Spring 16 introduction to business lecture 2

Forms of Business Ownership
Chapter # 2
LECTURE 2

Each form of business ownership has
advantages and disadvantages.
If you are planning to go into any type of
business, you need to review these pros and
cons and determine which form of
ownership meets your needs.
WHAT TYPE OF BUSINESS IS
RIGHT FOR YOU?

 Capital Requirements
The amounts of funds necessary to finance the operation.
 Time Requirements
The time needed to operate the business and provide guidance
to employees.
 Tax Liability
What taxes a business must pay to various
governments on earnings of business.
What Factors Should We Consider?

What Factors Should We Consider?
 Management Abilities
The skills needed to plan, organize and control the business.
 Risk
The amount of personal property a person is willing to lose
by starting a business.
 Control
The amount of authority the owner exercises.

 Sole Proprietorship
A business that is owned and usually
managed by one person/individual.
 Partnership
A business owned by two or more people.
 Corporation
A legal entity with authority to act and have
liability separate from its owners.
FORMS OF BUSINESS

SOLE PROPRIETORSHIP
A business that is owned and usually
managed by one person/individual.
The person may receive help from
others in operating the business, but
is the only boss: the sole proprietor
is the company.
￭ Small Independent Retail Shops
￭ Hardware store
￭ Bakery
￭ Restaurant
￭ Tea-stall

SOLE PROPRIETORSHIP
 The Sole Proprietor often aided by one or
two employees, operates a shop that
frequently caters to a group of regular
customers.
 The Capital (money) needed to start and
operate the business is normally provided by
the owner through personal wealth or
borrowed money.
 The sole proprietor is usually an active
manager, working in the business. He or she
controls the operations, supervises the
employees and makes the decisions.
 The sole proprietor usually accounts for the
success and failure of the business.

SOLE PROPRIETORSHIP: FEATURES
 Capital provided by one
through personal wealth or
borrowed money
 Should be an active manager
 Control the operation
 Supervise the employees
 Make and take the decisions
 Should have good
managerial ability

SOLE PROPRIETORSHIP: ADVANTAGES
 Easy of Starting and Ending the Business
All one has to do to start a sole proprietorship is buy or lease the
needed equipments and put up some announcements saying s/he is in
business. It is just as easy to get out of business; s/he simply stops.
Being Your Own Boss
Working for others simply does not have the same excitement as
working for own-self—at least, that’s the way sole proprietorship feel.

 Control
The owner has the freedom to make the final decisions on any sector.
 Secrecy
As the owner is one there is no change or limited changes to be shared of
the business secret information.
 Pride of Ownership
People who own and manage their own businesses are rightfully proud of
their work. They deserve all the credit for taking then risks and providing
needed goods or services.

 Sole Participation in Profits and Losses
All profits earned or losses incurred by operating the
business are to be shared by the Individual.
 Retention of Company Profit
Other than the joy of being boss, there is nothing like
the pleasure of knowing that one can earn as much as
possible and not have to share that money with
anyone.
 Tax Breaks
A major advantage of the proprietorship is that the
businesses pays no income tax. A Corporation pays
taxes on profits; its owners, the shareholders pay taxes
on dividends. Whereas, a sole proprietor pays no tax
on business profits, instead the person is taxed as an
individual on all his/her income earned from the
business.

SOLE PROPRIETORSHIP: DISADVANTAGES
 Few Fringe Benefits
As the owner is the boss, s/he loses the fringe
benefits that often come from working for
others. (Health insurance, disabilities
insurance, sick leave and vacation pay)
 Limited Growth
Expansion is often show since a sole
proprietorship relies on its owner for most of
its creativity, business know-how and
funding.
Limited Life Span
Death, Illness, bankruptcy or retirement of the
owner terminates the proprietorship.

SOLE PROPRIETORSHIP: DISADVANTAGES
 Unlimited Liabilities
The responsibility of business owner for all the debts of
the business. Obligations of investors to use personal
assets, when necessary to pay off the debts to business
creditors. He/She has the risk of personal losses.
 Limited Financial Resources
Funds available to the business are limited to the funds
that the one (sole) owner can gather. Therefore funds
are limited to personal wealth.
 Limitations in Managerial Ability
All businesses need management; that is someone must
keep inventory records, accounting records, tax records
and so forth. Many people who are skilled at selling
things or providing a service are not skilled in keeping
records. Sole proprietors may have no one to help.

SOLE PROPRIETORSHIP
The sole proprietor is usually an active manager, working in the
business. He or she controls the operations, supervises the
employees and makes the decisions.
The sole proprietor who is the owner usually accounts for
the success and failure of the business.

PARTNERSHIP
A business owned by two or more people.
An Association of two or more persons to carry on as co-owners of a business
for profit.
A partnership can be based on a written contract or a voluntary and legal oral
agreement. The law regards individual as partners when they act in such a way
as to make people believe they operate a business together.

TYPES OF PARTNERSHIP:
GENERAL PARTNERSHIP
A Partnership in which at least one
partner has unlimited liability; a
general partner has authority to act
and make binding decision as an
owner. Partners generally share
profits and losses according to a plan
specified by agreement between them.
The general partner may be liable for
all the debts of the business.

LIMITED PARTNERSHIP
A Partnership with at least one general partner
and one or more limited partners who are liable
for losses only up to the amount of their
investment.
The general partners arrange and run the
business, while the limited partners are investors
only. Investors receive special tax advantages and
protection from liability.
Limited partners legally may have no say in
managing the business. If there is any violation,
the limited partnership status is dissolved.

MASTER LIMITED PARTNERSHIP [MLPs]
A new form of partnership, the master limited
partnership (MLP), looks much like a
corporation in that it acts like a corporation
and is traded on the stock exchanges like a
corporation, but it is taxed like a partnership
and thus avoids the corporate income tax. Two
well-known MLPs are Burger King and
Perkins Family Restaurants.

JOINT VENTURES
Sometimes a number of individuals and businesses join
together in order to accomplish a specific purpose or
objectives or to complete a single transaction.
A joint venture (often abbreviated JV) is an entity
formed between two or more parties to undertake
economic activity together. The parties agree to create a
new entity by both contributing equity (capital), and
they then share in the revenues, expenses, and control of
the enterprise. The venture can be for one specific
project only, or a continuing business relationship such
as the Fuji Xerox joint venture.

PARTNERSHIP CONTRACT
Sound business practice dictates that a partnership agreement be written and signed,
although it is not a legal requirement. Such a contractual agreement is called Articles of
Partnership.
Written articles of partnership can prevent or lessen misunderstandings at a later date.
Oral partnership agreements, though quite legal, tend to be hard to recreate and are open
to misunderstandings. Written articles of partnership provide a proof of an agreement.

PARTNERSHIP CONTRACT
 Name of business partnership
 Type of business
 Location of the business
 Expected life of the partnership
 Names of the partners and amount of each one's
investment
 Procedure for distributing profits and covering
losses
 Amounts that partners will withdraw for services
 Procedure for withdrawal of funds
 Duties of each partner
 Procedures for dissolving the partnership

PARTNERSHIP: ADVANTAGES
 More Capital
In the sole proprietorship, the amount of capital is limited to personal wealth and the credit of the
owner. But in a partnership business, when two or more people pool their money and credit, it is
easier to pay the rent, utilities, and other bills incurred by a business.
 Combined Managerial Skills
In a partnership, people with different talents and skills may join together to form a business. It is
simply much easier to manage the day-to-day activities of a business with carefully chosen partners.
Partners give each other free time from the business and provide different skills and perspectives. 0

PARTNERSHIP: ADVANTAGES
 Ease of Starting
As it involves a private contract contractual
agreement, a partnership is fairly easy to start. It is
nearly as free from government regulation as a sole
proprietorship.
 Clear Legal Status
The legal outline for partnerships have been
established through the court. The questions of rights,
responsibilities, liabilities and partner duties have
been covered. Therefore the legal status of a
partnership is clearly visible. Lawyers can provide
legal advice about the partnership issues.
 Tax Advantages
The partnership has some potential tax advantage over
a corporation. In partnership has some proprietorship,
the owners pay taxes on their business earnings. But
the partnership as a business does not pay income tax.

PARTNERSHIP: DISADVANTAGES
When two people agree on anything, there is
the possibility of conflict and tension.
Partnerships have caused splits among
families, friends, and marriages.
 Unlimited Liability
Each general partner is liable for the
debts of the firm, no matter who was
responsible for causing those debts. You
are liable for your partners’ mistakes as
well as your own. Like sole proprietors,
general partners can lose their homes,
cars, and everything else they own if the
business loses a lawsuit or goes
bankrupt.
 Instability
If a partner dies or withdraws from the
business, the partnership is dissolved.

 Disagreements Among Partners
Disagreements over money are just one example of
potential conflict in a partnership. Who has final
authority over employees? Who hires and fires
employees? Who works what hours? What if one
partner wants to buy expensive equipment for the firm
and the other partner disagrees? Potential conflicts are
many. Because of such problems, all terms of
partnership should be spelled out in writing to protect
all parties and to minimize misunderstandings.
Decisions made by several people (Partners) are often
better than those made by one, but when there are two
or more people deciding on some aspect of the
business can be dangerous. Power and authority are
divided and the partners will not always agree on each
other. As a result poor decision making and more time
consuming can occur.

 Investment withdrawal difficulty
A person who invests money in a partnership may have a
hard time withdrawing the investment. It is much easier
to invest in a partnership than to withdraw. Sure, you can
end a partnership just by quitting. However, questions
about who gets what and what happens next are often
very difficult to solve when the partnership ends.
 Limited Capital Availability
The partnership may have an advantage over the sole
proprietorship in the availability of capital, but it does not
compare to a corporation in ability to raise capital.
Partners sometimes have limited capabilities and cannot
compete in businesses requiring large amount of capital.
The amount of capital a partnership can raise depends on
the personal wealth of the partners and their credit
ratings.

SYNDICATES
Two or more businesses joined together to accomplish specific business goals; a popular form in
underwriting large amounts of corporation stocks.
- It engages in financial transactions.
- Unlike a Joint Venture, a syndicate need not to be dissolved after the transaction is
completed.
- Member of syndicate can sell their own interest to buyer, the remaining partners cant say
anything.

Some industries such as automobile
manufacturing, computer
manufacturing, oil refining and natural
gas production require millions of
dollars to operate a business.
Typically such vast amount of money
are put together by attracting numerous
investors.
The unincorporated forms of business –
sole proprietorship and the partnership
do not attract investors who do not want
to make decisions or to be actually
involved in managing the firm.
CORPORATION

A legal entity with authority to act and have liability separate from its
owners.
In the eyes of law, the corporation is an artificial being, invisible and
intangible. It has the legal rights of an individual; it can own property,
purchase goods and services and sue other persons or corporation.
CORPORATION

Basically a vast amount of
money put together to attract
investors
The corporation owners spread
over a wide geographical area
can hire professional managers
to operate the business
It has legal right, purchase
property, goods and services.
CORPORATION

Charter
A state’s written agreement giving a corporation
the right to operate as a business. The state-issued
document authorizing its formation.
The individuals forming the corporation are called
its Incorporators.
 Domestic Corporation
An enterprise organized under the laws of one state
or country and doing business within the state or
country.
 Foreign Corporation
A business incorporated in one state or country and
doing business in another state or country.
FORMING A CORPORATION

Factors involved to start a corporation:
 To form a corporation, any country needs at least 3 persons.
 The applicants fill out an application form for a Charter (Articles of Incorporation)
 The form is then reviewed by the appropriate government officials.
 After granting the charter, the incorporators and all subscribers or the owners of the
stock of the business meet and elect the Board of Directors.

Factors involved to start a corporation: (Contd.)
 They also approve the bylaws of the corporation.
 The Board of Directors then meets to select the professional managers and to make any
other decisions needed to start the business.
 The corporation has relationship with shareholders, creditors, customers, and employees.
 The actual owner of corporation are shareholders who invest money in the business.
 The manager of the corporation decide what property to purchase, when and whom to
hire, where to borrow needed funds.

The Corporation Chartered by a
state as a separate entity
Professional
Managers
Property
(Equipment, Real
Estate, Inventory,
Buildings
People
(Supervisors,
Labourers, Clerks,
Sales Personnel)
Customers (Buyers
of goods and
services)
Shareholders
(Investors of money)
Creditors (Banks,
Bondholders, other
businesses)
Is Owned By
Owes
Recruits &
Hires
Owns
Is Run By
Sells To
CORPORATION: AT A GLANCE

 Limited Liability
A major advantage of corporations is the limited liability of owners.
Corporations in England and Canada have the letters Ltd. after their
name, as in British Motors, Ltd. The Ltd. stands for “limited liability,”
probably the most significant advantage of corporations. A person
investing funds in a corporation receives shares of stocks and becomes
an owner. In a corporation, the liability for the shareholder equals the
amount of funds invested. Thus if the business is forced to liquidate each
owner loses only the amount of money, he or she has invested.
 Skilled Management Team
The Board of Directors has the duty of hiring professional managers and
the owners delegate their power of operating business to these managers.
Professional managers are trained and experienced executives. The
professional managers may own shares of stock in the business but not
usually not enough to control the corporation.
CORPORATION: ADVANTAGES
Most people are not willing to risk everything to go into business. Yet for a business to grow and
prosper and create economic opportunity, many people would have to be willing to invest their
money in it. One way to solve this problem is to create an artificial being, an entity that exists
only in the eyes of the law—a corporation. Let’ s explore some of the advantages of
corporations:1

 Greater Capital Base
To raise money, a corporation can sell ownership (stock) to anyone who is
interested. This means that millions of people can own part of major
companies like IBM, Xerox, and General Motors and smaller companies as
well, such as JobDirect.com. Corporations may also find it easier to obtain
loans since lenders find it easier to place a value on the company when they
can review how the stock is trading. Corporations, however can attract
capital from a large number of investors by selling shares of stocks.
 Transfer of Ownership
The Shareholders have the right to sell their shares of a corporation’s stock
to whomever they like, barring a legal restriction on some closed
corporations. These shares of ownership can be sold whenever the
shareholder desires and at the price the buyer is willing to pay. Thus
shareholders can freely buy and sell shares of stock. The investment flows
easily and is not frozen. This right to sell shares of stock gives corporations
the ability to attract large number of shareholders.

 Stability
Because corporations are separate from those who
own them, the Shareholders’ death, retirement or
sale of stock need not dissolve the business. The
corporation’s policies may be hampered by the
sale of large blocks of stock, but business will go
on. Nor will the death or retirement of the
President of the board or Chief Executive Officer
stop the corporation from doing business.
 Legal-Entity Status
A Corporation can purchase property, make
contracts or sue and be sued in its corporate name.
These characteristics distinguish it most clearly
from other forms of business organizations.

 Difficulty and Expense of Starting
Starting a corporation involves applying for a Charter
from a state. Each state has its own set of laws; these
must be considered before deciding where to
incorporate. Fees and other expenses to start the
business need to be considered.
 Initial Cost
Incorporation may cost thousands of dollars and involve
expensive lawyers and accountants.
 Multiple Taxation
Corporate income is taxed twice. First the corporation
pays tax on income before it can distribute any to
stockholders. Then the stockholders pay tax on the
income (dividends) they receive from the corporation.
CORPORATION: DISADVANTAGES

 Lack of Control
The individual shareholder has little
control over the operations of the
corporations except to vote for a line up of
individuals for the Board of Directors. The
buying and selling of shares of stock is the
only real control owner has.
 Possible Conflict with Board of
Directors
Some conflict may rise if the stockholders
elect a board of directors that disagrees
with the present management.
 Difficulty of Termination
Once a corporation is started, it’s relatively
hard to end.

 Lack of Personal Interest
In most corporations except the small ones management
and ownership are separate. This separation can result in a
lack of personal interest in the success of the corporation.
 Credit Limitations
Banks and other lenders have to consider the limited
liability of corporations. If a corporation fails, its creditors
can look only to the assets of the business to satisfy
claims.
 Lack of Secrecy
A corporation must provide each shareholder with an
annual report and other reports. These reports present data
on sales volume, profit, total assets and other financial
matters. Public disclosure of these data enables
competitors and other outsiders to see the corporation’s
financial condition.

Private
Attempts to earn a satisfactory profit
Public
Owned and run by the government
Closed
Stock held by only a few owners and not actively sold on the stock market
Open
Stock held by numerous people and actively sold on the stock market. Eg.
Beximco Pharmaceuticals Ltd.
Municipal
Cities and townships that carry out business. Government owned Corporations.
Eg. Dhaka City Corporation, Chittagong City Corporation, etc.
TYPES OF CORPORATION

Domestic
Incorporated in one state or country and doing business within that state or country. Eg. AKIJ Group, PHP Group
Foreign
Incorporated in one state or country and doing business in another state or country. Unilever Bangladesh Limited
incorporated in UK.
Alien
Incorporated in one nation and operates in another state or country.
Eg. Coca Cola (COKE) --- Abdul Monem Limited.
Nonprofit
Service organization incorporated for limited-liability status. Eg. Save the Children, CARE, Anjuman-e-Mufidul Islam, etc.
Single-Individual
Individually owned business incorporated to escape high personal income tax rate.
TYPES OF CORPORATION

Combining two or more business
enterprises into a single entity.
 Joining together of two
corporations.
 Types of Mergers
 Horizontal Merger
 Vertical Merger
 Conglomerate Merger
MERGERS

 Horizontal Merger
A merger involving competitive firms in the same market.
Example: A Garment Manufacturer merging with another Garment Manufacturer.
 Vertical Merger
A merger in which a firm joins with its suppliers.
Example: A Cement Manufacturer (Lafarge Surma Cement) merging with the stone
crushers of Meghalaya, India.
 Conglomerate Merger
A merger involving firms selling goods in unrelated markets.
Example: Automobile Manufacturer merging with a Construction Firm.
TYPES OF MERGERS

An Organization in which people collectively own and
operate a business in order to compete with bigger
competitors.
 Take approval from Social Welfare Department.
 Group of people doing business for their own benefit
or welfare.
 Only the members get the benefits.
 Profits are distributed among the members.
 Milk Vita
 Dairy Coperatives
 Kingshuk Co-operative Society Ltd.
 Dhaka Club
 Gulshan Club
COOPERATIVES

Spring 16 introduction to business lecture 2

More Related Content

Similar to Spring 16 introduction to business lecture 2 (20)

More from Grant Thornton Bangladesh (20)

Recently uploaded (20)

Spring 16 introduction to business lecture 2