Learning Objectives

Identify the concerns to ask in choosing the appropriate kind of property for a business.Describe the single proprietorship and partnership creates of organization, and specify the benefits and disadvantages.Identify the different varieties of partnerships, and explain the prestige of a cooperation agreement.Explain just how corporations are formed and also how castle operate.Discuss the benefits and defect of the corporate kind of ownership.Examine special types of service ownership, including limited-liability companies, and also not-for-profit corporations.Define mergers and acquisitions, and also explain why suppliers are encouraged to unify or acquire other companies.

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The ice cream Cream Men

Who would have thought it? 2 ex-hippies with solid interests in social activism would finish up beginning one the the best-known ice cream cream suppliers in the country—Ben & Jerry’s. Probably it was supposed to be. Ben Cohen (the “Ben” the Ben & Jerry’s) constantly had a fascination with ice cream. Together a child, the made his own mixtures by smashing his favorite cookies and candies into his ice cream. However it wasn’t till his an elderly year in high institution that he ended up being an main “ice cream man,” happily driving his truck through neighborhoods filled with children eager to buy his ice cream cream pops. After high school, Ben do the efforts college but it wasn’t because that him. The attended Colgate college for a year and a half before the dropped the end to go back to his actual love: gift an ice cream man. He tried college again—this time in ~ Skidmore, where he learned pottery and also jewelry making—but, regardless of his an option of courses, quiet didn’t choose it.

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Figure 6.1: Ben Cohen and Jerry green field in 2010

In the meantime, Jerry green field (the “Jerry” that Ben & Jerry’s) was following a comparable path. He specialty in pre-med at Oberlin college in the really hopes of one day becoming a doctor. However he had to give up top top this goal once he to be not accepted into medical school. Top top a confident note, though, his college education steered him right into a more profitable field: the human being of ice cream making. He got his an initial peek in ~ the ice cream market when he operated as a trowel in the student cafeteria at Oberlin. So, fourteen year after they an initial met top top the small high school track team, Ben and Jerry reunited and also decided to go into ice cream making large time. They relocated to Burlington, Vermont—a college city in require of an ice cream parlor—and completed a $5 correspondence course from penn State on making ice cream. After gaining an A in the course—not surprising, provided that the exam were open book—they take it the plunge: through their life save of $8,000 and also $4,000 of borrowed funds they collection up an ice cream shop in a made-over gas station on a liven street corner in Burlington.1 The next huge decision was which kind of business ownership was finest for them. This chapter introduces girlfriend to their options.

Factors to Consider

If you’re beginning a new business, you have to decide i beg your pardon legal kind of ownership is best for you and your business. Carry out you want to own the organization yourself and also operate as a single proprietorship? Or, perform you want to re-superstructure ownership, operation as a cooperation or a corporation? prior to we discuss the pros and cons of these three varieties of ownership, let’s attend to some that the inquiries that you’d most likely ask yourself in picking the suitable legal form for her business.

In setup up your business, do you want to minimize the expenses of getting started? execute you expect to avoid facility government regulations and also reporting requirements?How much regulate would friend like? exactly how much duty for running the organization are you ready to share? What about sharing the profits?Do you want to stop special taxes?Do you have all the skills needed to operation the business?Are you most likely to get in addition to your co-owners end an extended duration of time?Is it important to you the the business survive you?What space your jae won needs and also how do you arrangement to finance your company?How much personal exposure come liability space you ready to accept? do you feeling uneasy about accepting an individual liability for the actions of other owners?

No single type of ownership will give you everything you desire. You’ll need to make some trade-offs. Due to the fact that each option has both benefits and disadvantages, your project is to decision which one provides the functions that room most important to you. In the adhering to sections fine compare 3 ownership options (sole proprietorship, partnership, corporation) on these eight dimensions.

Sole Proprietorship and its Advantages

In a sole proprietorship, as the owner, you have finish control over her business. You make all vital decisions and are typically responsible for every day-to-day activities. In exchange because that assuming every this responsibility, you get all the income earned through the business. Revenues earned space taxed as personal income, so you don’t have to pay any special federal and also state revenue taxes.

Disadvantages of sole Proprietorships

For many people, however, the sole proprietorship is no suitable. The flip side of enjoying finish control is having actually to supply all the different talents that may be important to do the service a success. And also when she gone, the business dissolves. You likewise have to rely on your own resources because that financing: in effect, you space the business and any money obtained by the company is loaned to you personally. Even more important, the single proprietor bears unlimited liability for any type of losses occurs by the business. The rule of unlimited personal liability method that if the business incurs a blame or ill a catastrophic (say, getting sued for causing an injury to someone), the owner is personally liable. Together a sole proprietor, you placed your an individual assets (your financial institution account, your car, maybe also your home) at threat for the benefits of her business. You have the right to lessen your threat with insurance, yet your liability exposure deserve to still it is in substantial. Offered that Ben and also Jerry determined to begin their ice cream cream organization together (and thus the organization was no owned by just one person), they might not set their agency up together a single proprietorship.

Partnership

A partnership (or basic partnership) is a service owned together by two or more people. About 10 percent of U.S. Businesses are partnerships2 and though the vast bulk are small, some are quite large. For example, the large four public audit firms space partnerships. Setting up a partnership is more facility than setup up a sole proprietorship, yet it’s still relatively easy and inexpensive. The expense varies according to size and complexity. It’s possible to type a an easy partnership there is no the assist of a lawyer or an accountant, despite it’s usually a good idea come get experienced advice.

Professionals can aid you identify and resolve issues that may later produce disputes among partners.

The partnership Agreement

The impact of disputes can be lessened if the partners have executed a well-planned partnership agreement that states everyone’s rights and also responsibilities. The commitment might administer such details together the following:

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

Unlimited Liability and also the Partnership

A significant problem with partnerships, similar to sole proprietorships, is unlimited liability: in this case, each companion is personally liable not only for his or her very own actions but likewise for the plot of every the partners. If your partner in an architectural firm renders a mistake that reasons a framework to collapse, the ns your business incurs results you just as much as it would certainly him or her. And also here’s the really bad news: if the service doesn’t have the cash or other assets come cover losses, you can be personally sue for the lot owed. In various other words, the party who endured a loss because of the error deserve to sue you because that your an individual assets. Many civilization are understandably wake up to get in into partnerships due to the fact that of countless liability. Particular forms that businesses permit owners come limit your liability. These include limited partnerships and corporations.

Limited Partnerships

The legislation permits organization owners to type a limited partnership which has actually two varieties of partners: a single general partner who operation the business and also is responsible because that its liabilities, and also any number of limited partners that have restricted involvement in the business and also whose casualty are limited to the lot of their investment.

Advantages and Disadvantages of Partnerships

The partnership has actually several benefits over the sole proprietorship. First, it brings together a diverse group that talented individuals who share duty for to run the business. Second, it provides financing easier: the company can draw on the financial sources of a variety of individuals. The partners no only contribute funds come the business but can also use personal resources to secure financial institution loans. Finally, continually needn’t it is in an issue since partners can agree legally to enable the cooperation to endure if one or more partners die.

Still, there room some negatives. First, as debated earlier, partners room subject to unlimited liability. Second, gift a partner method that you need to share decision making, and many civilization aren’t comfortable through that situation. Not surprisingly, partners often have distinctions of opinion on just how to run a business, and also disagreements deserve to escalate to the point of jeopardizing the keep going of the business. Third, in enhancement to share ideas, partners likewise share profits. This arrangement can job-related as long as every partners feel that they’re gift rewarded follow to your efforts and also accomplishments, but that isn’t always the case. If the partnership form of ownership is viewed negatively by some, it was an especially appealing to Ben Cohen and Jerry Greenfield. Beginning their ice cream cream business as a partnership to be inexpensive and also let them integrate their limited financial resources and also use your diverse skills and talents. As friends lock trusted every other and welcomed mutual decision making and profit sharing. Lock were additionally not wake up to be hosted personally liable for each other’s actions.

Corporation

A corporation (sometimes called a consistent or C-corporation) differs from a sole proprietorship and a partnership due to the fact that it’s a legal entity that is entirely separate native the next who very own it. The can enter into binding contracts, buy and sell property, sue and also be sued, be hosted responsible for its actions, and also be taxed. When businesses reach any comprehensive size, that is beneficial to organize together a corporation so the its owners have the right to limit your liability. Corporations, then, tend to be far larger, top top average, 보다 businesses utilizing other creates of ownership. As number 6.2 shows, enterprise account for 18 percent of all U.S. Businesses but generate virtually 82 percent of the revenues.3 Most big well-known businesses are corporations, however so are numerous of the smaller firms v which likely you carry out business.

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Figure 6.2: species of U.S. Businesses

Ownership and also Stock

Corporations space owned by shareholders that invest money in the company by buying share of stock. The part of the coporation, group they very own depends top top the percent of share they hold. For example, if a corporation has actually issued 100 share of stock, and you own 30 shares, you own 30 percent the the company. The shareholders elect a board that directors, a group of people (primarily from external the corporation) who room legally responsible because that governing the corporation. The board oversees the major policies and decisions made by the corporation, to adjust goals and holds monitoring accountable for achieving them, and hires and also evaluates the peak executive, generally dubbed the CEO (chief executive officer). The board likewise approves the distribution of earnings to shareholder in the kind of cash payments referred to as dividends.

Benefits the Incorporation

The corporate form of organization uses several advantages, including minimal liability for shareholders, greater access to jae won resources, devoted management, and also continuity.

Limited Liability

The most important benefit of organization is the limited liability come which shareholders are exposed: they room not responsible because that the obligations of the corporation, and also they have the right to lose no much more than the amount the they have actually personally invested in the company. Minimal liability would have been a big plus because that the unfortunate individual whose business partner shed down their dry clean establishment. Had actually they been incorporated, the corporation would have actually been liable for the debts occurs by the fire. If the corporation no have sufficient money to pay the debt, the separation, personal, instance shareholders would not have been obligated to salary anything. They would have actually lost every the money the they’d invested in the business, but no more.

Financial Resources

Incorporation also makes it feasible for businesses come raise funds by offering stock. This is a big advantage as a agency grows and also needs more funds come operate and compete. Depending on its size and financial strength, the corporation likewise has an advantage over other creates of organization in getting financial institution loans. An developed corporation deserve to borrow its own funds, but when a tiny business needs a loan, the financial institution usually needs that it be guarantee by the owners.

Specialized Management

Because the their dimension and capacity to salary high sales commissions and benefits, companies are typically able to attract an ext skilled and also talented employee than are proprietorships and partnerships.

Continuity and also Transferability

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

Transferring ownership of a copy, group is easy: shareholders just sell your stock to others. Part founders, however, desire to restrict the german of your stock and also so choose to run as a privately-held corporation. The stock in this corporations is held by only a few individuals, who room not permitted to sell it to the general public.

Companies with no such limitations on share sales are referred to as public corporations; stock is easily accessible for revenue to the basic public.

Drawbacks to Incorporation

Like sole proprietorships and also partnerships, corporations have both optimistic and an adverse aspects. In single proprietorships and also partnerships, because that instance, the individuals who own and manage a organization are the same people. This firm managers, however, don’t necessarily very own stock, and also shareholders nothing necessarily job-related for the company. This instance can be troublesome if the goals of the two teams differ significantly.

Managers, for example, space often an ext interested in career development than the as whole profitability that the company. Stockholders can care much more about revenues without regard because that the wellness of employees. This situation is recognized as the agency problem, a dispute of interest inherent in a connection in which one party is supposed to act in the best interest of the other. That is regularly quite complicated to avoid self-interest indigenous entering into these situations.

Another drawback to incorporation—one that frequently discourages tiny businesses indigenous incorporating—is the reality that corporations are much more costly to set up. Once you incorporate filing and licensing fees with audit and attorney fees, combine a business could set you back by $1,000 come $6,000 or more depending ~ above the size and scope of her business.4 Additionally, corporations space subject to levels of regulation and governmental oversight that deserve to place a load on small businesses. Finally, corporations are subject to those generally referred to as “double taxation.” Corporations are taxed by the federal and state federal governments on your earnings. As soon as these revenue are spread as dividends, the shareholder pay counting on this dividends. Corporate profits are thus taxed twice—the corporation payment the taxes the very first time and also the shareholders pay the taxes the 2nd time.

Five years after starting their ice cream cream business, Ben Cohen and also Jerry greenfield evaluated the pros and also cons the the corporate form of ownership, and the “pros” won. The major motivator to be the have to raise funds to construct a $2 million manufacturing facility. Not just did Ben and Jerry decision to move from a cooperation to a corporation, yet they also decided to offer shares of stock to the general public (and thus end up being a windy corporation). Their sale of stock to the general public was a little bit unusual: Ben and also Jerry want the community to own the company, so instead of providing the stock to anyone interested in to buy a share, they readily available stock to residents of vermont only. Ben thought that “business has actually a duty to give back to the neighborhood from which the draws that is support.”5 He want the agency to be owned by those who lined up in the gas terminal to buy cones. The stock to be so famous that one in every hundred Vermont families bought stock in the company.6 Eventually, as the company continued come expand, the stock was marketed on a national level.

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Other species of business Ownership

In addition to the three commonly embraced forms of business organization—sole proprietorship, partnership, and also regular corporations—some organization owners choose other creates of organization to accomplish their specific needs. Fine look at two of this options:

Limited-liability companiesNot-for-profit corporations

Limited-Liability Companies

How would you like a legal type of organization that provides the attractive features of the three common forms of company (corporation, single proprietorship and also partnership) and avoids the unattractive functions of these three organization forms? The limited-liability company (LLC) accomplishes exactly that. This kind provides organization owners with minimal liability (a crucial advantage that corporations) and also no “double taxation” (a an essential advantage of single proprietorships and also partnerships). Let’s look in ~ the llc in much more detail.

In 1977, Wyoming became the an initial state to enable businesses to run as limited-liability companies. Two decades later, in 1997, Hawaii came to be the last state to provide its approval to the new organization form. Due to the fact that then, the limited-liability agency has raised in popularity. The rapid expansion was fueled in part by transforms in state statutes the permit a limited-liability company to have just one member. The trend to LLCs have the right to be experienced by reading firm names on the side of van or on storefronts in her city. That is common to watch names such together Jim Evans Tree Care, LLC, and For-Cats-Only veterinary Clinic, LLC. However LLCs are not restricted to little businesses. Suppliers such as Crayola, domino Pizza, Ritz-Carlton Hotel Company, and also iSold that (which helps people sell their unwanted belongings top top eBay) space operating under the limited-liability kind of organization.

In a limited-liability company, owner (called members fairly than shareholders) room not personal liable for debts of the company, and also its income are taxed only once, at the personal level (thereby eliminating dual taxation).

We have touted the benefits of limited liability security for an LLC. Us now require to allude out some scenarios under i beg your pardon an gmbh member (or a shareholder in a corporation) could be held personally liable for the fan of his or she company. A company owner have the right to be organized personally liable if that or she:

Personally promises a service debt or bank loan i m sorry the company fails come pay.Fails to salary employment taxes come the government.Engages in cheat or illegal actions that damages the agency or who else.Does no treat the firm as a different legal entity, because that example, uses company assets for an individual 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 gaue won gain. As long as the organization’s activity is for charitable, religious, educational, scientific, or literary purposes, it deserve to be exempt from paying earnings taxes. Additionally, individuals and also other organizations that add to the not-for-profit corporation can take a taxation deduction for those contributions. The species of groups that normally apply for nonprofit standing vary widely and include churches, synagogues, mosques, and also other places of worship; museums; universities; and conservation groups.

There are an ext than 1.5 million not-for-profit establishments in the united States.7 part are extremely well funded, such together the Bill and also Melinda entrances Foundation, which has actually an treasure of around $40 billion and has offered away $36.7 billion because its inception.8 Others are nationally recognized, such as unified Way, Goodwill Industries, Habitat for Humanity, and the Red Cross. Yet the vast majority is neither wealthy nor famous, but nevertheless makes far-reaching contributions to society.

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Mergers and Acquisitions

The title read, “Wanted: an ext than 2,000 in Google hiring Spree.”9 The largest web search engine in the civilization was disclosing its to plan to flourish internally and also increase its workforce by an ext than 2,000 people, with fifty percent of the hires coming indigenous the joined States and the other half coming from various other countries. The added employees will assist the agency expand into brand-new markets and also battle for worldwide talent in the competitive Internet details providers industry. As soon as properly executed, internal growth benefits the firm.

An alternate approach to growth is come merge with or acquire an additional company. The rationale behind development through closing or acquisition is that 1 + 1 = 3: the combined company is an ext valuable 보다 the sum of the two different companies. This reason is attractive come companies facing competitive pressures. To grab a bigger re-superstructure of the market and improve profitability, providers will want to become an ext cost reliable by combining with various other companies.

Mergers and Acquisitions

Though they are frequently used as if castle synonymous, the terms merger and acquisition average slightly various things. A merger occurs when two companies combine to form a new company. An acquisition is the purchase of one company by another. An instance of a merger is the merging in 2013 of us Airways and American Airlines. The linked company, the biggest carrier in the world, flies under the name American Airlines.

Another example of an salvation is the acquisition of Reebok by Adidas for $3.8 billion.10 The transaction was intended to offer Adidas a stronger existence in phibìc America and aid the firm compete v rival Nike. Once this acquisition was completed, Reebok as a agency ceased to exist, though Adidas tho sells pair of shoes under the Reebok brand.

Motives behind Mergers and also Acquisitions

Companies are encouraged to unify or obtain other companies for a number of reasons, including the following.

Gain complementary Products

Acquiring complementary products was the an inspiration behind adidas acquisition that Reebok. Together Adidas CEO Herbert Hainer declared in a conference call, “This is a once-in- a-lifetime opportunity. This is a perfect fit for both companies, since the suppliers are so complementary…. Adidas is base in sports performance through such products as a motorized to run shoe and endorsement faces such superstars as British football player David Beckham. Meanwhile, Reebok plays heavily to the convey of sports and entertainment with endorsement deals and products by Nelly, Jay-Z, and also 50 Cent. The combination could it is in deadly to Nike.” that course, Nike has ongoing to thrive, yet one can’t blame hyiner for his optimism.11

Attain brand-new Markets or distribution Channels

Gaining new markets was a significant factor in the 2005 mergers of united state Airways and also America West. Us Airways was a significant player ~ above the eastern Coast, the Caribbean, and Europe, when America West was solid in the West. The expectation were that combining the two carriers would create an airline that might reach much more markets 보다 either carrier could do top top its own.12

Realize Synergies

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

In pursuing these acquisitions, Pfizer likely identified many synergies: rather simply, a totality that is better than the sum of its parts. There are numerous examples the synergies. A merger generally results in a number of redundant positions; the combined company does not likely need two vice-presidents that marketing, two chief gaue won officers, and so on. Removed the redundancy positions leads to far-ranging cost save that would certainly not be realized if the two providers did no merge. Let’s say each of the carriers was operation factories at 50% the capacity, and by merging, one factory could be closed and sold. The would also be an example of a synergy. Companies lug different strengths and also weaknesses right into the combined entity. If the newly-combined company can take benefit of the marketing capability of the stronger entity and also the circulation capabilities the the various other (assuming they room stronger), the new company can realize synergies in both of these functions.

Hostile Takeover

What happens, though, if one firm wants come acquire another company, yet that agency doesn’t desire to be acquired? The outcome can be a hostile takeover—an action of assuming regulate that’s withstood by the target company’s management and its board of directors. Ben Cohen and Jerry Greenfield discovered themselves in among these situations: Unilever—a very huge Dutch/British firm that owns three ice cream brands—wanted come buy Ben & Jerry’s, versus the co-founder wishes. Most of the Ben & jerry’s stockholders sided v Unilever. They had small confidence in the capacity of Ben Cohen and also Jerry greenfield to continue managing the agency and were frustrated through the firm’s social-mission focus. The stockholders favored Unilever’s sell to buy your Ben & Jerry’s share at almost twice its present market price and also wanted come take your profits. In the end, unilever won; Ben & jerry’s was gained by unilater in a enemy takeover.16 regardless of fears that the company’s social mission would end, it no happen. Though neither Ben Cohen no one Jerry greenfield are connected in the current management that the company, they have actually returned to their social activism roots and are heavily involved in plenty of social efforts sponsored through the company.

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Chapter Video: service Structures 

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