Chapter 5

Forms of Ownership

Business in Action
8e, Global Edition
Bovée/Thill

Learning Objectives

1. Define sole proprietorship, and explain the six

advantages and six disadvantages of this
ownership model.
2. Define partnership, and explain the six
advantages and three disadvantages of this
ownership model.
3. Define corporation, and explain the four
advantages and six disadvantages of this
ownership model.

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Learning Objectives (cont.)

4. Explain the concept of corporate governance,

and identify the three groups responsible for
ensuring good governance.
5. Identify the potential advantages of pursuing
mergers and acquisitions as a growth strategy,
along with the potential difficulties and risks.
6. Define strategic alliance and joint venture, and
explain why a company would choose these
options over a merger or an acquisition.

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Exhibit 5.1 Forms of Business Ownership

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Sole Proprietorships

• Sole proprietorship
 A business owned by a single person
• Unlimited liability
 A legal condition under which any damages or
debts incurred by a business are the owner’s
personal responsibility

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Advantages of Sole Proprietorships

• Simplicity
• Single layer of taxation
• Privacy
• Flexibility and control
• Fewer limitations on personal income
• Personal satisfaction

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Disadvantages of Sole Proprietorships

• Financial liability
• Demands on the owner
• Limited managerial perspective
• Resource limitations
• No employee benefits for the owner
• Finite life span

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Partnerships

• Partnership
 An unincorporated company owned by two or
more people
• Limited liability
 A legal condition in which the maximum
amount each owner is liable for is equal to
whatever amount each invested in the
business

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Partnerships (cont.)

• General partnership
 A partnership in which all partners have joint
authority to make decisions for the firm and
joint liability for the firm’s financial obligations
• Limited partnership
 A partnership in which one or more persons
act as general partners, run the business, and
have the same unlimited liability as sole
proprietors

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 Partnerships (cont.)

• Master limited partnership (MLP)

 A partnership that is allowed to raise money
by selling units of ownership to general public
partnerships and can bring together business
professionals with diverse skill sets and
perspectives

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Partnerships (cont.)

• Limited liability partnership (LLP)

 A partnership in which each partner has
unlimited liability only for his or her own
actions and at least some degree of limited
liability for the partnership as a whole

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Advantages of Partnerships

• Simplicity
• Single layer of taxation
• More resources
• Cost sharing
• Broader skill and experience base
• Longevity

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 Disadvantages of Partnerships

• Unlimited liability
• Potential for conflict
• Expansion, succession, and termination
issues

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The Partnership Agreement

• A partnership agreement should

address investment percentages, profit-
sharing percentages, management
responsibilities and other expectations of
each owner, decision-making strategies,
succession and exit strategies, criteria for
admitting new partners, and dispute-
resolution procedures.

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Corporations

• Corporation
 A legal entity, distinct from any individual
persons, that has the power to own property
and conduct business
• Shareholders
 Investors who purchase shares of stock in a
corporation

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 Corporations (cont.)

• Private • Public
corporation corporation
 A corporation in  A corporation in
which all the stock which stock is sold
is owned by only a to anyone who has
few individuals or the means to buy it
companies and is
not made available
for purchase by the
public
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Advantages of Corporations

• Ability to raise capital

• Liquidity
 A measure of how easily and quickly an asset
such as corporate stock can be converted
into cash by selling it
• Longevity
• Limited liability

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Disadvantages of Corporations

• Cost and complexity

• Reporting requirements
• Managerial demands
• Possible loss of control
• Double taxation
• Short-term orientation of the stock market

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Exhibit 5.2 Corporate Structures

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Corporate Governance

• Board of directors
 A group of professionals elected by
shareholders as their representatives, with
responsibility for the overall direction of the
company and the selection of top executives

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Corporate Governance (cont.)

• Corporate governance
 Describes all the policies, procedures,
relationships, and systems in place to
oversee the successful and legal operation of
the enterprise
 Also refers to the responsibilities and
performance of the board of directors
specifically

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Exhibit 5.3 Corporate Governance

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Shareholders

• Proxy
 A document that authorizes another person to
vote on behalf of a shareholder in a
corporation
• Shareholder activism
 Activities undertaken by shareholders to
influence executive decision making in areas
ranging from strategic planning to social
responsibility

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Corporate Officers

• Corporate officers
 The top executives who run a corporation
• Chief executive officer (CEO)
 The highest-ranking officer of a corporation

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 Mergers and Acquisitions

• Merger • Acquisition
 An action taken by  An action taken by
two companies to one company to
combine and buy a controlling
perform as a single interest in the
entity voting stock of
another company

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Mergers and Acquisitions (cont.)

• Hostile takeover
 Acquisition of another company against the
wishes of management
• Leveraged buyout (LBO)
 Acquisition of a company’s publicly traded
stock, using funds that are primarily
borrowed, usually with the intent of using
some of the acquired assets to pay back the
loans used to acquire the company

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Advantages of
Mergers and Acquisitions
• Increase their buying power as a result of their
larger size
• Increase revenue by cross-selling products to
each other’s customers
• Increase market share by combining product
lines
• Gain access to new expertise, systems, and
teams of employees

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 Disadvantages of
Mergers and Acquisitions
• Executives have to agree on how the merger
will be financed.
• Managers need to decide who will be in charge
after they join forces.
• Marketing departments need to figure out how
to blend product lines, branding strategies, and
advertising and sales efforts.
• Companies must often deal with layoffs.

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Exhibit 5.4 Types of Mergers

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Strategic Alliances
and Joint Ventures
• Strategic alliance • Joint venture
 A long-term  A separate legal
partnership entity established
between by two or more
companies to companies to
jointly develop, pursue shared
produce, or sell business
products objectives

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Exhibit 5.5 Options for Joining Forces

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Exhibit 5.5 Options for Joining Forces (cont.)

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Exhibit 5.5 Options for Joining Forces (cont.)

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