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MIE 201, Chapter 5 Notes

by: Jenna Loehrer

MIE 201, Chapter 5 Notes MIE 201

Jenna Loehrer
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MIE 201 chapter 5 in-class notes and book notes included!
Intro to Management
M.K. Ward
Class Notes




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This 11 page Class Notes was uploaded by Jenna Loehrer on Wednesday September 21, 2016. The Class Notes belongs to MIE 201 at North Carolina State University taught by M.K. Ward in Fall 2016. Since its upload, it has received 5 views. For similar materials see Intro to Management in Management at North Carolina State University.


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Date Created: 09/21/16
    MIE 201 Chapter 5 Notes (Forms of Ownership)  Learning Objectives  1. Define sole proprietorship, and explain the six advantages and six disadvantages of this  ownership model.  a. Sole proprietorship:​ business owned by a single individual and legally inseparable from that  person  i. Advantages:​ Simplicity, single layer of taxation, privacy, flexibility and control,  fewer limitations on personal items, personal satisfaction  ii. Disadvantages:​ Financial liability ​(Unlimited liability:​ legal condition under which  any damages or debts incurred by a business are the owner’s personal responsibility),  demands on the owner, limited managerial perspective, resource limitations, no  employee benefits for the owner, finite life span  2. Define partnership, and explain the six advantages and six disadvantages of this ownership  model.  a. Partnership: business structure in which two or more individual s share ownership of the firm  i. General partnership: all owners play an active role and have unlimited liability  ii. Limited partnership: only general partner or partners have active management roles  and unlimited liability  b. Six advantages of partnership:  i. Simplicity  ii. Single layer of taxation  iii. More resources  iv. Cost sharing  v. Broader experience and skill base  vi. Longevity  c. Three disadvantages of partnership:  i. Expansion   ii. Succession  iii. Termination issues  3. Define corporation, and explain the four advantages and six disadvantages of this ownership  model.  a. Corporation:​ legal entity, distinct from any individual persons, that has the power to own  property and conduct business  b. Advantages of corporations:  i. Ability to raise capital  ii. Liquidity:​ measure of how easily and quickly an asset such as corporate stock can be  converted into cash by selling it  iii. Longevity  iv. Limited liability  c. Disadvantages of corporations:  i. Cost and complexity  ii. Reporting requirements      MIE 201 Chapter 5 Notes (Forms of Ownership)  1. Corporation is required to report financial reports   iii. Managerial demands  1. Top executives must put time and energy to meet with shareholders, financial  analysts, and the news media  iv. Possible loss of control  v. Double taxation  1. Corporation must pay state and national taxes on its profits  vi. Short term orientation of the stock market  4. Explain the concept of corporate governance, and identify the three groups responsible for  ensuring good governance.   a. Corporate Governance:​ involves all the policies, procedures, relationships, and systems in  place to oversee the successful and legal operation of the enterprise; refers specifically to the  responsibilities and performance of the board of directors  b. Three groups responsible for ensuring good governance → (1) Shareholders, who elect (2)  board of directors, who approve overall strategy and hire (3) corporate officers who run the  company   5. Identify the potential advantages of pursuing mergers and acquisitions as a growth strategy,  along with the potential difficulties and risks.  a. Advantages of Mergers and Acquisitions  i. Strategic tool to expand year after year  ii. Increase buying power as result of larger size  iii. Increase revenue by cross­selling products to each other’s customers  iv. Increase market share by combining product lines to provide more comprehensive  offerings  v. Gain access to new expertise, systems, and teams of employees  vi. Can replace or improve bad management team  vii. Primary goal → reduce overlapping investments and capacities in order to lower  ongoing costs  b. Disadvantages of Mergers and Acquisitions  i. Executives have to agree on how the merger will be financed and find this money  ii. Managers need to decide who will be in charge after they join  iii. Marketing departments need to change branding strategies, advertising and sales  efforts  iv. Incompatible information systems need to be redesigned  v. Companies must often deal with layoffs, transfers, and changes in titles and work  assignments              MIE 201 Chapter 5 Notes (Forms of Ownership)  6. Define strategic alliance and joint venture, and explain why a company would choose these  options over a merger or acquisition.  a. Strategic alliance:​ long­term partnership between companies to jointly develop, produce, or  sell products  i. Can accomplish many of same goals as merger or acquisition, but with less risk and  work than permanently integrating two companies  b. Joint venture:​ separate legal entity established by two or more companies to pursue shared  business objectives  i. Without disrupting original companies to extent that a merger or aquisition does    Forms of Ownership  ● Sole Proprietorship: ​ business owned by a single person  ○ Advantages:   ■ Simplicity  ■ Single layer of taxation  ■ Privacy  ■ Flexibility and control  ■ Fewer limitations on personal items  ■ Personal satisfaction  ○ Disadvantages:  ■ Financial liability  ● Unlimited liability:​ legal condition under which any damages or debts incurred  by a business are the owner’s personal responsibility  ■ Demands on the owner   ■ Limited managerial perspective  ■ Resource limitations  ■ No employee benefits for the owner  ■ Finite life span  ● Partnership:​ unincorporated company owned by two or more  ○ General Partnership:​ partnership in which all partners have joint authority to make decisions  for the firm and joint liability for the firm’s financial obligations  ○ Limited Partnership:​ partnership in which one or more persons act as general partners who  run the business and have the same unlimited as sole proprietors  ■ Limited Liability:​ legal condition in which the maximum amount for each owner is  liable for is equal to whatever amount each invested in the business  ○ Two types of partnerships:   ■ Master Limited Partnership:​ partnership that is allowed to raise money by selling units  of ownership to the general public  ■ Limited Liability Partnership:​ partnership in which 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      MIE 201 Chapter 5 Notes (Forms of Ownership)  ○ Advantages:  ■ Simplicity  ■ Single layer of taxation  ■ More resources  ■ Cost sharing  ■ Broader skill and experience base  ■ Longevity  ○ Disadvantages:  ■ Unlimited liability  ■ Potential for conflict  ■ Expansion, succession, and termination issues  ● Corporation:​ legal entity, distinct from any individual persons, that has the power to own property  and conduct business  ○ Shareholders:​ investors who purchase shares of stock in a corporation  ○ Public corporation:​ corporation in which stock is sold to anyone who has the means to buy it  ○ Private corporation:​ corporation in which all the stock is owned by only a few individuals or  companies and is not made available for purchase by the public  ○ Advantages of corporations:  ■ Ability to raise capital  ■ Liquidity:​ measure of how easily and quickly an asset such as corporate stock can be  converted into cash by selling it  ■ Longevity  ■ Limited liability  ○ Disadvantages of corporations:  ■ Cost and complexity  ■ Reporting requirements  ● Corporation is required to report financial reports   ■ Managerial demands  ● Top executives must put time and energy to meet with shareholders, financial  analysts, and the news media  ■ Possible loss of control  ■ Double taxation  ● Corporation must pay state and national taxes on its profits  ■ Short term orientation of the stock market                    MIE 201 Chapter 5 Notes (Forms of Ownership)  ○ Special types of corporations:   ■ S Corporation:​ type of corporation that combine the capital­raising options and limited  liability of a corporation with the federal taxation advantages of a partnership  ■ Limited Liability Company (LLC):​ structure that combines limited liability with the  pass­through taxation benefits of a partnership, the number of shareholders is not  restricted, nor is member’s participation in management  ■ Benefit Corporation:​ profit­seeking corporation whose charter specifies a social or  environmental goal that the company must pursue in addition to profit  ● Corporate Governance      ○ Board of Directors:​ group of professionals elected by shareholders as their representatives,  with responsibility for the overall direction of the company and selection of top executives  ■ Board­related issues:  ● Composition → identifying the type of people who should be on the board  ● Education  ● Liability  ● Independent board chairs  ● Recruiting challenges  ○ Corporate Governance:​ in a broad sense, all the policies, procedures, relationships, and  systems in place to oversee the successful and legal operation of the enterprise; in a narrow  sense, responsibilities and performance of the board of directors specifically  ○ Shareholders  ■ Proxy:​ document that authorizes another person to vote on behalf of a shareholder  ■ Shareholder activism:​ activities undertaken by shareholders (individually or in groups)  to influence executive decision making in areas ranging from strategic planning to  social responsibility  ○ Corporate Officers:​ top executives who run a corporation  ■ Make major board decisions, ensure compliance with government regulations, etc  ○ Chief Executive Officer (CEO):​ highest­ranking officer of a corporation  ■ Hired by the board and have legal authority to conduct company’s business        MIE 201 Chapter 5 Notes (Forms of Ownership)  ● Mergers and Acquisitions  ○ Merger:​ action taken by two companies to combine as a single entity  ○ Acquisition:​ action taken by one company to buy a controlling interest in the voting stock of  another company  ■ Hostile Takeover:​ acquisition of another company against the wishes of management    ○ Advantages of Mergers and Acquisitions  ■ Strategic tool to expand year after year  ■ Increase buying power as result of larger size  ■ Increase revenue by cross­selling products to each other’s customers  ■ Increase market share by combining product lines to provide more comprehensive  offerings  ■ Gain access to new expertise, systems, and teams of employees  ■ Can replace or improve bad management team  ■ Primary goal → 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 find this money  ■ Managers need to decide who will be in charge after they join  ■ Marketing departments need to change branding strategies, advertising and sales  efforts  ■ Incompatible information systems need to be redesigned      MIE 201 Chapter 5 Notes (Forms of Ownership)  ■ Companies must often deal with layoffs, transfers, and changes in titles and work  assignments  ○ Mergers and Acquisition Defenses  ■ Every corporation is vulnerable to takeover by any individual or company that buys  enough shares to gain a controlling interest  ■ Hostile takeover can happen in two ways:  1) Tender offer  a) Buyer (or raider) often offers to buy certain shares of stock at much  higher price than current stock price; hopes to get enough shares to take  control of corporation and replace existing board of directors and  management  2) Proxy fight  a) Raider launches a public relations battle for shareholder votes, hoping  to enlist enough votes to remove the board and management  ■ Poison pill defense:​ targeted company involves some move that makes it less valuable  to potential raider  ● Common technique is to sell newly issued stock at prices below market value  ● Strategic Alliances and Joint Ventures  ○ Strategic alliance:​ long­term partnership between companies to jointly develop, produce, or  sell products  ○ Joint venture:​ separate legal entity established by two or more companies to pursue shared  business objectives        Chapter 5 In Class Notes: Forms of Ownership  Sole Proprietorship  ● Advantages  ○ Ease of establishment  ○ Working for yourself  ○ Tax advantages  ■ No double taxation  ○ Privacy  ● Disadvantages  ○ Unlimited liability  ○ Finite life span  ○ Limited capital available  ○ Limited experience  ○ Demands on owner  Partnerships:​ legal association of two or more people as co owners of a business  ● General Partnership:   ○ Equal partners → share ownership and unlimited liability (2 or more partners are equally  liable for damages)  ■ Normally invest similar amounts in partnership  ● Limited Partnership:   ○ Unequal partners → passive investors and limited liability  ■ General partner (runs business and very involved) and limited partner (passive  investors and mostly care about return on investment; only liable for amount  invested)  ● Advantages  ○ Easy to form  ○ Diversification of risk  ○ Additional capital available  ○ Tax advantages  ○ Additional skills  ○ Extended life  ● Disadvantages  ○ Unlimited liability  ○ Interpersonal problems  ■ Both lead to:  ● Debts  ● Lawsuits  ● Managing partner  ● Unproductive partners  ● Partnership Agreement  ○ Division of profits  ○ Dispute resolutions      Chapter 5 In Class Notes: Forms of Ownership  ○ Decision­making authority  ○ Expected contributions  Corporations:​ legal entity with the power to own property and conduct business  ● Enter into contracts  ● Buy and sell property  ● Sue and be sued  ● Face limited liability  ● Ownership of Corporations: shareholders and stock certificates  ● Public Corporation:   ○ Many shareholders and publicly traded  ● Private Corporation:   ○ Few shareholders and not publicly traded  ○ Advantages  ■ Limited liability  ■ Access to capital  ■ Increased liquidity  ■ Unlimited life span  ○ Disadvantages  ■ Excess paperwork  ■ Burdensome costs  ■ Double taxation  ■ Disclosure requirements  ■ Loss of control  ■ Short term orientation  ● Special Types of Corporations  ○ (Subchapter) S Corporation:​ corporation that benefits from tax savings; doesn’t pay double  taxation  ○ Limited Liability Corporation (LLC):​ limited liability features and tax savings  ○ Subsidiary Corporation:​ company​ that is owned or controlled by another ​company​, which  is called the parent ​company ​ or holdin​ ompany  ○ Based on Location:  ■ Alien Corporation:​ incorporates in one country and does business in another  country  ■ Foreign Corporation:​ corporation that incorporates in one state and does business in  another  ■ Domestic Corporation:​ corporation that incorporates (files to become corporation)  in one state and does business in the same state              Chapter 5 In Class Notes: Forms of Ownership  ● Corporate Governance    ● Board Issues  ○ Composition  ○ Education  ○ Liability  ○ Independent Board Chairs  ○ Recruiting Challenges  ● Corporate Officers hired by the board  ○ CEO  ○ CFO  ○ CIO    **** Ways That Corporate Structures Can Change Over Time → Mergers, Hostile Takeouts,  Acquisitions, Consolidation, Leveraged Buyouts  ****    Mergers and Acquisitions  ● Advantages:  ○ Economies of Scale  ○ Efficiencies  ○ Synergies  ● Disadvantages:  ○ High­Risk Corporate Debt  ○ Management Distractions  ○ Culture Clashes  ● Types of Mergers:  ○ Vertical  ○ Horizontal  ○ Conglomerate  ○ Market Extension  ○ Product Extension  ● Defenses Against Mergers and Acquisitions      Chapter 5 In Class Notes: Forms of Ownership  ○ Hostile Takeover → Tender Offer or Proxy Fight → Poison Pill, Shark Repellent, White  Night  ○ Vocabulary:  ■ Hostile Takeover  ■ Tender Offer  ■ Proxy Fight  ■ Poison Pill:  ■ Shark Repellent  ■ White Night  ● Strategic Alliance  ○ Expand market share  ○ Access technology  ○ Diversity offerings  ○ Share best practices  ● Joint Venture  ○ Attain specific goals  ○ Share strengths  ○ Spread costs  ○ Minimize risk 


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