BUSN 70 Chapter Notes - Chapter 4: Double Taxation, Complete Control, Tender Offer
5 May 2018
School
Department
Course
Professor
Introduction
Form of ownership of a business is important to the consumer
i.
I)
Sole Proprietorships
Businesses owned and operated by one individual, are the most
common form of business organization in the United States
i.
Many focus on services
ii.
Outnumber corporations, but net fewer sales and less income
iii.
Advantages of Sole Proprietorships
Ease and Cost of Formation
Easy and inexpensive, cheap permits and no lawyer required
1)
Technology has made these process easier for many
entrepreneurs
2)
i.
Secrecy
Greatest degree of secrecy (Keep trade secrets etc.)
1)
ii.
Distribution and Use of Profits
Belong exclusively to the owner
1)
iii.
Flexibility and Control of the Business
Complete control of the business and can make on the spot
decisions without needing any other approval
1)
iv.
Government Regulation
Most freedom from government regulation
1)
v.
Closing the business
Can be dissolved easily, all financial obligations must be
paid/resolved
1)
vi.
a.
Disadvantages of Sole Proprietorships
Unlimited Liability
If the business cannot pay its creditors, owner may be forced
to use personal items to pay off the debts
1)
i.
Limited Sources of Funds
Owner's personal financial conditions determine credit
standings
1)
Pay generally higher interest rates on bank loans than
corporations
2)
ii.
Limited Skills
Must be able to perform many functions and possess skills in
a number of diverse fields such as management, marketing,
finance etc.
1)
iii.
Lack of Continuity
Life expectancy is linked to that of the owner and his ability to
work
1)
Difficult to sell a sole proprietorship2)
iv.
Lack of Qualified Employees
Difficult to match the wages and benefits offered by a large
competing corporation because profits are not as high
1)
v.
Taxation
Taxation can potentially be a disadvantage depending on the
proprietor's income
1)
Do not suffer from the double taxation rate of corporations2)
vi.
b.
II)
Partnerships
An association of two or more persons who carry on as co-owners
of a business for profit
i.
Least used form of business, smaller than corporations but larger
than proprietorships
ii.
Types of Partners
General Partnerships - involves a complete sharing in the
management of a business
i.
Limited Partnerships - has at least one general partner, who
assumes unlimited liability, and at least one limited partner, whose
liability is limited to his or her investment in the business
ii.
a.
Articles of Partnership
Legal documents that set forth the basic agreement between
partners
i.
b.
Advantages of Partnerships
Ease of Organization
Starting a partnership is really principle1)
i.
Availability of Capital and Credit
Several partners has the benefit of a combination of talents
and skills and pooled financial resources
1)
Greater earning power and better credit ratings2)
ii.
Combining Knowledge and Skills
Successful partnerships avoid confusion and conflict by
specializing in specific areas of their expertise within a
business
1)
iii.
Decision Making
Can react more quickly to changes in the business
environment
Exception is large partnerships, which is normally slowa)
1)
iv.
Regulatory Controls
A partnership has fewer regulatory controls on it from the
federal government
1)
v.
c.
Disadvantages of Partnerships
Unlimited Liability i.
Business Responsibility
All partners are responsible for the actions of one another1)
ii.
Life of the Partnership
Terminated when a partner dies or withdraws
When withdrawing, the firms liabilities would be paid
off and the assets divided between the partners
a)
Articles of partnership in large partnerships simplify the
process of a partner withdrawing
b)
1)
iii.
Distribution of Profits
Distributed according to articles of partnership1)
iv.
Limited Sources of Funds
No public value and shares are not easily bought/sold publicly1)
Higher interest rates due to greater risk2)
v.
d.
Taxation of Partnerships
Do not pay taxes to the IRS, partners submits separate returns1)
e.
III)
Corporations
A legal entity, created by the state, whose assets and liabilities are
separate from its owners
i.
Has rights duties and powers of a personii.
Stock - shares of a business
Buy, sell or inherit shares that entitle people to profits1)
iii.
Dividends - profits distributed in cash formiv.
Creating a Corporation
Incorporators must file articles of incorporation to charter a
corporation
Includes name/address of business, objectives, classes
of stock, financial capital required etc. (See page 127)
a)
1)
Corporate Charter - State issued, shortly after received the
owners hold a meeting to establish bylaws and choose a
board of directors
2)
a.
Types of Corporations
Domestic, Foreign or Alien depending on where incorporated
and where they do business
1)
Private Corporation - owned by one or just a few people who
are closely involved in managing the business
2)
Public Corporation - anyone may buy, sell or trade stock
Initial Public Offering - "going public," selling stock to be
traded in public markets
a)
3)
Quasi-Public Corporation - owned and operated by the
federal, state, or local governments
Focus is to provide services to citizens rather than make
a profit
a)
4)
Nonprofit Corporation - similar to QP Corp except they are
not run by the government
5)
b.
Elements of a Corporation
The Board of Directors
Elected by the stockholders to oversee general operation of
the corporation, sets the long-range objectives of the
corporation
1)
Ensure that the objectives are completed and are legally liable
for mismanagement
2)
i.
Stock Ownership
Preferred Stock - a special class of owners because although
they generally do not have a say in how the company is run,
they have a claim to profits before stockholders
1)
Common Stock - Do not get special treatment in regards to
profits, but they do have some say in how the corporation is
run
Preemptive Right - common stockholders have the first
right to purchase new shares in a company when they
release more stock to sell
a)
2)
ii.
c.
Advantages of Corporation
Limited Liability
Stockholders not held responsible for firm's debts if it fails1)
i.
Ease of Transfer of Ownership
Sell/trade shares without termination1)
Does not affect daily/long-term operations of the corporation2)
ii.
Perpetual Life
Unless stipulated in articles of incorporation, corporations
generally last forever
1)
iii.
Expansion Potential
Long term financing allows expanding into national or global
markets easier
1)
iv.
d.
Disadvantages of Corporation
Double Taxation
Corporations pay taxes on their income, and the stockholders
receiving dividends are then taxed a second time as part of
the individual owner's income
1)
i.
Forming a Corporation
Can be costly, annual fee in states1)
ii.
Disclosure of Information
Must release annual report to shareholders with financial
info, profits, sales, facilities, equipment, debts, description of
company's operations, products and plans
1)
iii.
Employee-Owner Separation
Many employees for companies are not stockholders, so they
may feel that their work may only benefit the owners
1)
iv.
e.
IV)
Other Types of Ownership
Joint Ventures
A partnership established for a specific project or for a limited
time
1)
May be individuals or organizations and control may or may
not be equal
2)
a.
S Corporations
A form of business ownership that is taxed as thought it were
a partnership
1)
Only allowed to have up to 75 shareholders - limits financing2)
b.
Limited Liability Companies
A form of business ownership that provides limited liability, as
in a corporation, but is taxed as a partnership
1)
Flexible, simple to run, and do not require meetings and
protects members assets
2)
c.
Cooperatives
Organization of individuals or small businesses that have
banded together to reap the benefits of a larger corporation
1)
d.
V)
Trends in Business Ownership: Mergers and Acquisitions
Merger - two companies combine to form a larger corporation
Horizontal Merger - Firms with similar products merge1)
Vertical Merger - Firms with different but related levels of an
industry merge
2)
Conglomerate Merger - Firms in two unrelated industries
merge
3)
i.
Acquisition - occurs when one company purchases another
company, generally by buying most of its stock
Corporate Raider - company or individual who wants to
acquire or take over another company, and may give a tender
offer - buy stock at a premium price
1)
ii.
Preventing Hostile Takeovers
Poison Pill - current shareholders may buy more shareholders
to buy stock at discount
1)
Shark Repellant - in which management requires a large
majority of stockholders to approve the takeover
2)
White Knight - Find a more acceptable firm to acquire the
threatened company
3)
iii.
Leveraged Buyout - group of investors borrow money from banks
and other institutions to acquire a company using the assets of the
purchased business to guarantee repayment of the loan
iv.
VI)
Saturday, May 5, 2018
3:58 PM
Introduction
Form of ownership of a business is important to the consumeri.
I)
Sole Proprietorships
Businesses owned and operated by one individual, are the most
common form of business organization in the United States
i.
Many focus on servicesii.
Outnumber corporations, but net fewer sales and less incomeiii.
Advantages of Sole Proprietorships
Ease and Cost of Formation
Easy and inexpensive, cheap permits and no lawyer required1)
Technology has made these process easier for many
entrepreneurs
2)
i.
Secrecy
Greatest degree of secrecy (Keep trade secrets etc.)1)
ii.
Distribution and Use of Profits
Belong exclusively to the owner1)
iii.
Flexibility and Control of the Business
Complete control of the business and can make on the spot
decisions without needing any other approval
1)
iv.
Government Regulation
Most freedom from government regulation1)
v.
Closing the business
Can be dissolved easily, all financial obligations must be
paid/resolved
1)
vi.
a.
Disadvantages of Sole Proprietorships
Unlimited Liability
If the business cannot pay its creditors, owner may be forced
to use personal items to pay off the debts
1)
i.
Limited Sources of Funds
Owner's personal financial conditions determine credit
standings
1)
Pay generally higher interest rates on bank loans than
corporations
2)
ii.
Limited Skills
Must be able to perform many functions and possess skills in
a number of diverse fields such as management, marketing,
finance etc.
1)
iii.
Lack of Continuity
Life expectancy is linked to that of the owner and his ability to
work
1)
Difficult to sell a sole proprietorship
2)
iv.
Lack of Qualified Employees
Difficult to match the wages and benefits offered by a large
competing corporation because profits are not as high
1)
v.
Taxation
Taxation can potentially be a disadvantage depending on the
proprietor's income
1)
Do not suffer from the double taxation rate of corporations
2)
vi.
b.
II)
Partnerships
An association of two or more persons who carry on as co-owners
of a business for profit
i.
Least used form of business, smaller than corporations but larger
than proprietorships
ii.
Types of Partners
General Partnerships - involves a complete sharing in the
management of a business
i.
Limited Partnerships - has at least one general partner, who
assumes unlimited liability, and at least one limited partner, whose
liability is limited to his or her investment in the business
ii.
a.
Articles of Partnership
Legal documents that set forth the basic agreement between
partners
i.
b.
Advantages of Partnerships
Ease of Organization
Starting a partnership is really principle
1)
i.
Availability of Capital and Credit
Several partners has the benefit of a combination of talents
and skills and pooled financial resources
1)
Greater earning power and better credit ratings
2)
ii.
Combining Knowledge and Skills
Successful partnerships avoid confusion and conflict by
specializing in specific areas of their expertise within a
business
1)
iii.
Decision Making
Can react more quickly to changes in the business
environment
Exception is large partnerships, which is normally slowa)
1)
iv.
Regulatory Controls
A partnership has fewer regulatory controls on it from the
federal government
1)
v.
c.
Disadvantages of Partnerships
Unlimited Liability i.
Business Responsibility
All partners are responsible for the actions of one another1)
ii.
Life of the Partnership
Terminated when a partner dies or withdraws
When withdrawing, the firms liabilities would be paid
off and the assets divided between the partners
a)
Articles of partnership in large partnerships simplify the
process of a partner withdrawing
b)
1)
iii.
Distribution of Profits
Distributed according to articles of partnership1)
iv.
Limited Sources of Funds
No public value and shares are not easily bought/sold publicly1)
Higher interest rates due to greater risk2)
v.
d.
Taxation of Partnerships
Do not pay taxes to the IRS, partners submits separate returns1)
e.
III)
Corporations
A legal entity, created by the state, whose assets and liabilities are
separate from its owners
i.
Has rights duties and powers of a personii.
Stock - shares of a business
Buy, sell or inherit shares that entitle people to profits1)
iii.
Dividends - profits distributed in cash formiv.
Creating a Corporation
Incorporators must file articles of incorporation to charter a
corporation
Includes name/address of business, objectives, classes
of stock, financial capital required etc. (See page 127)
a)
1)
Corporate Charter - State issued, shortly after received the
owners hold a meeting to establish bylaws and choose a
board of directors
2)
a.
Types of Corporations
Domestic, Foreign or Alien depending on where incorporated
and where they do business
1)
Private Corporation - owned by one or just a few people who
are closely involved in managing the business
2)
Public Corporation - anyone may buy, sell or trade stock
Initial Public Offering - "going public," selling stock to be
traded in public markets
a)
3)
Quasi-Public Corporation - owned and operated by the
federal, state, or local governments
Focus is to provide services to citizens rather than make
a profit
a)
4)
Nonprofit Corporation - similar to QP Corp except they are
not run by the government
5)
b.
Elements of a Corporation
The Board of Directors
Elected by the stockholders to oversee general operation of
the corporation, sets the long-range objectives of the
corporation
1)
Ensure that the objectives are completed and are legally liable
for mismanagement
2)
i.
Stock Ownership
Preferred Stock - a special class of owners because although
they generally do not have a say in how the company is run,
they have a claim to profits before stockholders
1)
Common Stock - Do not get special treatment in regards to
profits, but they do have some say in how the corporation is
run
Preemptive Right - common stockholders have the first
right to purchase new shares in a company when they
release more stock to sell
a)
2)
ii.
c.
Advantages of Corporation
Limited Liability
Stockholders not held responsible for firm's debts if it fails1)
i.
Ease of Transfer of Ownership
Sell/trade shares without termination1)
Does not affect daily/long-term operations of the corporation2)
ii.
Perpetual Life
Unless stipulated in articles of incorporation, corporations
generally last forever
1)
iii.
Expansion Potential
Long term financing allows expanding into national or global
markets easier
1)
iv.
d.
Disadvantages of Corporation
Double Taxation
Corporations pay taxes on their income, and the stockholders
receiving dividends are then taxed a second time as part of
the individual owner's income
1)
i.
Forming a Corporation
Can be costly, annual fee in states1)
ii.
Disclosure of Information
Must release annual report to shareholders with financial
info, profits, sales, facilities, equipment, debts, description of
company's operations, products and plans
1)
iii.
Employee-Owner Separation
Many employees for companies are not stockholders, so they
may feel that their work may only benefit the owners
1)
iv.
e.
IV)
Other Types of Ownership
Joint Ventures
A partnership established for a specific project or for a limited
time
1)
May be individuals or organizations and control may or may
not be equal
2)
a.
S Corporations
A form of business ownership that is taxed as thought it were
a partnership
1)
Only allowed to have up to 75 shareholders - limits financing2)
b.
Limited Liability Companies
A form of business ownership that provides limited liability, as
in a corporation, but is taxed as a partnership
1)
Flexible, simple to run, and do not require meetings and
protects members assets
2)
c.
Cooperatives
Organization of individuals or small businesses that have
banded together to reap the benefits of a larger corporation
1)
d.
V)
Trends in Business Ownership: Mergers and Acquisitions
Merger - two companies combine to form a larger corporation
Horizontal Merger - Firms with similar products merge1)
Vertical Merger - Firms with different but related levels of an
industry merge
2)
Conglomerate Merger - Firms in two unrelated industries
merge
3)
i.
Acquisition - occurs when one company purchases another
company, generally by buying most of its stock
Corporate Raider - company or individual who wants to
acquire or take over another company, and may give a tender
offer - buy stock at a premium price
1)
ii.
Preventing Hostile Takeovers
Poison Pill - current shareholders may buy more shareholders
to buy stock at discount
1)
Shark Repellant - in which management requires a large
majority of stockholders to approve the takeover
2)
White Knight - Find a more acceptable firm to acquire the
threatened company
3)
iii.
Leveraged Buyout - group of investors borrow money from banks
and other institutions to acquire a company using the assets of the
purchased business to guarantee repayment of the loan
iv.
VI)
Saturday, May 5, 2018 3:58 PM
