Ben believed that “business has actually a responsibility to give ago to the ar from which that draws that is support.”5 He wanted the company to be owned by those that lined increase in the gas station to buy cones. The stock was so famous that one in every hundreds Vermont households bought stock in the company.6 Eventually, as the company continued come expand, the share was marketed on a nationwide level.

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Other varieties of service Ownership

In addition to the three commonly adopted forms of company organization—sole proprietorship, partnership, and regular corporations—some organization owners select other forms of company to satisfy their details needs. We’ll look at 2 of these options:

Limited-liability companiesNot-for-profit corporations

Limited-Liability Companies

How would certainly you favor a legal form of organization that provides the attractive attributes of the three typical forms of company (corporation, sole proprietorship and partnership) and also avoids the unattractive functions of these three company forms? The limited-liability company (LLC) accomplishes specifically that. This kind provides business owners with limited liability (a crucial advantage the corporations) and also no “double taxation” (a crucial advantage of single proprietorships and also partnerships). Let’s look at the llc in much more detail.

In 1977, Wyoming came to be the very first state to permit businesses to run as limited-liability companies. Twenty years later, in 1997, Hawaii ended up being the last state to give its approval come the brand-new organization form. Due to the fact that then, the limited-liability agency has raised in popularity. The rapid expansion was fueled in part by changes in state statutes that permit a limited-liability company to have actually just one member. The trend to LLCs deserve to be saw by reading firm names on the next of trucks or on shop in her city. The is typical to check out names such as Jim Evans Tree Care, LLC, and also For-Cats-Only veterinary Clinic, LLC. Yet LLCs are not limited to small businesses. Service providers such as Crayola, domino’s Pizza, Ritz-Carlton Hotel Company, and also iSold the (which helps human being sell their undesirable belongings ~ above eBay) are operating under the limited-liability type of organization.

In a limited-liability company, owners (called members fairly than shareholders) are not personally liable for debts that the company, and also its earnings are taxed only once, at the personal level (thereby eliminating twin taxation).

We have touted the benefits of restricted liability protection for one LLC. We now require to point out some situations under i m sorry an llc member (or a shareholder in a corporation) might be hosted personally liable for the debts of his or she company. A organization owner have the right to be held personally liable if he or she:

Personally promises a service debt or bank loan i m sorry the company fails to pay.Fails to salary employment taxes come the government.Engages in cheat or illegal habits that harms the firm or someone else.Does not treat the firm as a separate legal entity, because that example, uses agency assets for personal uses.

Not-for-Profit Corporations

A not-for-profit corporation (sometimes referred to as a nonprofit) is an organization developed to serve some public function rather 보다 for jae won gain. As lengthy as the organization’s activity is for charitable, religious, educational, scientific, or literature purposes, it can be exempt from paying income taxes. Additionally, individuals and also other organizations that contribute to the not-for-profit corporation can take a taxes deduction because that those contributions. The types of groups that normally apply for nonprofit status vary widely and also include churches, synagogues, mosques, and also other locations of worship; museums; universities; and also conservation groups.

There are more than 1.5 million not-for-profit organizations in the united States.7 part are exceptionally well funded, such together the Bill and Melinda entrances Foundation, which has actually an treasure of roughly $40 billion and also has offered away $36.7 billion since its inception.8 Others room nationally recognized, such as united Way, Goodwill Industries, Habitat because that Humanity, and the Red Cross. However the vast majority is neither well-off nor famous, however nevertheless makes far-ranging contributions to society.

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Mergers and Acquisitions

The title read, “Wanted: much more than 2,000 in Google rental Spree.”9 The largest internet search engine in the people was disclosing its plans to thrive internally and also increase its workforce by an ext than 2,000 people, with fifty percent of the hires coming native the unified States and the other half coming from various other countries. The added employees will assist the company expand into brand-new markets and also battle for an international talent in the compete Internet info providers industry. When properly executed, internal development benefits the firm.

An alternate approach to growth is come merge through or acquire another company. The reason behind development through merger or acquisition is that 1 + 1 = 3: the combined company is much more valuable 보다 the sum of the two separate companies. This reason is attractive come companies facing competitive pressures. To grab a bigger re-publishing of the market and also improve profitability, suppliers will desire to become much more cost reliable by combining with other companies.

Mergers and also Acquisitions

Though they are often used as if lock synonymous, the terms merger and acquisition mean slightly various things. A merger occurs as soon as two companies incorporate to type a new company. An acquisition is the purchase of one agency by another. An example of a closing is the merger in 2013 of united state Airways and also American Airlines. The linked company, the largest carrier in the world, paris under the name American Airlines.

Another instance of an acquisition is the acquisition of Reebok by Adidas for $3.8 billion.10 The deal was meant to provide Adidas a stronger existence in phibìc America and assist the agency compete with rival Nike. As soon as this acquisition to be completed, Reebok together a company ceased to exist, despite Adidas still sells pair of shoes under the Reebok brand.

Motives behind Mergers and Acquisitions

Companies are motivated to merge or obtain other suppliers for a number of reasons, consisting of the following.

Gain complementary Products

Acquiring complementary products was the an ideas behind adidas’s acquisition the Reebok. Together Adidas CEO Herbert Hainer declared in a conference call, “This is a once-in- a-lifetime opportunity. This is a perfect fit because that both companies, because the suppliers are so complementary…. Adidas is grounded in sports performance through such products as a motorized running shoe and also endorsement deals with such superstars as British football player David Beckham. Meanwhile, Reebok plays greatly to the mediate of sports and also entertainment through endorsement deals and also products by Nelly, Jay-Z, and also 50 Cent. The combination could it is in deadly to Nike.” the course, Nike has continued to thrive, however one can not blame hyiner for his optimism.11

Attain brand-new Markets or circulation Channels

Gaining brand-new markets to be a significant factor in the 2005 merger of united state Airways and America West. Us Airways was a major player ~ above the east Coast, the Caribbean, and also Europe, if America West was solid in the West. The expectation were the combining the two carriers would develop an airline that can reach more markets 보다 either carrier might do top top its own.12

Realize Synergies

The purchase of Pharmacia copy, group (a sweden pharmaceutical company) by Pfizer (a research-based pharmaceutical firm based in the united States) in 2003 developed one that the world’s largest drug makers and pharmaceutical companies, by revenue, in every major market about the globe.13 The acquisition developed an industry large with more than $48 billion in revenue and a research-and-development spending plan of an ext than $7 billion. Each day, practically forty million people roughly the world are treated v Pfizer medicines.14 Its subsequent $68 billion acquisition of competitor drug an equipment Wyeth additional increased its visibility in the medicine market.15

In pursuing this acquisitions, Pfizer most likely identified many synergies: quite simply, a whole that is greater than the sum of the parts. Over there are plenty of examples the synergies. A merger frequently results in a number of redundant positions; the combined agency does not most likely need 2 vice-presidents the marketing, 2 chief financial officers, and so on. Remove the redundancy positions leader to significant cost save that would certainly not be realized if the two service providers did not merge. Stop say every of the providers was operation factories in ~ 50% of capacity, and by merging, one factory could be closed and also sold. That would likewise be an instance of a synergy. Companies lug different strengths and also weaknesses right into the linked entity. If the newly-combined firm can take advantage of the marketing capability of the more powerful entity and also the distribution capabilities the the other (assuming they space stronger), the brand-new company have the right to realize synergy effect in both of this functions.

Hostile Takeover

What happens, though, if one agency wants to acquire an additional company, but that company doesn’t desire to it is in acquired? The outcome might be a hostile takeover—an action of assuming manage that’s resisted by the target company’s management and also its board of directors. Ben Cohen and Jerry Greenfield found themselves in among these situations: Unilever—a very big Dutch/British firm that owns three ice cream brands—wanted come buy Ben & Jerry’s, versus the founders’ wishes. Most of the Ben & jerry stockholders sided through Unilever. Castle had small confidence in the capacity of Ben Cohen and Jerry greenfield to proceed managing the company and were frustrated with the that company social-mission focus. The stockholders preferred Unilever’s market to buy your Ben & Jerry’s share at virtually twice its existing market price and wanted come take their profits. In the end, unilever won; Ben & jerry’s was obtained by unilever in a hostile takeover.16 regardless of fears the the company’s society mission would end, it didn’t happen. Despite neither Ben Cohen nor Jerry green field are connected in the current management the the company, they have returned to your social work roots and are heavily affiliated in plenty of social efforts sponsored through the company.

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Chapter Video: organization Structures 

Here is a short video clip providing a simple and straightforward recap the the vital points that each kind of business ownership.