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Chapter 4

Chapter 4 Notes

Management (MGT)
Course Code
Chris Bovaird

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Chapter 4 Understanding Legal Forms of Business Organization Notes
Organizing Options (Forms of Business Ownership)
The Sole Proprietorship
x sole proprietorship : a business owned and operated by one person
x legally, a business set up as a sole proprietorship is not considered a separate legal entity
Advantages of a Sole Proprietorship
x some advantages of a sole proprietorship include freedom, ease of formation, and tax benefits
Disadvantages of a Sole Proprietorship
x unlimited liability : personal liability for all debts of the business
x disadvantages include lack of continuity: sole proprietorship dissolves when owner dies; sole proprietorship depends on
resources of one person whose managerial and financial limitations may constrain the business; hard to borrow money
The Partnership
x partnership : a form of organization established when two or more persons agree to combine their financial, managerial, and
technical abilities for the purpose of operating a business for profit
x general partnerships : a type of partnership in which all partners are jointly liable for the obligations of the business
x limited partnerships : a type of partnership in which at least one general partner (who has unlimited liability) and one or more
limited partners; the limited partners cannot participate in the day-to-day management of the business or they risk the loss of
their limited liability status
x general partners : partners who are actively involved in the managing the firm and have unlimited liability
x limited partners : partners who don’t participate actively in the business and whose liability is limited to the amount they
invested in the partnership
Advantages of a Partnership
x advantages include: ability to grow by adding talent and money; somewhat easier time borrowing funds; can also invite new
partners to join by investing money; simple to organize, with few legal requirements; there is some sort of partnership agreement
that is private document; not legal entities; partners are taxed as individuals
Disadvantages of a Partnership
x disadvantages include: unlimited liability; lack of continuity; transferring of ownership; provides little or no guidance in
resolving conflict between the partners
The Corporation
x corporation : separate legal entity that is liability for its own debts and whose owners’ liability is limited to their investment
x shareholders : persons who own shares in a corporation
x board of directors : a group of individuals elected by firm’s shareholders and charged with overseeing, and taking legal
responsibility for, the corporation’s actions
x inside directors : members of corporation’s board of directors who are also full-time employees of the corporation
x outside directors : members of corporation’s board of directors who are not also employees of the corporation
x chief executive officer : the person responsible for the firm’s overall performance
Types of Corporations
x public corporation : a business whose shares are widely held and available for sale to the general public
x private corporation : shares are held by a small group of individuals and is not usually available for sale to the general public
x initial public offering (IPO) : sale of shares in a company for the first time to the general investing public
Advantages of Incorporation
x limited liability : the liability of investors is limited to their personal investments in the corporation
x other advantages include: continuity; advantages in raising money through shares, and lenders
x shares : a share of ownership in a corporation
Disadvantages of Incorporation
x disadvantages include: cost for new firm in forming a corporation; also need legal help in meeting government regulations
Redrawing Corporate Boundaries
x several trends in redrawing corporate boundaries have become evident in recent years including acquisitions and mergers,
divestitures and spinoffs, employee-owned corporations, strategic alliances, and subsidiary/parent corporations
Acquisitions and Mergers
x acquisition : one firm buys another firm and absorbs it into its operations
x mergers : the union of two companies to form a single new business
x horizontal merger : a merger of two firms that have previously been direct competitors in the same industry
x vertical merger : a merger of two firms that have previously had a buyer-seller relationship
x conglomerate merger : a merger of two firms in completely unrelated business
x friendly takeover : acquisition in which management of acquired company welcomes the firm’s buyout by another company
x hostile takeover : acquisition in which the management of the acquired company fights the firm’s buyout by another company
Divestitures and Spinoffs
x divestiture : occurs when a company sells part of its existing business operations to another company
x spinoff : strategy of setting up one or more corporate units as new, independent corporations
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