Chapter Five

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Chapter Five

• Options forOrganizing Business

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Sole Proprietorship

• A business owned and operated by one individual.

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Advantages and Disadvantagesof Sole
Proprietorship

• Advantages
• Ease and cost of formation
• Secrecy
• Distribution and use of profits
• Control of the business
• Government regulation
• Taxation
• Closing the business

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

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Partnership

• An association of two or more persons who carry
  on as co-owners of a business for profit.

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The Difference between General and Limited
Partners

• General partner A person who assumes full
  co-ownership of a business
• Limited partner A person who contributes
  capital to a business but is not active
  in managing it

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Advantages and Disadvantages of Partnerships

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

• Disadvantages
• Unlimited liability
• Business responsibility
• Life of the partnership
• Distributions of profits
• Limited sources of funds
• Taxation

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Corporation

• A legal entity created by the state, whose assets
  and liabilities are separate from its owners.

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Board of Directors
Shareholders
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Types of Corporations

• Private Corporation owned by only one person or
  a few people closely involved in its
  management.
• Public Corporation whose stock anyone may buy,
  sell, or trade.
• Subsidiary Corporation in which the majority of
  the stock is owned by another corporation
  known as the parent company

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Types of Corporations

• Holding Corporation that controls one or more
  companies through ownership of their
  common stock.
• Crown Corporations owned and operated by a
  federal, provincial, or local government.
• Non-profit Corporation that focuses on providing
  service rather than earning a profit.

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Advantages and Disadvantages of Corporations

• Advantages
• Limited liability
• Transfer of ownership
• Perpetual life
• External sources of funds
• Expansion potential

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

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Merger, Acquisition, and LBO

• Merger The combination of two companies
  (usually corporations) to form a new
  company
• Acquisition The purchase of one company by
  another, usually by buying its stock

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Merger, Acquisition, and LBO

• Leveraged Buyout (LBO)
• A purchase in which a group of investors
  borrow money from banks and other
  institutions to acquire a company (or division
  of one) using the assets of the purchased
  company to guarantee repayment of the loan.

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