In other words, the party who suffered a loss because of the error can sue you for your personal assets. Many people are understandably reluctant to enter into partnerships because of unlimited liability. Certain forms of businesses allow owners to limit their liability.
These include limited partnerships and corporations. The law permits business owners to form a limited partnership which has two types of partners: a single general partner who runs the business and is responsible for its liabilities, and any number of limited partners who have limited involvement in the business and whose losses are limited to the amount of their investment.
The partnership has several advantages over the sole proprietorship. First, it brings together a diverse group of talented individuals who share responsibility for running the business.
Second, it makes financing easier: the business can draw on the financial resources of a number of individuals. The partners not only contribute funds to the business but can also use personal resources to secure bank loans. Still, there are some negatives. First, as discussed earlier, partners are subject to unlimited liability. Not surprisingly, partners often have differences of opinion on how to run a business, and disagreements can escalate to the point of jeopardizing the continuance of the business.
Third, in addition to sharing ideas, partners also share profits. While the partnership form of ownership is viewed negatively by some, it was particularly appealing to Ben Cohen and Jerry Greenfield. Starting their ice cream business as a partnership was inexpensive and let them combine their limited financial resources and use their diverse skills and talents.
As friends they trusted each other and welcomed shared decision making and profit sharing. It can enter into binding contracts, buy and sell property, sue and be sued, be held responsible for its actions, and be taxed.
Once businesses reach any substantial size, it is advantageous to organize as a corporation so that its owners can limit their liability. Corporations, then, tend to be far larger, on average, than businesses using other forms of ownership. As Figure 6. Corporations are owned by shareholders who invest money in the business by buying shares of stock.
The portion of the corporation they own depends on the percentage of stock they hold. For example, if a corporation has issued shares of stock, and you own 30 shares, you own 30 percent of the company. The shareholders elect a board of directors , a group of people primarily from outside the corporation who are legally responsible for governing the corporation.
The board oversees the major policies and decisions made by the corporation, sets goals and holds management accountable for achieving them, and hires and evaluates the top executive, generally called the CEO chief executive officer. The board also approves the distribution of income to shareholders in the form of cash payments called dividends.
The corporate form of organization offers several advantages, including limited liability for shareholders, greater access to financial resources, specialized management, and continuity. The most important benefit of incorporation is the limited liability to which shareholders are exposed: they are not responsible for the obligations of the corporation, and they can lose no more than the amount that they have personally invested in the company. Limited liability would have been a big plus for the unfortunate individual whose business partner burned down their dry cleaning establishment.
Had they been incorporated, the corporation would have been liable for the debts incurred by the fire. Incorporation also makes it possible for businesses to raise funds by selling stock. This is a big advantage as a company grows and needs more funds to operate and compete. Depending on its size and financial strength, the corporation also has an advantage over other forms of business in getting bank loans. An established corporation can borrow its own funds, but when a small business needs a loan, the bank usually requires that it be guaranteed by its owners.
Because of their size and ability to pay high sales commissions and benefits, corporations are generally able to attract more skilled and talented employees than are proprietorships and partnerships.
Another advantage of incorporation is continuity. Because the corporation has a legal life separate from the lives of its owners, it can at least in theory exist forever. Transferring ownership of a corporation is easy: shareholders simply sell their stock to others. Some founders, however, want to restrict the transferability of their stock and so choose to operate as a privately-held corporation.
In general partnerships, both owners invest their money, property, labor, etc. In other words, even if you invest a little into a general partnership, you are still potentially responsible for all its debt.
General partnerships do not require a formal agreement—partnerships can be verbal or even implied between the two business owners. Limited partnerships require a formal agreement between the partners. Since then, the limited liability company has increased in popularity. Its rapid growth was fueled in part by changes in state statutes that permit a limited liability company to have just one member. The trend to LLCs can be witnessed by reading company names on the side of trucks or on storefronts in your city.
But LLCs are not limited to small businesses. In a limited liability company, owners called members rather than shareholders are not personally liable for debts of the company, and its earnings are taxed only once, at the personal level thereby eliminating double taxation. We have touted the benefits of limited liability protection for an LLC. We now need to point out some circumstances under which an LLC member or a shareholder in a corporation might be held personally liable for the debts of his or her company.
A business owner can be held personally liable if he or she:. A cooperative also known as a co-op is a business owned and controlled by those who use its services. Individuals and firms who belong to the cooperative join together to market products, purchase supplies, and provide services for its members.
If run correctly, cooperatives increase profits for its producer-members and lower costs for its consumer-members. Cooperatives are fairly common in the agricultural community. For example, some cranberry and grapefruit member growers market their cranberry sauce, fruit juices, and dried cranberries through the Ocean Spray Cooperative. A not-for-profit corporation sometimes called a nonprofit is an organization formed to serve some public purpose rather than for financial gain.
Additionally, individuals and other organizations that contribute to the not-for-profit corporation can take a tax deduction for those contributions. The types of groups that normally apply for nonprofit status vary widely and include churches, synagogues, mosques, and other places of worship; museums; universities; and conservation groups. Since Statistics Canada ended its deep collection of nonprofit statistics in , the most recent data available is:.
Track how quickly you can match some of the more recent, larger mergers or major corporations. The added employees will help the company expand into new markets and battle for global talent in the competitive Internet information providers industry. When properly executed, internal growth benefits the firm.
An alternative approach to growth is to merge with or acquire another company. This rationale is attractive to companies facing competitive pressures. To grab a bigger share of the market and improve profitability, companies will want to become more cost efficient by combining with other companies.
A merger occurs when two companies combine to form a new company. An acquisition is the purchase of one company by another. Contrast this merger with an acquisition in that same year. According to news reports, along with Safeway grocery stores — more than 60 percent of which are in Calgary, Vancouver, Edmonton and Winnipeg — Sobeys will also acquire:. Once this acquisition was completed, Reebok as a company ceased to exist, though Adidas still sells shoes under the Reebok brand. Companies are motivated to merge or acquire other companies for a number of reasons, including the following.
Though neither Ben Cohen nor Jerry Greenfield are involved in the current management of the company, they have returned to their social activism roots and are heavily involved in numerous social initiatives sponsored by the company. Solidifying the Vocabulary. Use this quick activity to ensure you understand the vocabulary related to mergers and acquisitions. Skip to content Learning Objectives By the end of the chapter, you should be able to: Identify the questions to ask in choosing the appropriate form of ownership for a business.
Describe the sole proprietorship and partnership forms of organization, and specify the advantages and disadvantages. Identify the different types of partnerships, and explain the importance of a partnership agreement. Explain how corporations are formed and how they operate. Discuss the advantages and disadvantages of the corporate form of ownership. Examine special types of business ownership, including limited liability companies, cooperatives, and not-for-profit corporations.
Define mergers and acquisitions, and explain why companies are motivated to merge or acquire other companies. Important terms and concepts A sole proprietorship is a business owned by only one person. Advantages include: complete control for the owner, easy and inexpensive to form, and owner gets to keep all of the profits. A limited liability company LLC is a hybrid business entity that has characteristics of both a corporation and a partnership or sole proprietorship depending on how many owners.
An LLC, although a business entity, is a type of unincorporated association and is not a corporation calling it a limited liability corporation is incorrect. The primary characteristic an LLC shares with a corporation is limited liability, and the primary characteristic it shares with a partnership is the availability of pass-through income taxation i.
It is often more flexible than a corporation, and it is well-suited for companies with a single owner. Membership interests in LLCs and partnership interests are also afforded a significant level of protection through the charging order mechanism. Limited liability company members may, in certain circumstances, also incur a personal liability in cases where distributions to members render the LLC insolvent.
State laws regarding stock corporations are very well developed and provide for a variety of governance and protective provisions for the corporation and its shareholders. However, most states do not dictate detailed governance and protective provisions for the members of a limited liability company. Thus, in the absence of such statutory provisions, the members of an LLC must establish governance and protective provisions pursuant to an operating agreement or similar governing document.
It may be more difficult to raise financial capital for an LLC as investors may be more comfortable investing funds in the better-understood corporate form with a view toward an eventual IPO. Many jurisdictions levy a franchise tax or capital values tax on LLCs. In essence, this franchise or business privilege tax is the fee the LLC pays the state for the benefit of limited liability.
The amount of the franchise tax can be based on the following:. Government-owned companies are either partially or fully owned by a government and have both a distinct legal form and commercial presence.
Distinguish between a state-owned enterprise, government-linked company, and quasi-governmental organization. There is no standard definition of a publicly-owned corporation or state-owned enterprise SOE , although the two terms can be used interchangeably.
Their defining characteristics are their distinct legal form, and their operation in commercial affairs. While they may also have public policy objectives, SOEs are different from other government entities established to pursue purely non-financial objectives. State-owned enterprises can be fully or partially owned by the government. SOEs are often the result of corporatization, a process in which government agencies are re-organized as semi-autonomous corporate entities.
The term government-linked company GLC is sometimes used to refer to private or public corporate entities in which an existing government owns a stake through a holding company. There are multiple ways of defining GLCs, depending on the proportion of the corporate entity a government owns.
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