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Chapter 1 – Forms of Business Ownership  There are three forms of business ownership:  Sole Trader (Sole proprietorship)  Partnership, and  Corporation.  Sole Traders  Sole Traders: A business owned by a single person (although it may have many employees).  Many farms, retail establishments, and small service businesses are sole traders, as are many home-based businesses, such as those operated by caterers, consultants, and freelance writers.  Many of the local businesses you frequent around your university campus are likely to be sole traders.

 Advantages of Sole Traders  Simplicity: sole trader is easy to establish and requires far less paperwork than other structures. About the only legal requirement for establishing a sole trader is obtaining an Australian Business number and registering for goods and services tax (GST) if the annual GST turnover is $75,000 or more.  Single layer of taxation: Income tax is a straightforward matter for sole traders. The federal government doesn’t recognize the company as a taxable entity; all profit “flows through” to the owner, where it is treated as personal income and taxed accordingly.  Privacy: Beyond filing tax returns and certain other government reports that may apply to specific businesses, sole traders generally aren’t required to report anything to anyone. Your business is your business.  Flexibility and control: As a sole trader, you aren’t required to get approval from a business partner, your boss, or a board of directors to change any aspect of your business strategy or tactics. You can make your own decisions, from setting your own hours to deciding how much of the work you’ll do yourself and how much you’ll assign to employees. It’s all up to you!  Fewer limitations on personal income: As a sole trader, you keep all the after-tax profits the business generates; if the business does extremely well, you do extremely well. Of course, if the business doesn’t generate any income, you don’t get a paycheck.  Personal satisfaction: For many sole traders, the main advantage is the satisfaction of working for themselves—of taking the risks and enjoying the rewards.  Disadvantages of Sole Traders  Financial liability: In a sole trader, the owner and the business are legally inseparable, which gives the trader Unlimited liability: A legal condition under which any damages or debts incurred by a business are the owner’s personal responsibility. you could lose not only the business but everything else you own, including your house, your car, and your personal investments.

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Demands on the owner: In addition to the potential for long hours (certainly, not all sole traders work crazy hours), sole traders often have the stress of making all the major decisions, solving all the major problems, and being tied so closely to the company that taking time off is sometimes impossible. Plus, business owners can feel isolated and unable to discuss problems with anyone Limited managerial perspective: Running even a simple business can be a complicated effort that requires expertise in accounting, marketing, information technology, business law, and many other fields. Few individual owners possess enough skills and experience to make consistently good decisions. Resource limitations: Because they depend on a single owner, sole traders usually have fewer financial resources and fewer ways to get additional funds from lenders or investors. This lack of capital can hamper a small business in many ways, limiting its ability to expand, to hire the best employees, and to survive rough economic periods. No employee benefits for the owner: Moving from a corporate job to sole trader can be a shock for employees accustomed to paid vacation time, sick leave, health insurance, and other benefits that many employers offer. Sole traders get none of these perks without paying for them out of their own pockets. Finite life span: A business run by a sole trader ceases to operate once the owner passes away.

 Partnerships  • Partnership: is a company that is owned by two or more people but is not a corporation.  The partnership structure is appropriate for firms that need more resources and leadership talent than a sole trader but don’t need the fundraising capabilities or other advantages of a corporation. Many partnerships are small, with just a handful of owners, although a few are very large (up to 10,000 partners).  Partnerships come in two basic types:  General partnership - A partnership in which all partners have joint authority to make decisions for the firm and joint liability for the firm’s financial obligations. - If the partnership gets sued or goes bankrupt, all the partners have to dig into their own pockets to pay the bills, just as sole traders must.  Limited partnership - Under this type of partnership, one or more persons act as general partners who run the business and have the same unlimited liability as sole traders. - The remaining owners are limited partners who do not participate in running the business and who have limited liability—the maximum amount they are liable for is whatever amount each invested in the business.  Advantages of Partnerships  Simplicity: Strictly speaking, establishing a partnership is almost as simple as establishing a sole trader: You and your partners just say you’re in business together, apply for the necessary business licenses, and get to work.  However, while this approach is legal, it is not safe or sensible. Partners need to protect themselves and the company with a partnership agreement.

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Single layer of taxation: Income tax is straightforward for partnerships. Profit is split between or among the owners based on whatever percentages they have agreed to. Each owner then treats his or her share as personal income. More resources: One of the key reasons to partner up with one or more coowners is to increase the amount of money you have to launch, operate, and grow the business. In addition to the money that owners invest themselves, a partnership can potentially raise more money because partners’ personal assets support a larger borrowing capacity.

 Advantages of Partnerships  Cost sharing: An important financial advantage in many partnerships is the opportunity to share costs. For example, a group of lawyers or doctors can share the cost of facilities and support staff while continuing to work more or less independently.  Broader skill and experience base: Pooling the skills and experience of two or more professionals can overcome one of the major shortcomings of the sole trader. If your goal is to build a business that can grow significantly over time, a partnership can be much more effective than trying to build it up as a sole owner.  Disadvantages of Partnerships  Unlimited liability: All owners in a general partnership and the general partners in a limited partnership face the same unlimited liability as sole traders.  However, the risk of financial wipeout can be even greater because a partnership has more people making decisions that could end in catastrophe.  Potential for conflict: More bosses equals more chances for disagreement and conflict. Partners can disagree over business strategy, the division of profits (or the liability for losses), hiring and firing of employees, and other significant matters.  Even simple interpersonal conflict between partners can hinder a company’s ability to succeed.  Limited life: Similar to sole traders, if one of the partners exits the partnership or dies; then the partnership is automatically dissolved.  The Partnership Agreement  A carefully written partnership agreement can maximize the advantages of the partnership structure and minimize the potential disadvantages.  A partnership agreement should address investment percentages, profit-sharing percentages, management responsibilities and other expectations of each owner, decision-making strategies, succession and exit strategies, criteria for admitting new partners, and dispute-resolution procedures.  Corporations  A legal entity, distinct from any individual persons, that has the power to own property and conduct business.  A corporation is owned by shareholders.  Shareholders  Investors who purchase shares in a corporation.

 Public corporation  A corporation in which shares are sold to anyone who has the means to buy them— individuals, investment companies such as superannuation funds, not-for-profit organizations, and other companies  Such corporations are said to be publicly held or publicly traded.  Private corporation  A corporation in which all shares are owned by only a few individuals or companies (maximum of 50 shareholders) and is not made available for purchase by the public.  Also known as a proprietary company or ‘Pty’.  Private corporations can be limited liability ‘Pty Ltd’ or unlimited liability ‘Pty’ (see slide 23).

 Advantages of Corporations  Ability to raise capital: The ability to pool money by selling shares (corporations can also raise money by selling bonds which will be covered later in weeks 5) to outside investors is the reason corporations first came into existence and remains one of the key advantages of this structure.  The potential for raising vast amounts gives corporations an unmatched ability to invest in research, marketing, facilities, acquisitions, and other growth strategies.  Liquidity: The shares of publicly traded companies have a high degree of liquidity, which means that investors can easily and quickly convert their shares into cash by selling them on the open market.  In contrast, liquidating (selling) the assets of a sole trader or a partnership can be slow and difficult.  Liquidity helps make corporate shares an attractive investment, which increases the number of people and institutions willing to invest in such companies.

 Advantages of Corporations  Longevity: Liquidity also helps give corporations a long life span; when shareholders sell their shares, ownership simply passes to a new generation, so to speak.  Limited liability: A corporation itself has unlimited liability, but the various shareholders who own the corporation face only limited liability—their maximum potential loss is only as great as the amount they have invested in the company.  Like liquidity, limited liability offers protection that helps make corporate shares an attractive investment.

 Disadvantages of Corporations  Cost and complexity: Starting a corporation is more expensive and more complicated than starting a sole trader or a partnership, and “taking a company public” (selling shares to the public) can be extremely expensive for a firm and time-consuming for upper managers.  Reporting requirements: To help investors make informed decisions about shares, government agencies require publicly traded companies to publish extensive and

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detailed financial reports. These reports can eat up a lot of staff and management time, and they can expose strategic information that might benefit competitors. Managerial demands: Top executives must devote considerable time and energy to meeting with shareholders, financial analysts, and the news media. By one estimate, CEOs of large publicly held corporations can spend as much as 40 percent of their time on these externally focused activities. Possible loss of control: Outside investors who acquire enough of a company’s shares can gain seats on the board of directors and therefore begin exerting their influence on company management. Double taxation: A corporation must pay corporate tax on its profits, and individual shareholders must pay income taxes on their share of the company’s profits received as dividends (periodic payments that some corporations opt to make to shareholders). However, under the new dividend imputation tax system implemented in Australia since 1987, a shareholder has the right to receive a credit for the tax paid by the corporation. Short-term orientation of the stock market: Publicly held corporations release their financial results once every quarter, and this seemingly simple requirement can have a damaging effect on the way companies are managed. The problem is that executives feel the pressure to constantly show earnings growth from quarter to quarter so that the share price keeps increasing—even if smart, strategic reasons exist for sacrificing earnings in the short term, such a s investing in new product development or retaining talented employees instead of laying them off during slow periods.

 Types of Corporations  Public companies limited by shares: - A limited by shares company (also known as a limited liability companies and usually denoted by the word ‘Ltd’ beside its name) is a company where the liability of the shareholders is limited to the issue price of their fully paid shares. However, if the shares are issued on a partly paid basis then the shareholder is liable for the remaining amount when it is called for or due.  Public companies limited by guarantee: - This form of enterprise is common for charitable or not-for-profit organisations. In case the company is wound up, the liability of the shareholders of a limited by guarantee company is limited to the amount they agreed to contribute.  Unlimited public companies: - This structure of enterprise is usually common for professional and investmenttype companies. - The liability of the shareholders to the debts of the company is unlimited. - These companies are usually organised like a partnership but with a corporate body.  No liability companies: - In Australia, this form of corporation is restricted to mining and resources companies. The reason for that has to do with the high level of risk shareholders face when investing in those companies. Shares issued by a no liability company are commonly on a partly paid basis. Shareholders have no liability to pay any

future calls on their partly paid shares. However, by doing so they forfeit such shares.  Corporate Governance  Although a corporation’s shareholders own the business, few of them are typically involved in managing it, particularly if the corporation is publicly traded. Instead, shareholders elect a board of directors to represent them, and the directors, in turn, select the corporation’s top officers, who actually run the company (see Exhibit 1.1 on the next slide).  The term corporate governance can be used in a broad sense to describe all the policies, procedures, relationships, and systems in place to oversee the successful and legal operation of the enterprise.  Because serious corporate blunders can wreak havoc on employees, investors, and the entire economy, effective corporate governance has become a vital concern for society as a whole, not just for the individual companies themselves.

 Shareholders  Even though most don’t have any direct involvement in company management, shareholders play a key role in corporate governance. All shareholders are invited to an annual meeting where top executives present the previous year’s results and plans for the coming year and shareholders vote on various resolutions that may be before the board.  Those who cannot attend the annual meeting in person can vote by proxy.

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A proxy is a document that authorizes another person to vote on behalf of a shareholder in a corporation Because shareholders elect the directors, in theory they are the ultimate governing body of the corporation. However, a major corporation may have thousands or even millions of shareholders, so unless they own a large number of shares, individual shareholders usually have little influence. Shareholder activism - Activities undertaken by shareholders to influence executive decision making in areas ranging from strategic planning to social responsibility

 Board of Directors  As the representatives of the shareholders, the members of the board of directors are responsible for selecting corporate officers, guiding corporate affairs, reviewing long-term plans, making major strategic decisions, and overseeing financial performance.  Boards are typically composed of major shareholders (both individuals an d representatives of institutional investors) and executives from other corporations.  Directors are often paid a combination of an annual fee and share options, the right to buy company shares at an advantageous price.

 Corporate Officers  The top executives who run a corporation.  The highest-ranking officer is the chief executive officer (CEO), and that person is aided by a team of other “C-level” executives, such as the chief financial officer (CFO), chief information officer (CIO), chief technology officer (CTO), and chief operating officer (COO)—titles vary from one corporation to the next.

 Mergers and Acquisitions  If a company determines that it doesn’t have the right mix of resources and capabilities to achieve its goals and doesn’t have the time to develop them internally, it can purchase or partner with a firm that has what it needs. Businesses can combine permanently through either mergers or acquisitions.  Merger - An action taken by two companies to combine and perform as a single entity.  Acquisition - An action taken by one company to buy a controlling interest in the voting stock of another company.

 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 who already know how to work together.

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Bringing a company under new ownership can also be an opportunity to replace or improve inept management and thereby help a company improve its performance. In many cases, the primary goal is to reduce overlapping investments and capacities in order to lower ongoing costs.

 Disadvantages of Mergers and Acquisitions  Executives have to agree on how the merger will be financed — and then come up with the money to make it happen.  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.  Incompatible information systems (including everything from email to websites to accounting software) may need to be rebuilt or replaced in order to operate together seamlessly.  Companies must often deal with layoffs, transfers, and changes in job titles and work assignments.  The organizational cultures of the two firms must be harmonised somehow, which can result in clashes between different values, management styles, communication practices, workplace atmosphere, and approaches to managing the changes required to implement the merger.

 Types of Mergers

 Hostile Takeover  Acquisition of another company against the wishes of management.  A hostile takeover can be launched in one of two ways: by tender offer or by proxy fight.

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In a tender offer, the buyer, or raider, as this party is sometimes called, offers to buy a certain number of shares in the corporation at a specific price. The price offered is generally more than the current share price, so that shareholders are 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. In a proxy fight, the raider launches a public relations battle for shareholder votes, hoping to gain enough votes to oust the board and management. Corporate boards and executives have devised a number of schemes to defend themselves against unwanted takeovers: - A poison pill defense, a targeted company invokes some move that makes it less valuable to the potential raider, with the hope of discouraging the takeover. A common technique is to sell newly issued shares to curr...