Learning Objectives

Identify the questions to ask in picking the correct create of ownership for a business.Describe the single proprietorship and partnership forms of organization, and also specify the advantages and disbenefits.Identify the various types of partnerships, and also describe the prestige of a partnership agreement.Exordinary how corporations are created and just how they run.Discuss the benefits and disadvantages of the corpoprice form of ownership.Examine unique forms of service ownership, consisting of limited-liability carriers, and also not-for-profit corporations.Define mergers and also acquisitions, and also describe why service providers are encouraged to merge or obtain various other suppliers.

You are watching: An llc offers personal liability protection while also keeping the advantage of __________.


The Ice Cream Men

Who would certainly have actually believed it? Two ex-hippies through strong interests in social activism would end up beginning one of the best-known ice cream companies in the country—Ben & Jerry’s. Perhaps it was expected to be. Ben Cohen (the “Ben” of Ben & Jerry’s) always had a fascination through ice cream. As a son, he made his own mixtures by shattering his favorite cookies and candies into his ice cream. But it wasn’t until his senior year in high college that he became an main “ice cream man,” happily driving his truck with communities filled via children eager to buy his ice cream pops. After high institution, Ben tried college but it wasn’t for him. He attended Colgate University for a year and also a half before he dropped out to return to his real love: being an ice cream male. He tried college again—this time at Skideven more, wright here he stupassed away ceramic and jewelry making—yet, in spite of his selection of courses, still didn’t prefer it.

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Figure 6.1: Ben Cohen and also Jerry Greenfield in 2010

In the meantime, Jerry Greenarea (the “Jerry” of Ben & Jerry’s) was adhering to a comparable course. He majored in pre-med at Oberlin College in the hopes of one day becoming a physician. But he had actually to provide up on this goal as soon as he was not embraced right into medical school. On a positive note, though, his college education steered him right into a more lucrative field: the civilization of ice cream making. He got his first peek at the ice cream industry as soon as he worked as a scooper in the student cafeteria at Oberlin. So, fourteenager years after they first met on the junior high college track team, Ben and also Jerry rejoined and also made a decision to go right into ice cream making significant time. They moved to Burlington, Vermont—a college town in require of an ice cream parlor—and also completed a $5 correspondence course from Penn State on making ice cream. After obtaining an A in the course—not surpincreasing, provided that the tests were open book—they took the plunge: via their life savings of $8,000 and also $4,000 of obtained funds they erected an ice cream shop in a made-over gas station on a busy street edge in Burlington.1 The next significant decision was which develop of organization ownership was ideal for them. This chapter introduces you to their alternatives.

Factors to Consider

If you’re starting a brand-new business, you have to decide which legal form of ownership is ideal for you and also your business. Do you want to very own the business yourself and operate as a single proprietorship? Or, carry out you want to share ownership, operating as a partnership or a corporation? Before we comment on the pros and cons of these three types of ownership, let’s deal with some of the concerns that you’d most likely ask yourself in selecting the appropriate legal develop for your service.

In establishing up your company, perform you desire to minimize the costs of obtaining started? Do you hope to stop complicated federal government regulations and reporting requirements?How a lot manage would certainly you like? How a lot obligation for running the business are you willing to share? What around sharing the profits?Do you want to avoid distinct taxes?Do you have actually all the skills essential to run the business?Are you most likely to gain together with your co-owners over an extended period of time?Is it important to you that the service survive you?What are your financing requirements and exactly how perform you setup to finance your company?How a lot individual exposure to liability are you willing to accept? Do you feel unsimple about accepting individual licapacity for the actions of fellow owners?

No single create of ownership will certainly provide you every little thing you desire. You’ll need to make some trade-offs. Due to the fact that each option has actually both advantages and also disadvantages, your task is to decide which one provides the functions that are many vital to you. In the following sections we’ll compare 3 ownership choices (sole proprietorship, partnership, corporation) on these eight dimensions.

Sole Proprietorship and its Advantages

In a sole proprietorship, as the owner, you have actually finish control over your organization. You make all essential decisions and are mostly responsible for all day-to-day activities. In exchange for assuming all this obligation, you get all the earnings earned by the business. Profits earned are taxed as personal income, so you don’t need to pay any special federal and also state revenue taxes.

Disbenefits of Sole Proprietorships

For many type of people, yet, the single proprietorship is not suitable. The flip side of enjoying complete regulate is having to supply all the various talents that may be necessary to make the service a success. And as soon as you’re gone, the company dissolves. You likewise have to rely on your own sources for financing: in result, you are the company and also any type of money obtained by the organization is loaned to you personally. Even more necessary, the sole proprietor bears infinite liability for any type of losses incurred by the company. The principle of limitless personal liability indicates that if the service incurs a debt or suffers a catastrophe (say, obtaining sued for leading to an injury to someone), the owner is personally liable. As a single proprietor, you put your personal assets (your bank account, your automobile, maybe even your home) at threat for the sake of your company. You have the right to lessen your danger through insurance, yet your licapability expocertain deserve to still be considerable. Given that Ben and also Jerry decided to start their ice cream company together (and also therefore the business was not owned by only one person), they could not set their agency up as a single proprietorship.

Partnership

A partnership (or basic partnership) is a company owned jointly by two or even more people. About 10 percent of UNITED STATE businesses are partnerships2 and also though the huge majority are small, some are rather huge. For instance, the big four public accountancy firms are partnerships. Setting up a partnership is even more facility than establishing up a sole proprietorship, yet it’s still relatively easy and inexpensive. The expense varies according to dimension and complexity. It’s feasible to develop a basic partnership without the help of a lawyer or an accountant, though it’s typically a good idea to acquire expert advice.

Professionals deserve to assist you determine and also resolve issues that might later on produce conflicts among partners.

The Partnership Agreement

The affect of disputes can be minimized if the partners have executed a well-planned partnership agreement that specifies everyone’s civil liberties and also responsibilities. The agreement can carry out such details as the following:

Amount of cash and also various other contributions to be made by each partnerDivision of partnership income (or loss)Partner responsibilities—who does whatConditions under which a partner have the right to sell an interemainder in the companyConditions for disaddressing the partnershipConditions for settling disputes

Countless Licapability and the Partnership

A major difficulty through partnerships, as via single proprietorships, is boundless liability: in this situation, each companion is personally liable not just for his or her very own actions however also for the actions of all the partners. If your partner in an architectural firm makes a mistake that causes a structure to collapse, the loss your company incurs impacts you simply as a lot as it would certainly him or her. And here’s the really negative news: if the service doesn’t have actually the cash or other assets to cover losses, you have the right to be personally sued for the amount owed. In various other words, the party that suffered a loss bereason of the error deserve to sue you for your personal assets. Many world are understandably reluctant to enter right into partnerships bereason of unlimited liability. Certain creates of businesses permit owners to limit their liability. These include restricted partnerships and also corporations.

Limited Partnerships

The law permits company owners to develop a restricted partnership which has actually 2 types of partners: a single basic companion who runs the business and also is responsible for its liabilities, and any number of limited partners that have limited involvement in the company and whose losses are restricted to the amount of their investment.

Advantages and Disbenefits of Partnerships

The partnership has actually a number of advantages over the sole proprietorship. First, it brings together a varied team of talented individuals who share obligation for running the company. Second, it makes financing easier: the business deserve to attract on the financial resources of a variety of individuals. The partners not only contribute funds to the business however can additionally usage personal resources to secure bank loans. Finally, continuity needn’t be an issue bereason partners deserve to agree legally to permit the partnership to endure if one or even more partners die.

Still, there are some negatives. First, as discussed earlier, partners are topic to limitless licapacity. Second, being a partner means that you have to share decision making, and also many type of human being aren’t comfortable through that instance. Not surprisingly, partners frequently have actually differences of opinion on just how to run a organization, and arguments can escalate to the suggest of jeopardizing the continuance of the business. Third, in addition to sharing principles, partners also share revenues. This setup deserve to work-related as long as all partners feel that they’re being rewarded according to their efforts and success, however that isn’t always the instance. While the partnership develop of ownership is perceived negatively by some, it was specifically appealing to Ben Cohen and Jerry Greenarea. Starting their ice cream organization as a partnership was inexpensive and also let them incorporate their limited financial resources and usage their diverse abilities and also talents. As friends they trusted each other and also welcomed shared decision making and profit sharing. They were also not reluctant to be held personally liable for each other’s actions.

Corporation

A corporation (occasionally dubbed a constant or C-corporation) differs from a sole proprietorship and a partnership bereason it’s a legal entity that is completely sepaprice from the parties that own it. It have the right to enter into binding contracts, buy and market residential or commercial property, sue and be sued, be hosted responsible for its actions, and also be taxed. Once businesses reach any type of extensive size, it is useful to organize as a corporation so that its owners deserve to limit their liability. Corporations, then, tfinish to be much larger, on average, than businesses making use of other develops of ownership. As Figure 6.2 reflects, corporations account for 18 percent of all UNITED STATE businesses however generate virtually 82 percent of the revenues.3 Many huge famous businesses are corporations, but so are many kind of of the smaller sized firms with which most likely you carry out business.

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Figure 6.2: Types of UNITED STATE Businesses

Ownership and also Stock

Corporations are owned by shareholders that invest money in the business by buying shares of stock. The percent of the corporation they own depends on the percentage of stock they host. For instance, if a corporation has issued 100 shares of stock, and also you very own 30 shares, you own 30 percent of the firm. The shareholders elect a board of directors, a group of people (mostly from exterior the corporation) who are legally responsible for governing the corporation. The board oversees the major policies and decisions made by the corporation, sets objectives and holds monitoring accountable for achieving them, and hires and also evaluates the peak executive, primarily dubbed the CEO (chief executive officer). The board additionally approves the circulation of ininvolved shareholders in the create of cash payments dubbed dividends.

Benefits of Incorporation

The corporate create of company uses a number of advantages, including restricted liability for shareholders, greater access to financial sources, specialized administration, and continuity.

Limited Liability

The the majority of crucial advantage of incorporation is the limited liability to which shareholders are exposed: they are not responsible for the duties of the corporation, and they deserve to shed no even more than the amount that they have personally invested in the company. Limited liability would certainly have been a big plus for the unfortunate individual whose organization companion shed dvery own their dry cleaning establishment. Had they been included, the corporation would have actually been liable for the debts incurred by the fire. If the corporation didn’t have actually enough money to pay the debt, the individual shareholders would not have been obligated to pay anything. They would certainly have shed all the money that they’d invested in the service, yet no even more.

Financial Resources

Incorporation also renders it feasible for businesses to raise funds by selling stock. This is a big benefit as a firm grows and needs even more funds to run and also contend. Depfinishing on its size and also financial toughness, the corporation also has actually an benefit over various other creates of business in gaining bank loans. An establimelted corporation can borrow its own funds, but as soon as a small service requirements a loan, the financial institution commonly needs that it be guaranteed by its owners.

Specialized Management

Since of their size and capability to pay high sales comgoals and benefits, corporations are mainly able to lure more professional and also talented employees than are proprietorships and also partnerships.

Continuity and Transferability

Another advantage of incorporation is continuity. Since the corporation has actually a legal life separate from the resides of its owners, it can (at leastern in theory) exist forever before.

Transferring ownership of a corporation is easy: shareholders simply offer their stock to others. Some founders, but, desire to restrict the transfercapability of their stock and so pick to run as a privately-held corporation. The stock in these corporations is hosted by just a few individuals, that are not enabled to sell it to the general public.

Companies via no such constraints on stock sales are called public corporations; stock is accessible for sale to the general public.

Drawbacks to Incorporation

Like sole proprietorships and also partnerships, corporations have both positive and negative elements. In single proprietorships and partnerships, for instance, the individuals who very own and regulate a business are the exact same civilization. Corporate managers, yet, don’t necessarily very own stock, and also shareholders don’t necessarily occupational for the agency. This case can be troublesome if the goals of the two teams differ substantially.

Managers, for instance, are often more interested in career advance than the all at once profitcapability of the agency. Stockholders can treatment even more around earnings without regard for the wellness of employees. This instance is well-known as the company problem, a problem of interemainder innate in a relationship in which one party is expected to act in the ideal interemainder of the other. It is regularly rather difficult to proccasion self-interest from entering into these instances.

Anvarious other drawback to incorporation—one that regularly discoureras tiny businesses from incorporating—is the reality that corporations are more costly to put up. When you incorporate filing and licensing fees with bookkeeping and attorney fees, incorporating a service can set you ago by $1,000 to $6,000 or even more depending on the size and scope of your company.4 Additionally, corporations are topic to levels of regulation and governpsychological oversight that deserve to area a burden on little businesses. Finally, corporations are topic to what’s generally dubbed “double taxation.” Corporations are taxed by the federal and also state governments on their income. When these earnings are distributed as dividends, the shareholders pay taxes on these dividends. Corporate revenues are for this reason taxed twice—the corporation pays the taxes the first time and the shareholders pay the taxes the second time.

Five years after founding their ice cream company, Ben Cohen and Jerry Greenarea evaluated the pros and also cons of the corporate create of ownership, and the “pros” won. The main motivator was the must raise funds to develop a $2 million production facility. Not only did Ben and also Jerry decide to switch from a partnership to a corporation, yet they likewise made a decision to sell shares of stock to the public (and therefore come to be a public corporation). Their sale of stock to the public was a bit unusual: Ben and also Jerry wanted the neighborhood to very own the company, so instead of giving the stock to anyone interested in buying a share, they readily available stock to residents of Vermont just. Ben believed that “business has actually a responsibility to provide earlier to the community from which it draws its assistance.”5 He wanted the agency to be owned by those who lined up in the gas terminal to buy cones. The stock was so well-known that one in eexceptionally hundred Vermont households bought stock in the firm.6 Eventually, as the agency continued to expand also, the stock was offered on a nationwide level.

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Other Types of Business Ownership

In enhancement to the three commonly embraced develops of organization organization—single proprietorship, partnership, and also continual corporations—some organization owners select other develops of organization to accomplish their certain needs. We’ll look at 2 of these options:

Limited-licapability companiesNot-for-profit corporations

Limited-Licapacity Companies

How would certainly you choose a legal create of company that offers the attractive functions of the 3 prevalent forms of company (corporation, single proprietorship and partnership) and stays clear of the unattrenergetic features of these three organization forms? The limited-licapability company (LLC) accomplishes specifically that. This form gives service owners with restricted licapacity (a crucial benefit of corporations) and no “double taxation” (a crucial benefit of single proprietorships and also partnerships). Let’s look at the LLC in more information.

In 1977, Wyoming ended up being the first state to permit businesses to run as limited-liability carriers. Twenty years later, in 1997, Hawaii became the last state to provide its approval to the new organization form. Since then, the limited-licapability agency has actually enhanced in popularity. Its fast development was sustained in part by changes in state statutes that permit a limited-liability firm to have simply one member. The trfinish to LLCs have the right to be witnessed by analysis agency names on the side of trucks or on storefronts in your city. It is common to watch names such as Jim Evans Tree Care, LLC, and also For-Cats-Only Veterinary Clinic, LLC. But LLCs are not restricted to little businesses. Companies such as Crayola, Domino’s Pizza, Ritz-Carlton Hotel Company, and also iSold It (which helps human being offer their unwanted belongings on eBay) are operating under the limited-liability form of company.

In a limited-licapacity agency, owners (dubbed members fairly than shareholders) are not personally liable for debts of the company, and its income are taxed only as soon as, at the personal level (thereby eliminating double taxation).

We have actually touted the benefits of limited licapacity protection for an LLC. We currently should suggest out some situations under which an LLC member (or a shareholder in a corporation) could be organized personally liable for the debts of his or her agency. A business owner deserve to be held personally liable if he or she:

Personally assures a service debt or bank loan which the company fails to pay.Fails to pay employment taxes to the government.Engeras in fraudulent or illegal actions that harms the firm or someone else.Does not treat the company as a separate legal entity, for instance, supplies agency assets for individual provides.

Not-for-Profit Corporations

A not-for-profit corporation (sometimes called a nonprofit) is an organization created to serve some public function rather than for financial get. As long as the organization’s task is for charitable, religious, educational, scientific, or literary functions, it have the right to be exempt from paying earnings taxes. Furthermore, individuals and also other establishments that add to the not-for-profit corporation have the right to take a taxes deduction for those contributions. The types of teams that normally apply for nonprofit status differ widely and also include churches, synagogues, mosques, and also other places of worship; museums; universities; and also conservation teams.

Tright here are even more than 1.5 million not-for-profit establishments in the United States.7 Some are incredibly well funded, such as the Bill and also Melinda Gates Foundation, which has actually an endowment of about $40 billion and has provided ameans $36.7 billion considering that its inception.8 Others are nationally well-known, such as United Way, Goodwill Industries, Habitat for Humanity, and the Red Cross. Yet the large majority is neither rich nor famed, but nevertheless renders significant contributions to society.

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Mergers and also Acquisitions

The headline check out, “Wanted: More than 2,000 in Google Hiring Spree.”9 The largest Internet search engine in the human being was disclosing its plans to prosper internally and also rise its workpressure by even more than 2,000 people, with half of the hires coming from the USA and the various other fifty percent coming from various other countries. The added employees will certainly assist the agency expand also into brand-new industries and also fight for worldwide talent in the competitive Internet indevelopment service providers market. When effectively executed, interior expansion benefits the firm.

An alternate approach to development is to merge through or get one more agency. The rationale behind expansion through merger or acquisition is that 1 + 1 = 3: the unified company is even more useful than the amount of the 2 sepaprice carriers. This rationale is attractive to companies facing competitive pressures. To grab a bigger share of the sector and also boost profitcapacity, carriers will certainly want to become more expense efficient by combining with other providers.

Mergers and also Acquisitions

Though they are frequently supplied as if they’re associated, the terms merger and also acquisition intend slightly various points. A merger occurs once two suppliers combine to develop a brand-new company. An acquisition is the purchase of one company by one more. An instance of a merger is the merging in 2013 of US Airmeans and Amerihave the right to Airlines. The unified company, the biggest carrier in the world, flies under the name Amerihave the right to Airlines.

Another instance of an acquisition is the purchase of Reebok by Adidas for $3.8 billion.10 The deal was meant to offer Adidas a stronger presence in The United States and Canada and also assist the firm complete through rival Nike. Once this acquisition was completed, Reebok as a company ceased to exist, though Adidas still sells shoes under the Reebok brand also.

Motives behind Mergers and Acquisitions

Companies are urged to merge or acquire other carriers for a number of reasons, including the adhering to.

Gain Complementary Products

Acquiring complementary products was the incentive behind Adidas’s acquisition of Reebok. As Adidas CEO Herbert Hainer proclaimed in a conference call, “This is a once-in- a-lifetime opportunity. This is a perfect fit for both carriers, bereason the providers are so complementary…. Adidas is grounded in sports performance with such assets as a motorized running shoe and also endorsement faces such superstars as British soccer player David Beckham. On the other hand, Reebok plays heavily to the melding of sporting activities and entertainment through endorsement deals and also products by Nelly, Jay-Z, and 50 Cent. The combination can be deadly to Nike.” Of course, Nike has actually continued to thrive, however one can’t blame Hainer for his optimism.11

Attain New Markets or Distribution Channels

Gaining brand-new industries was a far-reaching aspect in the 2005 merger of US Airmeans and also America West. US Airmethods was a significant player on the East Coast, the Caribbean, and also Europe, while America West was strong in the West. The expectations were that combining the 2 carriers would produce an airline that might reach even more sectors than either carrier could perform on its very own.12

Realize Synergies

The purchase of Pharmacia Corporation (a Swedish pharmaceutical company) by Pfizer (a research-based pharmaceutical agency based in the United States) in 2003 created among the world’s biggest drug devices and pharmaceutical companies, by revenue, in every significant industry around the globe.13 The acquisition created an sector gigantic via more than $48 billion in revenue and a research-and-breakthrough budget of even more than $7 billion. Each day, virtually forty million civilization about the world are treated with Pfizer medications.14 Its succeeding $68 billion purchase of rival drug maker Wyeth additionally boosted its existence in the pharmaceutical industry.15

In pursuing these acquisitions, Pfizer likely identified many kind of synergies: quite sindicate, a whole that is higher than the amount of its parts. Tbelow are many type of examples of synergies. A merger generally results in a number of redundant positions; the unified firm does not likely require 2 vice-presidents of marketing, two chief financial policemans, and also so on. Eliminating the redundant positions leads to significant expense savings that would certainly not be realized if the two carriers did not merge. Let’s say each of the suppliers was operating factories at 50% of capacity, and also by merging, one factory could be closed and also offered. That would likewise be an example of a synergy. Companies bring different toughness and also weaknesses into the combined entity. If the newly-merged agency deserve to take advantage of the marketing capabilities of the stronger entity and also the distribution capabilities of the various other (assuming they are stronger), the brand-new company deserve to realize synergies in both of these functions.

Hostile Takeover

What happens, though, if one company desires to obtain an additional agency, however that agency doesn’t desire to be acquired? The outcome could be a hostile takeover—an act of assuming regulate that’s stood up to by the targeted company’s administration and its board of directors. Ben Cohen and also Jerry Greenfield discovered themselves in among these situations: Unilever—a really huge Dutch/British firm that owns 3 ice cream brands—wanted to buy Ben & Jerry’s, versus the founders’ wishes. Many of the Ben & Jerry’s stockholders sided via Unilever before. They had actually little confidence in the capacity of Ben Cohen and also Jerry Greenfield to proceed managing the firm and were frustrated via the firm’s social-mission emphasis. The stockholders chosen Unilever’s offer to buy their Ben & Jerry’s stock at almost twice its present industry price and wanted to take their earnings. In the end, Unilever won; Ben & Jerry’s was gained by Unilever in a hostile takeover.16 In spite of fears that the company’s social mission would certainly finish, it didn’t happen. Though neither Ben Cohen nor Jerry Greenfield are associated in the present administration of the agency, they have actually returned to their social activism roots and are greatly affiliated in countless social campaigns sponsored by the company.

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Chapter Video: Firm Structures 

Here is a short video providing a simple and also straightforward recap of the vital points of each develop of service ownership.