MIE 201, Chapter 5 Notes
MIE 201, Chapter 5 Notes MIE 201
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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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