Topic 3 - Forms of Business Ownership Flashcards
Types of business ownership
- Sole proprietorship
- Partnership
- Corporation
- Co-operative
Charecteristics
Sole Proprietorship
- Owned by one person, who performs most roles and owns everything.
- Owner gets all profits and takes all the losses – called unlimited liability.
- Easiest and least expensive to setup
- Easiest for tax purposes – income recorded under personal income.
List
Advantages of Sole Proprietorships
- Easiest and inexpensive to form
- Profits all go to the owner
- Direct control of the business
- No special taxation
- Ease of dissolution
List
Disadvantages of Sole Proprietorships
- Unlimited liability
- Difficulty raising capital
- Limited managerial expertise
- Trouble finding qualified employees
- Personal time commitment
- Unstable business life
- Losses are the owner’s responsibility
Charecteristics
Partnerships
- Two or more individuals share costs and responsibilities
- Terms of partnership recorded in the partnership agreement.
Define “Silent” partners
partners that usually will front a lot of capital, but do not want to participate in business decisions – but receive profits in return.
General Partnership
Types of Partnership
- All partners share in the management and profits.
- All partners have unlimited liability (can be held responsible for the other partner’s business-related debts)
Limited Partnership
Types of Partnership
- One or more general partners who have unlimited liability
- One or more limited partners whose liability is limited to the amount of investment.
Advantages of Partnership
- Ease of formation
- Availability of Capital
- Diversity of skills and expertise
- Flexibility
Disadvantages of Partnership
- Unlimited liability
- Potential for conflicts between partners
- Complexity of profit sharing
- Difficulty exiting or dissolving a partnership
Charecterisitcs
Descibe Corporations
A corporation is a legal entity subject to the laws of the state in which it is formed, where the right to operate as a business is issued by state charter. A corporation can own property, enter into contracts, sue and be sued, and engage in business operations under the terms of its charter. Unlike sole proprietorships and partnerships, corporations are taxable entities with a life separate from their owners, who are not personally liable for its debts.
Corporations have their own organizational structure with three important components:
- stockholders
- directors
- officers.
Stockholders (or shareholders)
The Corporate Structure
Ehe owners of a corporation, holding shares that provide them with certain rights, and receive profits in the form of dividends.
Board of Directors
The Corporate Structure
Elected by shareholders to govern and handle overall management of the corporation.
Officers
The Corporate Structure
Hired by the board, the officers of a corporation are its top management and include the president and CEO, vice presidents, and other top level officers responsible for achieving corporate goals and policies.
Advantages of corporations
- Limited liability
- Ease if transferring ownership
- Unlimited life
- Tax deductions
- Ability to atrract financing
Advantages of corporations
- Double taxation of profits
- Cost and complexity of formation
- More government restrictions
Charecteristics
Cooperatives
- Business owned by workers / those who use it.
- Run by a board of directors
- Each member only gets 1 vote
- Profit shared based on use.
What is a cooperative?
A cooperative is a legal entity with several corporate features : limited liability, an unlimited lifespan, an elected board of directors, and an administrative staff.
Describe
Buyer cooperatives
Types of cooperatives
- Combines members’ purchasing power.
- Pooling buying power and buying in volume increases purchasing power and efficiency, resulting in lower prices.
Describe
Seller cooperatives
Types of cooperatives
- Popular in agriculture, where individual producers join to compete more effectively with large producers.
Advantages of Cooperatives
- There are equal voting rights for members
- This structure encourages member contribution and shared responsibility
- Liability for members is limited
- There is no limit on the number of members
Disadvantages of Cooperatives
- Members have equal voting rights regardless of investment - which may not suit an investor-driven business
- Legal limits on payments of dividends on shares may not suit an investor-driven business
List Charecteristics
Joint Ventures
Two or more companies form an alliance to pursue a specific project, usually for a specified time period.
Reasons for joint ventures
- the project may be too large for one company to handle on its own.
- access to new markets, products or technology.
Describe
Franchises
Franchisor liscenses, Franchisee
- A franchisor licenses the rights to the business to a franchisee for a fee
Franchisee runs the business according to an agreement. - Franchisee also pays a monthly fee, has to purchase a product through a franchiser, sometimes gets trained by a franchiser, has to maintain uniform quality, etc.
List
Advantages of Franchises
- Increased ability for franchisor to expand
- Recognized name, product, and operating concept
- Management training and assistance
- Financial assistance
List
Disadvantages of Franchises
- Loss of control
- Cost of franchising
- Restricted operating freedom
Defne
Mergers
A merger occurs when two or more firms combine to form one new company.
Defne
Acquisitions
An acquisition is when a corporation or investor group finds a target company and negotiates with its board of directors to purchase it.
List
Types of Mergers
- Horizontal merger
- Virtical merger
- Conglomerate merger
Define
Horizontal merger
Companies at the same stage in the same industry merge to reduce costs, expand product offerings or reduce competition.
Define
Vertical Merger
A company buys a firm in its same industry, often involved in an earlier or later stage of the production or sales process.
Conglomerate merger
Brings together companies in unrelated businesses to reduce risk.
