Learning Objectives

Identify the inquiries to asking in selecting the appropriate type of property for a business.Describe the single proprietorship and also partnership forms of organization, and also specify the benefits and disadvantages.Identify the different types of partnerships, and explain the prominence of a partnership agreement.Explain how corporations room formed and how lock operate.Discuss the advantages and defect of the corporate kind of ownership.Examine special varieties of service ownership, including limited-liability companies, and also not-for-profit corporations.Define mergers and acquisitions, and also explain why companies are encouraged to merge or gain other companies.

You are watching: This type of business organization is entirely legally independent from its owners.


The ice cream Cream Men

Who would have thought it? 2 ex-hippies with strong interests in society activism would finish up beginning one that the best-known ice cream carriers in the country—Ben & Jerry’s. Possibly it was meant to be. Ben Cohen (the “Ben” of Ben & Jerry’s) constantly had a fascination with ice cream. As a child, that made his own mixtures by shattering his favorite cookies and candies into his ice cream. But it wasn’t until his an elderly year in high college that he came to be an main “ice cream man,” happy driving his van through neighborhoods filled with children eager come buy his ice cream cream pops. ~ high school, Ben make the efforts college but it wasn’t for him. He attended Colgate college for a year and also a half before the dropped the end to return to his actual love: being an ice cream cream man. That tried university again—this time at Skidmore, wherein he learned pottery and also jewelry making—but, regardless of his choice of courses, quiet didn’t prefer it.

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Figure 6.1: Ben Cohen and also Jerry greenfield in 2010

In the meantime, Jerry greenfield (the “Jerry” the Ben & Jerry’s) was adhering to a similar path. He majored in pre-med at Oberlin college in the wishes of one day becoming a doctor. Yet he had to offer up ~ above this goal when he to be not accepted into clinical school. ~ above a confident note, though, his college education steered him into a more lucrative field: the human being of ice cream making. He obtained his very first peek at the ice cream cream market when he operated as a scooper in the college student cafeteria at Oberlin. So, fourteen year after they very first met top top the small high school track team, Ben and also Jerry reunited and decided to go into ice cream making huge time. They moved to Burlington, Vermont—a college city in require of an ice cream cream parlor—and perfect a $5 correspondence food from penn State top top making ice cream. After obtaining an A in the course—not surprising, given that the test were open book—they took the plunge: through their life save of $8,000 and $4,000 of obtained funds they collection up an ice cream shop in a made-over gas station on a busy street corner in Burlington.1 The next big decision was which type of company ownership was ideal for them. This thing introduces you to their options.

Factors come Consider

If you’re starting a brand-new business, you have to decide i m sorry legal type of property is ideal for you and also your business. Carry out you desire to very own the company yourself and also operate as a sole proprietorship? Or, do you want to share ownership, operating as a partnership or a corporation? prior to we comment on the pros and also cons of this three types of ownership, let’s attend to some that the concerns that you’d more than likely ask you yourself in selecting the appropriate legal kind for your business.

In setup up your business, execute you desire to minimization the prices of getting started? execute you hope to avoid facility government regulations and reporting requirements?How much manage would you like? just how much obligation for to run the business are you ready to share? What about sharing the profits?Do you want to avoid special taxes?Do you have all the skills needed to run the business?Are you likely to get along with your co-owners over an extended duration of time?Is it essential to you that the business survive you?What room your gaue won needs and how perform you arrangement to finance your company?How much personal exposure come liability space you ready to accept? do you feel uneasy around accepting personal liability for the action of other owners?

No single type of property will offer you everything you desire. You’ll have to make some trade-offs. Due to the fact that each option has both advantages and disadvantages, your job is to decision which one offers the attributes that are most crucial to you. In the following sections fine compare three ownership options (sole proprietorship, partnership, corporation) on this eight dimensions.

Sole Proprietorship and also its Advantages

In a sole proprietorship, together the owner, friend have finish control over your business. You make all important decisions and are normally responsible for all day-to-day activities. In exchange because that assuming every this responsibility, you get all the revenue earned by the business. Earnings earned space taxed as personal income, so girlfriend don’t have to pay any kind of special federal and state revenue taxes.

Disadvantages of sole Proprietorships

For many people, however, the sole proprietorship is no suitable. The flip next of enjoying finish control is having to supply every the various talents that might be necessary to make the company a success. And when you gone, the service dissolves. You also have to count on your own resources for financing: in effect, you space the business and any money obtained by the service is loaned come you personally. Even much more important, the single proprietor bears unlimited liability for any type of losses occurs by the business. The rule of unlimited an individual liability method that if the service incurs a debt or suffers a catastrophic (say, getting sued for causing an injury come someone), the owner is personally liable. As a single proprietor, you put your personal assets (your financial institution account, your car, maybe even your home) at risk for the sake of her business. You can lessen your risk with insurance, yet your liability exposure deserve to still it is in substantial. Offered that Ben and also Jerry made decision to begin their ice cream cream company together (and therefore the business was no owned by just one person), they could not collection their firm up as a single proprietorship.

Partnership

A partnership (or basic partnership) is a service owned jointly by 2 or much more people. About 10 percent of U.S. Businesses space partnerships2 and also though the vast majority are small, some are quite large. For example, the big four public accounting firms space partnerships. Setting up a partnership is more complex than setup up a sole proprietorship, yet it’s still fairly easy and inexpensive. The price varies follow to size and complexity. It’s feasible to kind a straightforward partnership without the assist of a lawyer or one accountant, though it’s usually a good idea to get skilled advice.

Professionals can help you identify and resolve issues that may later produce disputes amongst partners.

The partnership Agreement

The influence of disputes can be reduced if the partners have actually executed a well-planned partnership agreement that specifies everyone’s rights and also responsibilities. The commitment might provide such details as the following:

Amount of cash and also other contribute to it is in made by each partnerdivision of partnership income (or loss)Partner responsibilities—who walk whatConditions under i m sorry a partner can sell an attention in the companyConditions because that dissolving the partnershipConditions for settling disputes

Unlimited Liability and also the Partnership

A major problem with partnerships, similar to sole proprietorships, is unlimited liability: in this case, each companion is personally responsible not just for his or her own actions but additionally for the plot of all the partners. If your partner in an architectural firm renders a mistake that reasons a framework to collapse, the loss your service incurs effects you simply as lot as it would certainly him or her. And also here’s the really bad news: if the company doesn’t have the cash or other assets come cover losses, you deserve to be personally sued for the amount owed. In other words, the party who endured a loss because of the error can sue you because that your an individual assets. Many human being are understandably reluctant to get in into partnerships since of unlimited liability. Particular forms that businesses permit owners come limit your liability. This include minimal partnerships and corporations.

Limited Partnerships

The regulation permits company owners to type a limited partnership which has two species of partners: a single general partner who operation the business and also is responsible because that its liabilities, and any number of minimal partners that have minimal involvement in the business and whose casualty are minimal to the amount of your investment.

Advantages and also Disadvantages the Partnerships

The partnership has several advantages over the single proprietorship. First, that brings together a diverse group the talented people who share obligation for running the business. Second, it provides financing easier: the organization can attract on the financial sources of a number of individuals. The partners no only contribute funds come the organization but can also use personal resources to secure bank loans. Finally, continuous needn’t be an issue since partners deserve to agree legally to allow the partnership to endure if one or an ext partners die.

Still, there space some negatives. First, as debated earlier, partners space subject to limitless liability. Second, gift a partner means that you have to share decision making, and many world aren’t comfortable through that situation. No surprisingly, partners frequently have distinctions of opinion on just how to run a business, and also disagreements have the right to escalate come the allude of dangerous the continuance of the business. Third, in enhancement to share ideas, partners additionally share profits. This arrangement can job-related as lengthy as all partners feel that they’re gift rewarded according to your efforts and also accomplishments, however that isn’t always the case. When the partnership kind of property is perceived negatively by some, that 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 integrate their limited financial resources and also use your diverse skills and talents. As friends they trusted every other and also welcomed shared decision making and profit sharing. Lock were also not wake up to be organized personally liable because that each rather actions.

Corporation

A corporation (sometimes referred to as a consistent or C-corporation) different from a sole proprietorship and a partnership because it’s a legal reality that is entirely separate native the next who own it. That can enter into binding contracts, buy and sell property, sue and be sued, be hosted responsible because that its actions, and be taxed. When businesses with any an extensive size, it is helpful to organize as a copy, group so that its owners have the right to limit their liability. Corporations, then, have tendency to be much larger, top top average, 보다 businesses utilizing other forms of ownership. As number 6.2 shows, enterprise account for 18 percent of all U.S. Businesses but generate virtually 82 percent the the revenues.3 Most big well-known businesses are corporations, yet so are plenty of of the smaller sized firms through which likely you do business.

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Figure 6.2: types of U.S. Businesses

Ownership and also Stock

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

Benefits that Incorporation

The corporate kind of organization provides several advantages, including limited liability because that shareholders, greater access to gaue won resources, specialized management, and continuity.

Limited Liability

The most important benefit of incorporation is the limited liability come which shareholders are exposed: they room not responsible because that the responsibilities of the corporation, and also they can lose no much more than the amount the they have actually personally invested in the company. Minimal liability would have been a big plus for the unfortunate separation, personal, instance whose business partner melted down your dry clean establishment. Had 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 individual shareholders would certainly not have actually been causing obligation to salary anything. Castle would have lost every the money the they’d invest in the business, but no more.

Financial Resources

Incorporation likewise makes it feasible for businesses to raise funds by offering stock. This is a big advantage together a agency grows and needs an ext funds come operate and compete. Depending on its size and also financial strength, the corporation additionally has an advantage over other forms of service in getting financial institution loans. An established corporation have the right to borrow its very own funds, yet when a tiny business demands a loan, the financial institution usually calls for that it be guarantee by that is owners.

Specialized Management

Because of their size and ability to salary high sales commissions and benefits, enterprise are usually able to attract much more skilled and talented employee than are proprietorships and partnerships.

Continuity and also Transferability

Another benefit of incorporation is continuity. Since the corporation has actually a legal life different from the stays of the owners, it have the right to (at the very least in theory) exist forever.

Transferring property of a corporation is easy: shareholders simply sell your stock to others. Part founders, however, desire to border the transmission potential of your stock and so choose to operate as a privately-held corporation. The stock in this corporations is organized by only a couple of individuals, who room not allowed to sell it to the basic public.

Companies with no such restrictions on share sales are dubbed public corporations; share is available for revenue to the general public.

Drawbacks come Incorporation

Like single proprietorships and partnerships, corporations have both hopeful and an unfavorable aspects. In single proprietorships and partnerships, for instance, the people who own and manage a organization are the very same people. This firm managers, however, nothing necessarily own stock, and also shareholders nothing necessarily work-related for the company. This situation can be troublesome if the goals of the two groups differ significantly.

Managers, for example, room often an ext interested in career advance than the in its entirety profitability that the company. Stockholders could care more about profits without regard because that the wellness of employees. This case is recognized as the agency problem, a problem of interest natural in a partnership in which one party is supposed to action in the finest interest that the other. That is frequently quite challenging to avoid self-interest native entering right into these situations.

Another drawback to incorporation—one that regularly discourages small businesses from incorporating—is the reality that companies are much more costly to set up. When you incorporate filing and licensing fees with accounting and lawyer fees, incorporating a service could collection you back by $1,000 come $6,000 or an ext depending ~ above the size and scope of her business.4 Additionally, corporations space subject to level of regulation and governmental monitor that can place a load on tiny businesses. Finally, corporations are subject to those generally dubbed “double taxation.” Corporations space taxed through the federal and state federal governments on their earnings. As soon as these earnings are spread as dividends, the shareholders pay count on this dividends. Corporate revenues are therefore taxed twice—the corporation pays the counting the very first time and the shareholders pay the count the second time.

Five years after starting their ice cream business, Ben Cohen and Jerry green field evaluated the pros and also cons the the corporate type of ownership, and the “pros” won. The major motivator to be the should raise accumulation to develop a $2 million manufacturing facility. Not only did Ben and Jerry decision to switch from a partnership to a corporation, however they additionally decided to sell shares of share to the public (and thus become a publicly corporation). Your sale of stock to the public was a little bit unusual: Ben and also Jerry wanted the ar to very own the company, so rather of offering the share to anyone interested in buying a share, they available stock to occupants of vermouth only. Ben believed that “business has actually a responsibility to give earlier to the community from which it draws the support.”5 He wanted the firm to be owned by those who lined up in the gas station to buy cones. The stock was so popular that one in every hundreds Vermont family members bought stock in the company.6 Eventually, as the company continued to expand, the share was offered on a nationwide level.

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Other species of company Ownership

In enhancement to the three commonly embraced forms of business organization—sole proprietorship, partnership, and also regular corporations—some service owners select other develops of organization to satisfy their specific needs. Fine look at 2 of this options:

Limited-liability companiesNot-for-profit corporations

Limited-Liability Companies

How would certainly you prefer a legal type of company that offers the attractive functions of the three usual forms of organization (corporation, single proprietorship and partnership) and avoids the unattractive features of this three organization forms? The limited-liability company (LLC) accomplishes precisely that. This form provides organization owners with restricted liability (a crucial advantage of corporations) and no “double taxation” (a vital advantage of sole proprietorships and also partnerships). Let’s look in ~ the llc in an ext detail.

In 1977, Wyoming ended up being the very first state to allow businesses to operate as limited-liability companies. 20 years later, in 1997, Hawaii came to be the last state to provide its approval to the new organization form. Because then, the limited-liability firm has enhanced in popularity. The rapid expansion was fueled in part by alters in state statutes the permit a limited-liability agency to have actually just one member. The tendency to LLCs have the right to be experienced by reading firm names on the next of trucks or on storefronts in her city. The is usual to view names such as Jim Evans Tree Care, LLC, and For-Cats-Only veterinarian Clinic, LLC. However LLCs are not restricted to tiny businesses. Providers such together Crayola, domino Pizza, Ritz-Carlton Hotel Company, and also iSold it (which helps people sell their unwanted belongings ~ above eBay) are operating under the limited-liability form of organization.

In a limited-liability company, owners (called members rather than shareholders) room not personally liable for debts the the company, and its earnings are taxed just once, in ~ the personal level (thereby eliminating twin taxation).

We have touted the benefits of minimal liability security for one LLC. Us now require to suggest out some circumstances under i beg your pardon an gmbh member (or a shareholder in a corporation) can be organized personally liable because that the debts of his or her company. A service owner have the right to be held personally responsible if he or she:

Personally assures a company debt or financial institution loan i m sorry the firm fails come pay.Fails to pay employment taxes to the government.Engages in cheat or illegal actions that harms the firm or who else.Does not treat the agency as a different legal entity, for example, uses company assets for personal uses.

Not-for-Profit Corporations

A not-for-profit corporation (sometimes referred to as a nonprofit) is one organization developed to serve some public purpose rather 보다 for jae won gain. As long as the organization’s activity is for charitable, religious, educational, scientific, or literary purposes, it have the right to be exempt from paying revenue taxes. Additionally, individuals and other organizations that contribute to the not-for-profit corporation deserve to take a tax deduction because that those contributions. The types of groups that normally use for nonprofit standing vary widely and include churches, synagogues, mosques, and also other locations of worship; museums; universities; and conservation groups.

There are more than 1.5 million not-for-profit organizations in the unified States.7 part are very well funded, such together the Bill and Melinda gateways Foundation, which has an treasure of approximately $40 billion and also has provided away $36.7 billion since its inception.8 Others space nationally recognized, such as joined Way, Goodwill Industries, Habitat for Humanity, and the Red Cross. However the vast bulk is neither rich nor famous, but nevertheless makes far-reaching contributions to society.

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Mergers and Acquisitions

The headline read, “Wanted: an ext than 2,000 in Google rental Spree.”9 The largest net search engine in the people was discover its plans to thrive internally and also increase its workforce by more than 2,000 people, with half of the rental coming native the joined States and also the other fifty percent coming from other countries. The included employees will aid the agency expand into brand-new markets and battle for global talent in the vain Internet information providers industry. As soon as properly executed, internal development benefits the firm.

An alternative approach to growth is come merge through or acquire another company. The rationale behind development through merger or salvation is the 1 + 1 = 3: the combined firm is much more valuable than the sum of the two separate companies. This rationale is attractive to companies encountering competitive pressures. To grab a bigger re-publishing of the market and also improve profitability, service providers will want to become more cost effective by combining with other companies.

Mergers and Acquisitions

Though castle are regularly used as if castle synonymous, the terms merger and also acquisition average slightly various things. A merger occurs as soon as two companies integrate to type a new company. One acquisition is the purchase of one agency by another. An instance of a merger is the merging in 2013 of us Airways and also American Airlines. The linked company, the largest carrier in the world, flies under the surname American Airlines.

Another instance of an acquisition is the purchase of Reebok by Adidas for $3.8 billion.10 The deal was meant to give Adidas a stronger existence in north America and aid the firm compete with rival Nike. Once this acquisition to be completed, Reebok together a agency ceased come exist, despite Adidas tho sells pair of shoes under the Reebok brand.

Motives behind Mergers and also Acquisitions

Companies are encouraged to merge or obtain other suppliers for a variety of reasons, including the following.

Gain complementary Products

Acquiring complementary products to be the an ideas behind adidas acquisition that Reebok. As 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, due to the fact that the suppliers are therefore complementary…. Adidas is base in sports performance with such assets as a motorized running shoe and also endorsement encounters such superstars as British football player David Beckham. Meanwhile, Reebok plays heavily to the convey of sports and also entertainment v endorsement deals and products by Nelly, Jay-Z, and also 50 Cent. The mix could be 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 distribution Channels

Gaining new markets was a far-reaching factor in the 2005 closing of us Airways and America West. Us Airways was a major player ~ above the eastern Coast, the Caribbean, and also Europe, if America West was strong in the West. The expectation were the combining the two carriers would produce an airline that might reach more markets than either carrier can do ~ above its own.12

Realize Synergies

The purchase of Pharmacia copy, group (a swedish pharmaceutical company) by Pfizer (a research-based pharmaceutical firm based in the unified States) in 2003 developed one of the world’s largest drug makers and pharmaceutical companies, by revenue, in every major market roughly the globe.13 The acquisition developed an industry gigantic with an ext than $48 billion in revenue and also a research-and-development budget of much more than $7 billion. Each day, virtually forty million people around the world are treated through Pfizer medicines.14 Its subsequent $68 billion purchase of competitor drug an equipment Wyeth further increased its visibility in the medicine market.15

In pursuing this acquisitions, Pfizer most likely identified many synergies: fairly simply, a entirety that is greater than the amount of the parts. Over there are many examples of synergies. A merger frequently results in a variety of redundant positions; the combined agency does not likely need 2 vice-presidents of marketing, two chief financial officers, and so on. Remove the redundant positions leader to significant cost save that would not be establish if the two companies did not merge. Stop say every of the carriers was operating factories in ~ 50% that capacity, and also by merging, one factory might be closed and also sold. The would likewise be an instance of a synergy. Companies lug different strengths and also weaknesses into the linked entity. If the newly-combined company can take advantage of the marketing capability of the more powerful entity and also the circulation capabilities of the various other (assuming they are stronger), the new company deserve to realize synergy effect in both of these functions.

Hostile Takeover

What happens, though, if one firm wants to acquire one more company, but that company doesn’t desire to be acquired? The outcome can be a hostile takeover—an action of assuming control that’s resisted by the target company’s management and its board of directors. Ben Cohen and also Jerry Greenfield uncovered themselves in among these situations: Unilever—a very huge Dutch/British agency that owns three ice cream brands—wanted to 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 to be frustrated with the this firm social-mission focus. The stockholders preferred Unilever’s sell to buy your Ben & Jerry’s stock at virtually twice its present market price and also wanted come take their profits. In the end, unilater won; Ben & jerry was gained by unilever in a enemy takeover.16 in spite of fears that the company’s social mission would certainly end, it no happen. Despite neither Ben Cohen nor Jerry greenfield are associated in the current management of the company, they have actually returned to their social work roots and are heavily associated in numerous social efforts sponsored by the company.

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Chapter Video: business Structures 

Here is a short video providing a straightforward and simple recap the the crucial points that each kind of service ownership.