MIE 201 Exam 2: Chapters 4, 5, 8 Makanui NCSU

3 types of business ownership

- sole propreitorship

- partnership

- corporation

sole proprietorships

- businesses owned by one individual

- the most common form of business organization in the United States

- easiest and least expensive form of business to start

- ex: tutoring/bookkeeping/landscaping etc...

sole proprietorship advantages

- simplicity

- single layer of taxation - taxed at individual rates

- privacy

- flexibility and control

- personal satisfaction

- fewer limitations on personal income

-complete ownership of the profits

sole proprietorship disadvantages

- unlimited liability

- finite life span

- resource limitations

- limited managerial experience

- demands on owner

- no employee benefits for the owner

-lack of qualified employees (can't match wage demands)

Many sole proprietors will focus on ______

services (like child care, salons, etc) rather than on the manufacture of goods

unlimited liability

- means that the owner is personally and fully responsible for all losses and debts of the business

- major drawback to a sole proprietorship or a partnership

- from a legal standpoint the owner and business are one and the same

definition of a partnership

an association of two or more persons to carry on, as co-owners, a business for profit; profits will be divided as specified in the agreement

types of partnerships

- general partnerships

- limited partnerships

- MLP

- LLP

general partnerships

- partners are considered equal by law and all are liable for the business's debts

- partners share ownership and both have unlimited liability

ex) lawyers, accountants, etc.

limited partnerships

- one or more persons act as general partners who run the business while the remaining partners are passive investors (not involved in managing the business)

- called this because their liability (amount of money they can lose) is limited to the amount of the capital they invested at the beginning of their partnership

- passive investors and have limited liability

articles of partnership

legal documents that set forth the basic agreement between partners

-list the money or assets that each partner contributed

-states each partner's individual management role/duty

- defines the steps a partner must take to sell his or her partnership interest or what will happen if one of the patterns dies

MLP (master limited partnership)

- allowed to raise money by selling units of ownership to the general public in the same way that corporations sell shares of stock to the public

- gives MLPs the fundraising capabilities of corporations without the double-taxation disadvantage

- mainly oil and gas companies

LLP (limited liability partnership)

- form of business was created to help protect individual partners in certain professions from major mistakes (such as errors that trigger malpractice lawsuits) by other partners in the firm

- each partner has unlimited liability only for his or her own actions and at least some degree of limited liability for the partnership as a whole

advantages of a partnership

- simplicity

- single layer of taxation

- more resources than a sole proprietorship

- cost sharing between partners

- broader skills and experience

- longevity

disadvantages of a partnership

- unlimited liability for general partners

- interpersonal problems

managing partner & unproductive partners

- limited partners have no voice in the management of the business

- distribution of profits

corporations

- businesses that are owned by many investors who buy shares of stock

- a legal entity with the power to own property and conduct business

- can receive, own, and transfer property; make contracts; sue; and be sued

- faces limited liability because it is its own legal entity

a corporation is like what?

- a horcrux

- they can be in so many types of business that even if you take out one component they will still survive and thrive in all their other components of business

ownership of corporations

- shareholders

- stock certificates

shareholders

- owners of a corporation who are issued shares of stock in return for their investments

stock certificate

- represents shares of stock owned by shareholders of a company

- may be sold or given to upon the death of the owner to someone else

types of corporations

- public corporations

- private corporations

public corporations

- many shareholders

- stock is publicly traded

- stock available for sale to the general public

private corporations

- few shareholders

- stock not publicly traded

- stock is held only by a few individuals or companies and is not publicly traded

- owners retain complete control over their operations and ownership by withholding their stock from public sale

- finance their operating costs and growth from either company earnings or bank loans

corporations change from private to public ownership and vice versa when??

- their financial needs and strategic interests change

Quasi-public corporation

corporations owned and operated by the federal, state, or local government

ex) NASA, and USPS

advantages of corporations

- limited liability

- ability to raise capital

- increased liquidity

- unlimited life span

- ease of transfer of ownership

limited liability

- a form of business ownership in which the owners are liable only up to the amount of their individual investments

disadvantages of corporations

- cost and complexity

- reporting requirements

- possible loss of control

- managerial demands

- double taxation

- short term orientation - stock market

dividends

profits of a corporation that are distributed in the form of cash payments to stockholders

corporate charter

a legal document that the state issues to a company based on information the company provides in the articles of incorporation

double taxation

- feature of taxation that allows stockholders' dividends to be taxed both as corporate profit and as personal income

special types of corporations

- subchapter S corporation

- limited liability corporation

- subsidiary corporation

- alien v. foreign corporation

- benefit or B corporation

- domestic corporation

S corporation

- made only for federal income tax purposes and otherwise is no different from any other corporation

- owners receive the tax advantages of a partnership while they raise money through the sale of stock

- income and tax deduction flow directly to the owners

nonprofit corporations

focus on providing a service rather than earning a profit but are not owned by a government entity

limited liability corporation

- flexible business entities combine the tax advantages of a partnership with the personal liability protection of a corporation

- not restricted in the number of shareholders they can have and members participation in management is not restricted as it is in limited partnerships

subsidiary corporations

- partially or wholly owned by another corporation known as a parent company which supervises the operations of the subsidary

holding company

- special type of a parent company that owns other companies for investment reasons and usually exercises little operating control over those subsidaries

benefit coropration

- profit seeking corporation whose charter also requires it to pursue a stated social or environmental goal

alien corporation

- a corporation that operates in the United States but is incorporated in another country

foreign corporation

- a corporation that is incorporated in one state but that does business in several other states where it is registered

- frequently happens in the state of Delaware where incorporation laws are more lenient

domestic corporation

- a company that is incorporated in one state that does business only in the state where it is chartered

corporate governance

- the way in which a corporation is structured and the effect that structure has on the corporation's behavior

- shareholders elect the board of directors who hire corporate officers who hire employees

board of directors

- represent the shareholders and are responsible for declaring dividends, guiding corporate affairs, reviewing long-term strategic plans, selecting corporate officer, and overseeing financial performance

inside directors

Board members who are generally part of the company's senior management team; appointed by shareholders to provide the board with necessary information pertaining to the company's internal workings and performance.

outside directors

board members who are not employees of the firm, but who are frequently senior executives from other firms or full-time professionals

where does the center of power lie within a corporation

- the CEO or chief executive officer

- with the help of the other C-level officers

shareholders commitments in a corporation

- annual meetings where they discuss the years results and plans for the next year

- those who cannot attend send a proxy in their place to vote for them

- shareholder activism is when they pressure management on matters ranging a wide variety relating to the overall company performance

board issues

- composition

- education

- liability

- independent board chairs

- recruiting challenges

education

- board members are expected to understand everything from government regulation t financial management to executive compensation strategies in addition to the inner working of the corporation itself

board chair

- oversees the board of directors who are supposed to oversee the corporate officers who make up the top management team while the CEO oversees the management team

CEO

- chief executive officer

CFO

- chief financial officer

CIO

- chief information officer

CTO

- chief technology officer

COO

- chief operating officer

business combinations

- mergers

- acquisitions

- leveraged buyouts

- hostile takeovers

- consolidation

mergers

- 2 companies join together to form a single entity

- companies can merge by either pooling their resources or through a purchase of the assets of one company by the other

ex: Disney-Pixar

ex: SiriusXM

consolidation

- two companies create a new third entity that then purchases the two original companies

acquisition

- one company simply buys a controlling interest in the voting stock of another company

ex: Amazon buys Whole Foods

ex: Micheal Kors buys Jimmy Choo

cooperative

an organization composed of individuals that have banded together to reap the benefits of belonging to a larger organization

hostile takeovers

- the buyer tries to convince enough shareholders to go against management and vote to sell

- acquisition of another company against the wishes of management

ex: AOL and Time Warner

leveraged buyout

- one or more individuals purchase a company's publicly traded stock by using borrowed funds

- usually with the intent of using some of the acquired assets to pay back the loans used to acquire the company

ex: Blackstone Group buys Hilton Hotels

hostile takeover types

- tender offer

- proxy fight

tender offer

- the raider offers to buy a certain number of shares of stock in the corporation at a specific price (generally more than the current stock price so shareholders are more motivated to sell)

- the raider hopes to get enough shares to take control of the corporation and to replace the existing board of directors and management

proxy fight

- the raider launches a public relations battle for shareholders votes hoping to enlist enough votes to oust the board and management

techniques to prevent hostile takeovers

- poison pill

- shark repellent

- white knight

poison pill

- this plan triggered by a takeover attempt makes the company less valuable in some way to the potential raider

- the idea is to discourage the takeover from actually happening

shark repellent

- this tactic is more direct; it is simply a requirement that stockholders representing a large majority of shares approve of any takeover attempt (only viable if the management team has the support of the shareholder majority)

white knight

- a third company invited to acquire a company that is in danger of being swallowed up in a hostile takeover

- usually agree to leave the current management team in place and let the company continue to operate in an independent fashion.

advantages of mergers and acquisitions

- increase their buying power as a result of their larger size

- increase revenue by cross-selling products to each other's customers

- increase market share by combining product lines

- gain access to new expertise, systems, and teams of employees

disadvantages of mergers and acquisitions

- executives have to agree on how the merger will be financed

- managers need to decide who will be in charge after they join forces

- marketing departments need to figure out how to blend product lines, branding strategies, and advertising and sales efforts

- companies must often deal with layoffs

vertical merger

- occurs when a company purchases a complementary company at a different stage or level in an industry

- 2 diff. companies

ex) Burger King purchasing an Idaho potato farm for its fries

horizontal merger

- involves two similar companies at the same level

- companies can merge to expand their product offerings or their geographic market coverage

- 2 same companies

conglomerate merger

- a parent company buys companies in unrelated industries often to diversify its assets to protect against downturns in specific industries

strategic alliance

- a long-term partnership between companies to jointly develop, produce, or sell products

- can help expand market share, access technology, diversity offerings, share best practices

ex: Cisco and Salesforce announce global strategic alliance

joint ventures

- a special type of strategic alliance in which two or more firms jointly create a new business entity that is legally separate and distinct from its parents

- attain specific goals, share strengths, spread costs, minimize risks

ex: Toyota and Mazda forming their own new car company

small business

- a company that is independently owned and operated, is not dominant in its field, and employs fewer than 500 people (although this # varies by industry)

advantages of small business

Independence

Costs

Flexibility

Focus - finely defined market niche

Reputation

disadvantages of a small business

High stress level

High failure rate

Undercapitalization

Managerial inexperience or incompetence

Inability to cope with growth

entrepreneurship characteristics

- a process

- persistence

- passion

- value creation

- creative

entrepreneur

- anyone who starts a new business

the entrepreneurial spirit

- the positive, forward-thinking desire to create profitable, sustainable business enterprises

- vital to the health of the economy and to everyone's standard of living

Microentrepreneur

entrepreneurs who start a business with 5 or fewer people

social entrepreneur

individuals who use entrepreneurship to address social problems

what do you need to start a small business?

- an entrepreneur

- an idea

- a drive to succeed

economic roles of small business

- provide new jobs

- introduce new products

- service large corporations

- half the US payroll

- risk takers

- specialized goods and services

Industries that attract small businesses

Retailing and wholesaling, services, manufacturing, and high technology

sharing economy

an economic model involving the sharing of underutilized resources, aka "gig economy"

like Uber

2 types of small businesses

- lifestyle

- high-growth

lifestyle small businesses

- run by individuals

- limited products and/or services

- limited resources

- limited marketplace

- aren't designed to grow into large corporations

- built around personal and financial needs of an individual or a family

ex: mom and pop surf shop

high-growth small businesses

- run by teams

- multiple products and/or services

- investment capital

- large marketplace

- expand rapidly by obtaining a sizable supply of investment capital

ex: Tesla growing into a large corporation

factors contributing to an increase in small business

- E-commerce

- technology

- social media

- growing diversity in entrepreneurship

- corporate downsizing and outsourcing

why people start their own companies

- more control over their futures

- tired of working for someone else

- passion for new products

- pursue business goals that are important to them on a personal level

- inability to find attractive employment anywhere else

qualities of successful entrepreneurs

- love what they do, passion to succeed

- highly disciplined

- self-confident and optimistic

- like to control their own destiny

- relate well with others

- curious and eager

- learn from mistakes and see failures as opportunities

- balance risk and reward

intrapreneurship

- entrepreneurial activity that takes place within the context of a large corporation

- freedom to define and initiate new projects, much as they were independent entrepreneurs

champion intrapreneurs think about these things on top of the regular entrepreneurship things

- in a company

- bureaucracy

- budget

- culture

- politics

small business ownership types

- start up

- buy an existing business

- franchise

financial resources needed to run a small business

equity financing (when a new business owner borrows against the value of assets)

venture capitalists

debt financing

line of credit

trade credit

bartering

business start up definition

- a newly formed business

- usually start small, but some might grow to become much bigger

buying an existing business definition

- already have a proven product, current customers, active suppliers, a known location, and trained employees