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Chapter 4

Options for Organizing

Business

© 2023 McGraw Hill, LLC. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw Hill, LLC.
 Learning Objectives
4-1 Describe the advantages and disadvantages of the sole
proprietorship form of organization.
4-2 Describe the two types of business partnership and their
advantages and disadvantages.
4-3 Describe the corporate form of organization and its
advantages and disadvantages.
4-4 Assess the advantages and disadvantages of mergers,
acquisitions, and leveraged buyouts.
4-5 Propose an appropriate organizational form for a startup
business.

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 Basic Forms of Business Ownership
Three Major Forms
• Sole proprietorship.
• Owned by one person.
• Partnership.
• Owned by two or more people.
• Corporation.
• 20 percent of business, but 81 percent of U.S. business receipts.

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 Figure 4.1 Comparison of Sole Proprietorships,
Partnerships, S Corporations, and C Corporations

Source: Tax Policy Center, “Fiscal Facts: Breakdown of US Businesses,” May 11, 2020,
[Link] (accessed February 18, 2021).

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 Table 4.1 Various Forms of Business
Ownership
Structure Ownership Taxation Liability Use
Owned by a single
Sole Individual
One owner Unlimited individual/easiest way to
Proprietorship income taxed
conduct business
Individual Easy way for two
Two or more Somewhat
Partnership owners’ income individuals to conduct
owners limited
taxed business
Corporation and A legal entity with
Any number of
Corporation shareholder Limited shareholders or
shareholders
taxed stockholders
A legal entity with tax
Up to 100 Taxed as a
S Corporation Limited advantages for restricted
shareholders partnership
number of shareholders
Unlimited
Limited Liability Taxed as a Avoidance of personal
number of Limited
Company partnership lawsuits
shareholders

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 Sole Proprietorships 1

Sole proprietorship—Businesses owned and

operated by one individual
• Most common form of business organization in the United
States.
• Typically employ fewer than 50 people.
• Comprise nearly three-quarters of all U.S. businesses.

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 Sole Proprietorships 2

Advantages of Sole Proprietorships

• Ease and cost of formation.
• Secrecy.
• Distribution and use of profits.
• Flexibility and control of the business.
• Government regulation.
• Taxation.
• Closing the business.

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 Sole Proprietorships 3

Disadvantages of Sole Proprietorships

• Unlimited liability.
• Limited sources of funds.
• Limited skills.
• Lack of continuity.
• Lack of qualified employees.
• Taxation.

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 Partnerships 1

Partnership—A form of business organization

defined by the Uniform Partnership Act as “an
association of two or more persons who carry on as
co-owners of a business for profit”
• Least used form of business.
• Typically larger than sole proprietorships but smaller than
corporations.

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 Partnerships 2

Types of Partnership
General partnership.
Limited partnership.
• Master limited partnership (MLP).

Articles of Partnership—legal documents that set

forth the basic agreement between partners.
Required by most states.
Makes good sense for partners to draw them up.

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 Partnerships 3

Advantages of Partnerships
• Ease of organization.
• Availability of capital and credit.
• Combined knowledge and skills.
• Decision making.
• Regulatory controls.

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 Partnerships 4

Disadvantages of Partnerships
• Unlimited liability.
• Responsibilities and conflicts.
• Life of the partnership.
• Distribution of profits.
• Limited sources of funds.
Taxation of Partnerships
• Quasi-taxable organizations.

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 Corporations 1

Corporation—A legal entity, created by the state,

whose assets and liabilities are separate from its
owners
Has many of the rights, duties, and powers of a person.
• Can own and transfer property.
• Can enter into contracts.
• Can sue and be sued in court.

Stock
Dividends

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 Corporations 2

Creating a Corporation
• Incorporators create corporation.
• Each state has a specific procedure called chartering the
corporation.
• Articles of incorporation are the legal documents.
• State issues a corporate charter to the company.
• Owners establish by laws and elect a board of directors.

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 Corporations 3

Types of Corporations
Domestic corporation.
• Conducts business in the state in which it is chartered.

Foreign corporation.
• Conducts business outside the state in which it is chartered.

Alien corporation.
• Conducts business outside the nation in which it is incorporated.

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 Corporations 4

Types of Corporations continued

Private corporation.
• Owned by just one or a few people closely involved in managing the
business.
• No stock is sold to public.
• Not required to disclose financial information publicly.
• May become public via initial public offering (IPO).

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 Table 4.5 America’s Largest Private
Companies
Revenue
Company Industry (in billions) Employees
Koch Industries Multicompany $115.0 100,000
Cargill Food, drink, and tobacco $114.6 155,000
Business services and
Deloitte supplies $47.6 330,000
Business services and
PricewaterhouseCoopers supplies $43.0 276,000
Publix Super Markets Food markets $38.1 207,000
Business services and
Ernst & Young supplies $37.2 289,965
Mars Food, drink, and tobacco $37.0 130,000
Reyes Holdings Food, drink, and tobacco $35.0 29,000
H-E-B Food markets $31.2 135,500
Convenience stores and
Pilot Flying J gas stations $29.5 26,696

Source: “America’s Largest Private Companies,” Forbes, [Link] (accessed

February 19, 2021).

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 Corporations 5

Types of Corporations continued

Public corporation.
• A corporation whose stock anyone may buy, sell, or trade.
• May be taken private when all firm’s stock is purchased and can no
longer be sold publicly.
• Two types of public corporations:
• Quasi-public corporations.
• Nonprofit corporations.

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 Corporations 6

Elements of a Corporation
Board of directors.
• Elected by stockholders.
• Sets long-range objectives of the corporation.
• Ensures objectives are met on schedule.
• Hires corporate officers.

Outside directors.
Inside directors.

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 Corporations 7

Elements of a Corporation continued

Stock ownership.
• Preferred stock
• Do not have say in running the company but have a claim to profits before
other stockholders.
• Common stock.
• Do not get preferential treatment regarding dividends but have voting rights.
• May vote by proxy.
• Have preemptive rights.

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 Corporations 8

Advantages of Corporations
• Limited liability.
• Ease of transfer of ownership.
• Perpetual life.
• External sources of funds.
• Expansion potential.

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 Corporations 9

Disadvantages of Corporations
• Double taxation.
• Forming a corporation.
• Disclosure of information.
• Employee-owner separation.

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 Other Types of Ownership 1

Joint Ventures
• A partnership established for a specific project or for a
limited time.
S Corporations
• Corporation taxed as though it were a partnership with
restrictions on shareholders.

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 Other Types of Ownership 2

Limited Liability Companies (LLCs)

• Form of ownership that provides limited liability and
taxation like a partnership but places fewer restrictions on
members.

Cooperatives (co-ops)
• Organizations composed of individuals or small
businesses that band together to reap the benefits of
belonging to a larger organization.

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 Trends in Business Ownership: Mergers
and Acquisitions 1

Mergers—the combination of two companies to

form a new company.
• Horizontal merger.
• Vertical merger.
• Conglomerate merger.

Acquisitions—the purchase of one company by

another, usually by buying its stock.

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 Table 4.7 The Largest Mergers of All Time

Transaction Value (in

Rank Acquirer Target billions)
1 Vodafone Mannesmann AG $180
2 America Online Time Warner $165
(AOL)
3 Verizon Vodafone $130
Communications
4 Dow Chemical DuPont $130
5 AB InBev SABMiller $104

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 Trends in Business Ownership: Mergers
and Acquisitions 2
Corporate raider
• Tender offer.

Techniques to head off hostile takeover

• Ask stockholders not to sell.
• File a lawsuit.
• Poison pill.
• Shark repellant.
• White knight.
Leveraged buyout (LBO)

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