Pa r t 2

Business Ownership
and Entrepreneurship
Chapter 4
Choosing a Form of
Business Ownership
Chapter 5
Small Business,
Entrepreneurship,
and Franchises

Chaikovskiy Igor/Shutterstock.com

In this part, we examine two very practical aspects of business: The most popular
(and most important) forms of legal ownership business owners choose. In addition,
because the majority of businesses are small, we look at specific issues related to
small business.
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 C h a p ter

4
YinYang/E+/Getty Images

Choosing a Form of
Business Ownership
Why Learning Objectives
Should Once you complete this chapter, you will be able to:
You Care? 4-1 Describe the advantages and disadvantages 4-6 Examine special types of businesses,
of sole proprietorships. including S corporations, limited-liability
There’s a good chance that
4-2 Explain the different types of partners and companies, and not-for-profit corporations.
during your lifetime you will
the importance of partnership agreements. 4-7 Discuss the purpose of a joint venture and
work for a business or start a
4-3 Describe the advantages and disadvantages syndicate.
business. With this fact in mind,
of partnerships.
the material in this chapter can 4-8 Explain how growth from within and growth
help you to understand how and 4-4 Summarize how a corporation is formed. through mergers can enable a business
why businesses are organized. 4-5 Describe the advantages and disadvantages to expand.
of a corporation.

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 Inside Business
S.C. Johnson Keeps Business in the Family

S .C. Johnson, a thriving, $10 billion multinational business,

was founded in 1886 when Samuel Curtis Johnson of Racine,
Wisconsin, mixed his first batch of floor wax. Today, the business
well as the original. Although Saran Wrap has lost market share to
competing products that weren’t reformulated, S.C. Johnson values
safety more than sales, and it has a history of addressing health and
is still based in Racine, and it remains firmly in the hands of family. environmental concerns.
Fisk Johnson, the founder’s great-great grandson, presides over Another benefit of being privately held is freedom from the
an empire of household brands ranging from Saran Wrap, Shout, pressures of stockholders and industry analysts. As a result, Fisk
and Scrubbing Bubbles to Windex, Ziploc, and Pledge. Johnson can take a long-term view, share profits with employees
Unlike Procter & Gamble, Unilever, and other major corporate every year, and do the right thing for customers because, as his
competitors that sell stock to the public, S.C. Johnson is a privately great-grandfather Herbert F. Johnson—the son of Samuel—once
held corporation. This enables the company to stay true to its values, said, “Goodwill of people is the only enduring thing in any business.”1
even if sales and profits sometimes suffer. For example, when S.C.
Johnson acquired Saran Wrap, top managers became concerned Did you know?
about how the food wrap’s chemical properties reacted to microwave S.C. Johnson is one of the largest U.S. family-owned
heat. After company scientists reformulated the wrap to eliminate the businesses, with $10 billion in annual revenues and 13,000
chemicals, the new version didn’t cling to food containers quite as employees worldwide.

For Samuel Curtis Johnson, the founder of S.C. Johnson, success didn’t come quickly
or easily. Originally he sold wood flooring to people in the mid-western part of the
United States. After he received letter after letter from customers who wanted to
know the best way to take care of their wood flooring, he created Johnson floor wax.
While recognized as one of the best wood floor products available, the first batch of
wax was created in Samuel’s bath tub. Based on initial success, Samuel included a
can of his floor wax with every new wood floor he sold. Soon even people without
Johnson floors were knocking on his door and wanted to buy his floor wax. Other
products including wood finishes and wood fillers were created, and by 1898, sales
of Johnson floor wax, finishes, and fillers exceeded those of flooring. These products
became the foundation for a thriving, family business that now includes many of the
cleaning and household products available in stores throughout the United States
and over 70 foreign countries. Just for a moment, think about how business was
defined in Chapter 1.
“Business is the organized effort of individuals to produce and sell for a profit,
the goods and services that satisfy society’s needs.”
For Samuel Johnson, the most important part of the definition is the last three
words—satisfy society’s needs. He saw a need and developed a product to meet
that need. Profits from S.C. Johnson early products provided the funding needed
for growth and expansion. Today, S.C. Johnson owners and employees still believe
that meeting customer needs is the most important part of their business. Remember
what Herbert F. Johnson said, “Goodwill of people is the only enduring thing in any
business.” That’s good advice that’s worth remembering if you are a business owner,
an employee or a manager, or just starting your career in business.
A company like S.C. Johnson must make many decisions in order to grow and
expand. One of the most important decisions is choosing a form of ownership.

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 Options include sole proprietorship, partnership, corporation, or special forms of
ownership that will meet a company’s special needs.
We begin this chapter by describing the three common forms of business
ownership: sole proprietorships, partnerships, and corporations. We discuss how
these types of businesses are formed and note the advantages and disadvantages
of each. Next, we consider several types of business ownership usually chosen for
special purposes, including S corporations, limited-liability companies (LLCs), not-
for-profit corporations, joint ventures, and syndicates. We conclude the chapter
with a discussion of how businesses can grow through internal expansion or
through mergers with other companies.

4-1  Sole Proprietorships

Learning Objective A sole proprietorship is a business that is owned (and usually operated) by one
4-1 Describe the advantages person. Although a few sole proprietorships are large and have many employees, most
and disadvantages of sole are small. Some of today’s largest corporations, including Walmart, JCPenney, and
proprietorships. Procter & Gamble Company, started out as tiny—and in many cases, struggling—
sole proprietorships.
Often entrepreneurs with a promising idea choose the sole proprietorship
form of ownership. Annie Withey, for example, created a cheddar cheese-flavored
popcorn snack food. Annie’s popcorn, called Smartfood, became one of the fastest-
selling snack foods in U.S. history. After a few years, Frito-Lay bought the brand for
about $15 million. Despite her success in a very competitive industry, Annie Withey
still thinks like a sole proprietor. Ms. Withey went on to start a new company called
Annie’s Homegrown and develop an all-natural white-cheddar macaroni and cheese
product. In 2014, General Mills paid $820 million for Annie’s Homegrown.2 And
while the money from the sale of Annie’s Homegrown did not all go to Ms. Withey,
it does illustrate that a good idea and a successful business can be worth a lot
of money.
As you can see in Figure 4-1, there are approximately 24.1 million sole
proprietorships in the United States. They account for 72 percent of the country’s
business firms. Although the most popular form of ownership when compared with
partnerships and corporations, they rank last in total sales revenues. As shown in
Figure 4-2, sole proprietorships account for about $1.3 trillion, or about 4 percent
of total annual sales.

Figure 4-1  Relative Percentages of Sole Proprietorships, Partnerships, and

Corporations in the United States

Corporations
5.9 million
18%

Partnerships
3.4 million
10%
Sole Proprietorships
24.1 million
72%

sole proprietorship  a business

that is owned (and usually
operated) by one person Source: “Statistics of Income,” The Internal Revenue Service website at www.irs.gov (accessed January 7, 2017).

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 Figure 4-2  Total Sales Receipts of Sole Proprietorships, Partnerships,
and Corporations in the United States

Sole Proprietorships
$1.3 trillion
4%
Partnerships
$5.1 trillion
14%

Corporations
$30.2 trillion
82%

Source: “Statistics of Income,” The Internal Revenue Service website at www.irs.gov (accessed January 7, 2017).

Sole proprietorships are most common in retailing, service, and agriculture.

Thus, the clothing boutique, appliance-repair shop down the street, and independent
farmer are likely to be sole proprietorships.

4-1a  Advantages of Sole Proprietorships

Most of the advantages of sole proprietorships arise from the two main characteristics
of this form of ownership: simplicity and individual control.

Ease of Start-Up and Closure  Sole proprietorship is the simplest way to start
a business. A sole proprietorship can be, and most often is, established without the
services of an attorney. The legal requirements often are limited to registering the
name of the business and obtaining any necessary licenses or permits.
If the enterprise does not succeed, the firm can be closed as easily as it was
opened. Creditors must be paid, of course, but generally, the owner of a sole
proprietorship does not have to go through any legal procedure before hanging up
an “Out of Business” sign.

Pride of Ownership  A successful sole proprietor is often very proud of her or

his accomplishments—and rightfully so. In almost every case, the owner deserves a
great deal of credit for solving the day-to-day problems associated with operating a
sole proprietorship. Unfortunately, the reverse is also true. When the business fails,
it is often the sole proprietor who is to blame.

Retention of All Profits  Because all profits become the personal earnings of the
owner, the owner has a strong incentive to succeed. This direct financial reward
attracts many entrepreneurs to the sole proprietorship form of business and, if the
business succeeds, is a source of great satisfaction.

No Special Taxes  Profits earned by a sole proprietorship are taxed as the personal
income of the owner. As a result, a sole proprietor must report business profit or
loss and certain other financial information for a business on the Internal Revenue
Service’s Schedule C which becomes part of their personal income tax return. They
must also make estimated quarterly tax payments to the federal government.

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 Business failures do happen! 
No business owner opens a
business with the intention
of failing. And yet, many
small firms—especially
sole proprietorships and
partnerships—do fail.
Although there are many
reasons why small businesses
fail, the limited amount of time
a sole proprietor or partners
can invest in the business is
a major factor that can lead
to failure.

Rob Byron/Shutterstock.com
Flexibility of Being Your Own Boss  A sole proprietor is completely free to make
decisions about the firm’s operations. Without asking or waiting for anyone’s approval,
a sole proprietor can move a shop’s location, open a new store, or close an old one.
And, he or she can make an immediate change in business hours. The manager of
a store in a large corporate chain such as Best Buy Company may have to seek the
approval of numerous managers and company officials before making such changes.

4-1b  Disadvantages of Sole Proprietorships

The disadvantages of a sole proprietorship stem from the fact that these businesses
are owned by one person. Some capable sole proprietors experience no problems.
Individuals who start out with few management skills and little money are most at
risk for failure.

Unlimited Liability Unlimited liability is a legal concept that holds a business

owner personally responsible for all the debts of the business. There is legally no
difference between the debts of the business and the debts of the proprietor. If
the business fails, or if the business is involved in a lawsuit and loses, the owner’s
personal property—including savings and other assets—can be seized (and sold if
necessary) to pay creditors.
Unlimited liability is perhaps the major factor that tends to discourage would-be
entrepreneurs with substantial personal wealth from using the sole proprietor
form of business organization. Unlimited liability is also a reason why many sole
proprietors switch to the corporate form of ownership or some other type of business
organization once their businesses become successful.

Lack of Continuity  Legally, the sole proprietor is the business. If the owner retires,
dies, or is declared legally incompetent, the business essentially ceases to exist. In
many cases, however—especially when the business is a profitable enterprise—the
owner may sell the business or the owner’s heirs may take it over and either sell it
or continue to operate it. The business also can suffer if the sole proprietor becomes
ill and cannot work for an extended period of time. If the owner, for example, has
unlimited liability  a legal concept
that holds a business owner
a heart attack, there is often no one who can step in and manage the business. An
personally responsible for all the illness can be devastating if the sole proprietor’s personal skills are what determine
debts of the business if the business is a success or a failure.

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 Using Social Media

American Express Goes Social

to Help Small Businesses
American Express has been inviting entrepreneurs and small the latest while on the go. On Facebook, OPEN has more
business owners to browse and join the conversations on its than 400,000 likes (https://www.facebook.com/Open); on
OPEN website and social media accounts since 2007. The Twitter, OPEN has 200,000 followers (https://twitter.com
goal is to help small businesses with insights, resources, /AmexOpen). The OPEN LinkedIn page has 40,000 followers
networking, and advice. By laying the foundation for a lively (https://www.linkedin.com/company/american-express-open).
social-media community of entrepreneurs, American Express And if you want to be inspired or get practical advice from
provides a valuable service for many sole proprietorships, successful entrepreneurs, check out the hundreds of videos
partnerships, and small businesses that are incorporated. on OPEN’s YouTube channel (https://www.youtube.com
The American Express website provides many different types /americanexpressopen).
of information including how to build a brand image and
attract new customers. Sources: Based on information in “Five Ways to Authentically Engage Your Customers,”
Kellogg Insight (Kellogg School of Management), April 4, 2016, http://insight.kellogg.
For a taste of what’s available, visit the OPEN Forum northwestern.edu/article/five-ways-to-authentically-engage-your-customers; “Customer
page (https://www.americanexpress.com/us/small-business Experience Takes the Lead at American Express,” Venture Beat, February 4, 2016,
http://venturebeat.com/2016/02/04/customer-experience-takes-the-lead-at-american
/openforum/explore/) and take a look at the top stories. -express/; American Express Open Forum, https://www.americanexpress.com/us/small
OPEN participants can also download an app to keep up on -business/openforum/explore/.

Lack of Money  Banks, suppliers, and other lenders usually are often unwilling to lend
large sums of money to sole proprietorships. Only one person—the sole proprietor—
can be held responsible for repaying such loans, and the assets of most sole proprietors
usually are limited. Moreover, these assets may have been used already as security or
collateral for personal borrowing (a home mortgage or car loan) or for short-term credit
from suppliers. Lenders also worry about the lack of continuity of sole proprietorships:
Who will repay a loan if the sole proprietor dies? Finally, many lenders are concerned
about the large number of sole proprietorships that fail—a topic discussed in Chapter 5.
The limited ability to borrow money can prevent a sole proprietorship from
growing. It is the main reason that many business owners, when in need of relatively
large amounts of capital, change from a sole proprietorship to a partnership or
corporate form of ownership.

Limited Management Skills  The sole proprietor is often the sole manager—
in addition to being the only salesperson, buyer, accountant, and, on occasion,
janitor. Even the most experienced business owner is unlikely to have expertise in
all these areas. Unless he or she obtains the necessary expertise by hiring employees,
assistants, or consultants, the business can suffer in the areas in which the owner
is less knowledgeable. For the many sole proprietors who cannot afford to hire the
help they need, there just are not enough hours in the day to do everything that
c e pt ck ✓
needs to be done.

Difficulty in Hiring Employees  The sole proprietor may find it hard to attract
Con Che
▸▸ What is a sole proprietorship?
and keep competent help. Potential employees may feel that there is no room for
advancement in a firm whose owner assumes all managerial responsibilities. And ▸▸ What are the advantages of a
when those who are hired are ready to take on added responsibility, they may find sole proprietorship?
that the only way to do so is to quit the sole proprietorship and go to work for a ▸▸ What are the disadvantages of
larger firm or start up their own businesses. The lure of higher salaries and increased a sole proprietorship?
benefits also may cause existing employees to change jobs.

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 4-1c  Beyond the Sole Proprietorship
Like many others, you may decide that the major disadvantage of a sole proprietorship
is the limited amount that one person can do in a workday. One way to reduce
the effect of this disadvantage (and retain many of the advantages) is to form a
partnership and have more than one owner.

4-2  Partnerships
Learning Objective A person who would not think of starting and running a sole proprietorship business
4-2 Explain the different types alone may enthusiastically seize the opportunity to form a business partnership. The
of partners and the importance of U.S. Uniform Partnership Act defines a partnership as a voluntary association of two
partnership agreements. or more persons to act as co-owners of a business for profit. Back in 1837, William
Procter and James Gamble—two sole proprietors—formed a partnership called
Procter & Gamble (P&G). Their partnership combined the talents of each man and
helped the new partnership business compete with 14 other soap and candle makers
in Cincinnati, Ohio. Eventually, in 1890, Procter & Gamble incorporated to raise
additional capital for expansion that allowed the company to become a global giant.
Today, P&G brands are known worldwide and include Pantene, Gillette, Tide, Oil
of Olay, and many more that people use every day.3
As shown in Figures 4-1 and 4-2, there are approximately 3.4 million partnerships
in the United States, and this type of ownership accounts for about $5.1 trillion in sales
receipts each year. Note, however, that this form of ownership is much less common than
the sole proprietorship or the corporation. In fact, as Figure 4-1 shows, partnerships
represent only about 10 percent of all American businesses. Although there is no
legal maximum on the number of partners a partnership may
have, most have only two. Regardless of the number of
Robbiverte/ Dreamstime.com

people involved, a partnership often represents a pooling

of special managerial skills and talents; at other times, it is
the result of a sole proprietor taking on a partner for the
purpose of obtaining more capital.

4-2a  Types of Partners

All partners are not necessarily equal. Some may be
active in running the business, whereas others may have a
limited role.

General Partners  A general partner is a person who assumes full

or shared responsibility for operating a business. General partners are
active in day-to-day business operations, and each partner can enter into
contracts on behalf of the other partners. He or she also assumes unlimited
liability for all debts, including business debts incurred by any other general partner
without his or her knowledge or consent. To avoid future liability, a general partner
partnership  a voluntary
association of two or more persons
who withdraws from the partnership must give notice to creditors, customers, and
to act as co-owners of a business suppliers.
for profit
general partner  a person
Limited Partners  A limited partner is a person who invests money in a business
who assumes full or shared but who has no management responsibility or liability for losses beyond his or
responsibility for operating a her investment in the partnership. Typically, the general partner or partners collect
business management fees and receive a percentage of profits. Limited partners receive a portion
limited partner  a person who of profits and tax benefits. Limited partnerships, for example, may be formed to
invests money in a business but finance real estate, oil and gas, motion picture, and other business ventures. Because of
has no management responsibility
potential liability problems, special rules apply to limited partnerships. These rules are
or liability for losses beyond the
amount he or she invested in the intended to protect customers and creditors who deal with limited partnerships. For
partnership example, prospective partners in a limited partnership must file a formal declaration,

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 usually with the secretary of state, that describes the essential details of the partnership
and the liability status of each partner involved in the business. At least one general
partner must be responsible for the debts of the limited partnership. Also, some states
c e pt ck ✓
Con Che
prohibit the use of the limited partner’s name in the partnership’s name.

4-2b  The Partnership Agreement ▸▸ How does a sole proprietorship

Articles of partnership refers to an agreement listing and explaining the terms of the differ from a partnership?
partnership. Although both oral and written partnership agreements are legal and ▸▸ Explain the difference between
can be enforced in the courts, a written agreement has an obvious advantage. It is a general partner and a limited
not subject to lapses of memory. partner.
Figure 4-3 shows a typical partnership agreement. The partnership agreement
▸▸ Describe the issues that should
should state be included in a partnership
●● Who will make the final decisions agreement.
●● What each partner’s duties will be

Figure 4-3  Articles of Partnership

The articles of partnership is a written or oral agreement that lists and explains the terms of a partnership.

PARTNERSHIP AGREEMENT

Names of This agreement, made June 20, 2017, between Penelope Wolfburg of 783A South
partners Street, Hazelton, Idaho, and Ingrid Swenson of RR 5, Box 96, Hazelton, Idaho.

Nature, name, 1. The above named persons have this day formed a partnership that shall operate
and address under the name of W-S Jewelers, located at 85 Broad Street, Hazelton, Idaho
of business 83335, and shall engage in jewelry sales and repairs.

Duration of 2. The duration of this agreement will be for a term of fifteen (15) years, beginning
partnership June 20, 2017, or for a shorter period if agreed upon in writing by both partners.

Contribution 3. The initial investment by each partner will be as follows: Penelope Wolfburg,
of capital assets and liabilities of Wolfburg’s Jewelry Store, valued at a capital investment
of $40,000; Ingrid Swenson, cash of $20,000. These investments are
partnership property.

Duties of 4. Each partner will give her time, skill, and attention to the operation of this
each partner partnership and will engage in no other business enterprise unless permission is
granted in writing by the other partner.

Salaries, 5. The salary for each partner will be as follows: Penelope Wolfburg, $40,000 per
withdrawals, year; Ingrid Swenson, $30,000 per year. Neither partner may withdraw cash or
and distribution other assets from the business without express permission in writing from the
of profits other partner. All profits and losses of the business will be shared as follows:
Penelope Wolfburg, 60 percent; Ingrid Swenson, 40 percent.

6. Upon the dissolution of the partnership due to termination of this agreement, or

to written permission by each of the partners, or to the death or incapacitation
of one or both partners, a new contract may be entered into by the partners or
the sole continuing partner has the option to purchase the other partner’s
Termination interest in the business at a price that shall not exceed the balance in the
terminating partner’s capital account. The payment shall be made in cash in
equal quarterly installments from the date of termination.

7. At the conclusion of this contract, unless it is agreed by both partners to

continue the operation of the business under a new contract, the assets of the
partnership, after the liabilities are paid, will be divided in proportion to the
balance in each partner’s capital account on that date.

Signatures
Penelope Wolfburg Ingrid Swenson

Date
Date Date

Source: Adapted from Goldman and Sigismond, Cengage Advantage Books: Business Law 9E.

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 ●● The investment each partner will make
●● How much profit or loss each partner receives or is responsible for
●● What happens if a partner wants to dissolve the partnership or dies.
Although the people involved in a partnership can draft their own agreement,
most experts recommend consulting an attorney.
When entering into a partnership agreement, partners would be wise to let a
neutral third party—a consultant, an accountant, a lawyer, or a mutual friend—
assist with any disputes that might arise.

Advantages and Disadvantages

4-3 
of Partnerships
Learning Objective When compared to sole proprietorships and corporations, partnerships are the
4-3 Describe the advantages least popular form of business ownership. Still there are situations when forming a
and disadvantages of partnerships. partnership makes perfect sense. Before you make a decision to form a partnership,
all the people involved should consider both the advantages and disadvantages of
a partnership.

4-3a  Advantages of Partnerships

Partnerships have many advantages. The most important are described as follows.

Ease of Start-Up  Partnerships are relatively easy to form. As with a sole

proprietorship, the legal requirements often are limited to registering the name of
the business and obtaining any necessary licenses or permits. It may not even be
necessary to prepare written articles of partnership, although doing so is generally
a good idea.

Availability of Capital and Credit  Because partners can pool their funds, a
partnership usually has more capital available than a sole proprietorship does.
This additional capital, coupled with the general partners’ unlimited liability and
combined management skills, may encourage banks and suppliers to extend more
credit or approve larger loans to a partnership than to a sole proprietor. Still,
partnerships have found it hard to get long-term financing simply because lenders
worry about the possibility of management disagreements and lack of continuity.

Personal Interest  General partners are very concerned with the operation of the
firm—perhaps even more so than sole proprietors. After all, they are responsible
for the actions of all other general partners, as well as for their own. The pride of
ownership from solving the day-to-day problems of operating a business—with
the help of another person(s)—is a strong motivating force and often makes all the
people involved in the partnership work harder to become more successful.

Combined Business Skills and Knowledge  Partners often have complementary

skills. The weakness of one partner—in manufacturing, for example—may be offset
by another partner’s strength in that area. Moreover, the ability to discuss important
decisions with another concerned individual often relieves some pressure and leads
to more effective decision making.

Retention of Profits  As in a sole proprietorship, all profits belong to the owners

of the partnership. The partners share directly in the financial rewards and therefore
are highly motivated to do their best to make the firm succeed. As noted, the
partnership agreement should state how much profit or loss each partner receives
or is responsible for.

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 The pride of ownership. 
While sales and profits
are often the benchmark
for success, there’s also a
special pride of ownership
when two people are solving
problems and working
together for the same
purpose. Being responsible
for what happens to a
business—as well as what
Monkey Business Images/Shutterstock.com

happens to your business

partner—can be a motivating
force for working that much
harder to be successful.

No Special Taxes  Although a partnership pays no income tax, the Internal

Revenue Service requires partnerships to file an annual information return that
states the receipts and expenses for the partnership and the amount of profit or
loss. The partnership return must also list the names of all partners involved in the
business and their share of the partnership’s profit or loss. Then each partner is
required to report his or her share of profit (or loss) from the partnership on his or
her individual tax return. Ultimately each partner’s share of the partnership profit is
taxed in the same way a sole proprietor is taxed.

4-3b Disadvantages of Partnerships
Although partnerships have many advantages when compared with sole proprietor­
ships and corporations, they also have some disadvantages, which anyone thinking of
forming a partnership should consider.
Unlimited Liability  As we have noted, each general partner has unlimited liability
for all debts of the business. Each partner is legally and personally responsible for
the debts, taxes, and actions of any other partner conducting partnership business,
even if that partner did not incur those debts or do anything wrong. General partners
thus run the risk of having to use their personal assets to pay creditors. Limited
partners, however, risk only their original investment.
Today, many states allow partners to form a limited-liability partnership (LLP),
in which a partner may have limited-liability protection from legal action resulting
from the malpractice or negligence of the other partners. Many states that allow LLPs
restrict this type of ownership to certain types of professionals such as accountants,
architects, attorneys, and similar professionals. (Note the difference between a limited
partnership and an LLP. A limited partnership must have at least one general partner
that has unlimited liability. On the other hand, all partners in an LLP may have
limited liability for the malpractice and negligence of the other partners.)

Management Disagreements  What happens to a partnership if one of the partners

brings a spouse or a relative into the business? What happens if a partner wants to
withdraw more money from the business? Notice that each of these situations—and
for that matter, most of the other problems that can develop in a partnership—
involves one partner doing something that disturbs the other partner(s). This human

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 factor is especially important because business partners— with egos, ambitions, and
money on the line—are especially susceptible to friction. When partners begin to
disagree about decisions, policies, or ethics, distrust may build and get worse as time
passes—often to the point where it is impossible to operate the business successfully.

Lack of Continuity  Partnerships are terminated if any one of the general partners
dies, withdraws, or is declared legally incompetent. However, the remaining partners
can purchase that partner’s ownership share. For example, the partnership agreement
may permit surviving partners to continue the business after buying a deceased partner’s
interest from his or her estate. However, if the partnership loses an owner whose specific
management or technical skills cannot be replaced, it is not likely to survive.

Frozen Investment  It is easy to invest money in a partnership, but it is sometimes

quite difficult to get it out. This is the case, for example, when remaining partners
are unwilling to buy the share of the business that belongs to a partner who retires.
To avoid such difficulties, the partnership agreement should include some procedure
for buying out a partner.
In some cases, a partner must find someone outside the firm to buy his or her

c e pt ck ✓ share. How easy or difficult it is to find an outsider depends on how successful the
business is and how willing existing partners are to accept a new partner.

Con Che 4-3c  Beyond the Partnership

▸▸ What are the advantages of a The main advantages of a partnership over a sole proprietorship are increased
partnership? availability of capital and credit and the combined business skills and knowledge of
▸▸ What are the disadvantages of the partners. However, some of the basic disadvantages of the sole proprietorship also
a partnership? plague the general partnership. A third form of business ownership, the corporation,
overcomes many of these disadvantages.

4-4  Corporations
Learning Objective Recognize the name Ray Kroc? Maybe not the name, but there’s a good chance you
4-4  Summarize how a have purchased some fast food from McDonalds. Here’s the story: Back in 1955, Ray
corporation is formed. Kroc was selling Multimixers malt machines when he met two brothers, Dick and Mac
McDonald who were running a fast-food restaurant that served burgers, fries, and
beverages. The McDonald brothers were looking for an agent to help grow their business.
Kroc saw an opportunity and founded the McDonald’s System, Inc., a predecessor to
today’s McDonald’s Corporation. Kroc’s goal was to build a restaurant system that
would be famous for providing food of consistently high quality that tasted the same in
Alaska as it did in Alabama. By 1958, McDonald’s had sold its 100 millionth hamburger.
Today, McDonald’s has 36,000 locations in more than 100 countries around the globe.4
While Kroc and the executives of McDonald’s had to make many decisions, one
very important decision was the decision to incorporate the business. While they
could have chosen other forms of business ownership, the decision to incorporate
enabled the company to attract investors and raise additional capital for expansion
that eventually allowed the company to become a global giant.
While not all sole proprietorships and partnerships become corporations, there
are reasons why business owners choose the corporate form of ownership. Let’s
begin with a definition of a corporation. Perhaps the best definition of a corporation
was given by Chief Justice John Marshall in a famous Supreme Court decision
corporation  an artificial person in 1819. A corporation, he said, “is an artificial person, invisible, intangible, and
created by law with most of
existing only in contemplation of the law.” In other words, a corporation (sometimes
the legal rights of a real person,
including the rights to start and referred to as a regular or C-corporation) is an artificial person created by law, with
operate a business, to buy or sell most of the legal rights of a real person. These include:
property, to borrow money, to
sue or be sued, and to enter into
●● The right to start and operate a business
binding contracts ●● The right to buy or sell property

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 ●● The right to borrow money
●● The right to sue or be sued
●● The right to enter into binding contracts.
Unlike a real person, however, a corporation exists only on paper. There are
approximately 5.9 million corporations in the United States. They comprise about
18 percent of all businesses, but they account for 82 percent of sales revenues (see
Figure 4-1 and Figure 4-2).

4-4a  Corporate Ownership

The shares of ownership of a corporation are called stock. The people who own a
corporation’s stock—and thus own part of the corporation—are called stockholders.
Once a corporation has been formed, it may sell its stock to individuals or other
companies that want to invest in the corporation. It also may issue stock as a reward
to key employees or as a return to investors in place of cash payments.
A closed corporation is a corporation whose stock is owned by relatively few
people and is not sold to the general public. As an example, Mars—the company
famous for M&Ms, Snickers, Dove, Milky Way, Twix, and other chocolate candy—
is a privately held, family-owned, closed corporation. Although many people think
that a closed corporation is a small company, there are exceptions. Mars, for
example, has annual sales of more than $33 billion, employs more than 80,000
associates worldwide, and operates in 77 different countries.5
An open corporation is one whose stock can be bought and sold by any stock  the shares of ownership of a
individual. Examples of open corporations include General Electric, Microsoft, corporation
Apple, and Nike. stockholder  a person who owns
a corporation’s stock
closed corporation  a corporation
4-4b  Forming a Corporation whose stock is owned by relatively
few people and is not sold to the
Although you may think that incorporating a business guarantees success, it does not. general public
There is no special magic about placing the word Incorporated or the abbreviation Inc. open corporation  a corporation
after the name of a business. Unfortunately, like sole proprietorships or partnerships, whose stock can be bought and
corporations can go broke. The decision to incorporate a business, therefore, should sold by any individual

Ever stop at a McDonald’s? 

If you’re like most people
you’ve eaten at a McDonald’s.
When McDonald’s began, it
was a “drive up” fast food
restaurant, and menu items
centered on small, inexpensive
hamburgers, fries, and drinks.
Today, the menu has expanded
to include not only burgers and
fries, but also salads, chicken
sandwiches, 24-hour breakfast
items, and much more. And,
while there are still drive up
restaurants, there are also
restaurants in shopping malls,
Sorbis/Shutterstock.com

airports, train stations, and

just about any location where
there are people who want a
predictable menu and prices.

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 Table 4-1  Ten Aspects of Business That May Require Legal Help
  1. C
 hoosing either the sole proprietorship, partnership, corporate, or some special
form of ownership
  2. Constructing a partnership agreement
  3. Incorporating a business
  4. Registering a corporation’s stock
  5. Obtaining a trademark, patent, or copyright
  6. Filing for licenses or permits at the local, state, and federal levels
  7. Purchasing an existing business or real estate
  8. Creating valid contracts
  9. Hiring employees and independent contractors
10. Extending credit and collecting debts

be made only after carefully considering whether the corporate form of ownership
suits your needs better than the sole proprietorship or partnership forms.
If you decide that the corporate form is the best form of ownership for you,
most experts recommend that you begin the incorporation process by consulting a
lawyer to be sure that all legal requirements are met. While it may be possible to
incorporate a business without legal help, it is well to keep in mind the old saying,
“A man who acts as his own attorney has a fool for a client.” Table 4-1 lists some
aspects of starting and running a business that may require legal help.

Where to Incorporate  A business is allowed to incorporate in any state that it

chooses. Most small- and medium-sized businesses are incorporated in the state
where they do the most business. The founders of larger corporations or of those
that will do business nationwide often compare the benefits that various states
provide to corporations. The decision on where to incorporate usually is based on
two factors: (1) the cost of incorporating in one state compared with the cost in
another state and (2) the advantages and disadvantages of each state’s corporate
laws and tax structure. Some states are more hospitable than others, and some offer
fewer restrictions, lower taxes, and other benefits to attract new firms. Delaware,
Nevada, and Wyoming are often chosen by corporations that do business in more
than one state because of their corporation-friendly laws and pro-business climate.6
An incorporated business is called a domestic corporation in the state in which it is
incorporated. In all other states where it does business, it is called a foreign corporation.
Sears Holdings Corporation, the parent company of Sears and Kmart, is incorporated
in Delaware, where it is a domestic corporation. In the remaining 49 states, Sears is a
foreign corporation. Sears must register in all states where it does business and may
be required to pay taxes and annual fees to each state. A corporation chartered by a
foreign government and conducting business in the United States is an alien corporation.
Volkswagen AG and Samsung Corporation are examples of alien corporations.

domestic corporation  a The Corporate Charter  Once a home state has been chosen, the incorporator(s)
corporation in the state in which it submits articles of incorporation to the secretary of state or appropriate state
is incorporated authority. When the articles of incorporation are approved, they become a contract,
foreign corporation  a often called the corporate charter, between a corporation and the state in which
corporation in any state in which it
the state recognizes the formation of the artificial person that is the corporation.
does business except the one in
which it is incorporated Usually, the articles of incorporation include the following information:
alien corporation  a corporation ●● The firm’s name and address
chartered by a foreign government
and conducting business in the
●● The incorporators’ names and addresses
United States ●● The purpose of the corporation

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 Ethics and Social Responsibility Concerns

The KIND Foundation Funds Kind Projects

Daniel Lubetzky founded KIND Snacks in 2004 From more than 5,000 nominations, a panel
to make granola bars and other snacks that of judges selected seven to receive sizable cash
are both healthy and tasty. Initially, stores were donations. San Francisco nonprofit Lava Mae,
reluctant to stock his snacks because they spearheaded by Doniece Sandoval, received the
seemed, well, too healthy. But once Lubetzky grand prize of $500,000 to expand its program of
persuaded some retailers to carry the products, free hot showers and mobile grooming services
consumers began to buy, and sales multiplied for the city’s homeless population. Six other
year after year. More than a decade later, New people received $100,000 each to take their
York-based KIND has grown into a national community projects to the next level. Lubetzky
brand, selling 22 types of snack bars in grocery is also supporting programs that help entrepre-
and specialty stores from coast to coast. neurs launch startups that will have a positive
Living the spirit of KIND, CEO Lubetzky cre- social impact. The CEO says: “I don’t see it as
ated the KIND Causes program in 2013, making philanthropy so much as a duty.”
a $10,000 donation each month to people and Sources: Based on information in Bartie Scott, “KIND Snacks Is Giving Away $1.1
groups doing good in the community. Lubetzky Million to Spread Kindness,” Inc., December 6, 2016, http://www.inc.com/bartie-
scott/kind-prize-money-goes-to-organization-that-provids-showers-for-homeless.
recently established a separate, not-for-profit html; Rebecca Koenig, “Snacks Company Creates Foundation to Promote Kindness,”
foundation to award larger donations to worthy Chronicle of Philanthropy, January 28, 2016, https://www.philanthropy.com/article
/Snacks-Company-Creates/235096; “How Did I Get Here? Daniel Lubetzky, Founder
causes. During the first year, the KIND founda- & CEO, Kind,” Bloomberg Businessweek, November 22, 2016, https://www.bloomberg.
tion announced it would give $1.1 million to a com/features/2016-how-did-i-get-here/daniel-lubetzky.html; www.kindsnacks.com
/foundation; Elaine Pofeldt, “4 Ways to Turn a Great Idea into a Multimillion-dollar
handful of people who “embody kindness” and Company,” CNBC, September 21, 2016, http://www.cnbc.com/2016/09/21/4-ways-
make a difference. to-turn-a-great-idea-into-a-multimillion-dollar-company.html.

●● The maximum amount of stock and types of stock to be issued

●● The rights and privileges of stockholders
●● The length of time the corporation is to exist.
To help you to decide if the corporate form of organization is the right choice,
you may want to visit the library. You can also use an Internet search engine and enter
the term “business incorporation” for useful websites. Even though you may be able
to complete and file the necessary paperwork without the help of an attorney, most
experts recommend obtaining legal advice from an attorney who has helped other
businesses choose a form of ownership. In addition, before making a decision to
organize your business as a corporation, you may want to consider two additional
areas: stockholders’ rights and the importance of the organizational meeting.

Stockholders’ Rights  Even if you own a single share of stock, you’re legally a part common stock  stock owned by
owner of the corporation. There are two basic types of stock. Owners of common stock individuals or firms who may vote
may vote on corporate matters. Generally, an owner of common stock has one vote for on corporate matters but whose
each share owned. However, any claims of common stockholders on profits, dividends, claims on profits and assets are
and assets of the corporation are paid after the claims of others. The owners of preferred subordinate to the claims of others
stock usually have no voting rights, but their claims on dividends are paid before those preferred stock  stock owned by
individuals or firms who usually do
of common stockholders. Although some large corporations may issue both common
not have voting rights but whose
and preferred stock, generally smaller corporations issue only common stock. claims on dividends are paid before
Perhaps the most important right of owners of both common and preferred stock those of common-stock owners
is to share in the profit earned by the corporation through the payment of dividends. dividend  a distribution of earnings
A dividend is a distribution of earnings to the stockholders of a corporation. Other to the stockholders of a corporation

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 Figure 4-4  Hierarchy of Corporate Structure

Stockholders exercise a great deal of influence through their right to elect the board of directors.

Stockholders Board of
Elect Appoints Officers Hire Employees
(owners) directors

rights include receiving information about the corporation, voting on changes to

the corporate charter, and attending the corporation’s annual stockholders’ meeting,
where they may exercise their right to vote.
Because common stockholders usually live all over the nation, very few actually
may attend a corporation’s annual meeting. Instead, they vote by proxy. A proxy
is a legal form listing issues to be decided at a stockholders’ meeting and enabling
stockholders to transfer their voting rights to some other individual or individuals.
The stockholder can register a vote and transfer voting rights simply by signing and
returning the form. Today, most corporations also allow stockholders to exercise their
right to vote by proxy by accessing the Internet or using a toll-free phone number.

c e pt ck ✓ Organizational Meeting   As the last step in forming a corporation, the

Con Che
incorporators and original stockholders meet to adopt corporate bylaws and elect
their first board of directors. (Later, directors will be elected or reelected at the
corporation’s annual meetings by the firm’s stockholders.) The board members are
▸▸ Explain the difference between directly responsible to the stockholders for the way they operate the firm.
an open corporation and a
closed corporation.
4-4c  Corporate Structure
▸▸ How is a domestic corporation
different from a foreign
The organizational structure of most corporations is more complicated than that of
corporation and an alien a sole proprietorship or partnership. In a corporation, both the board of directors
corporation? and the corporate officers are involved in management.
▸▸ Outline the incorporation Board of Directors  As an artificial person, a corporation can act only through its
process, and describe the basic
directors, who represent the corporation’s stockholders. The board of directors is the
corporate structure.
top governing body of a corporation and is elected by the stockholders. In theory,
▸▸ What rights do stockholders then, the stockholders are able to control the activities of the entire corporation
have? through its directors because they are the group that elects the board of directors
(see Figure 4-4).
Board members can be chosen from within the corporation or from outside it.
Note: For a small corporation, only one director is required in many states although
you can choose to have more. Directors who are elected from within the corporation
are usually its top managers—the president and executive vice presidents, for
example. Those elected from outside the corporation generally are experienced
managers or entrepreneurs with proven leadership ability and/or specific talents the
proxy  a legal form listing issues organization seems to need. In smaller corporations, majority stockholders usually
to be decided at a stockholders’
meeting and enabling stockholders
serve as board members.
to transfer their voting rights to The major responsibilities of the board of directors are to set company goals
some other individual or individuals and develop general plans (or strategies) for meeting those goals. The board is also
board of directors  the top responsible for the firm’s overall operation and appointing corporate officers.
governing body of a corporation,
the members of which are elected Corporate Officers  Corporate officers are appointed by the board of directors.
by the stockholders Although a small corporation may not have all of the following officers, the chairman
corporate officers  the chairman of the board, president, executive vice presidents, corporate secretary, and treasurer
of the board, president, executive are all corporate officers. They help the board to make plans, carry out strategies
vice presidents, corporate
secretary, treasurer, and any other
established by the board, hire employees, and manage day-to-day business activities.
top executive appointed by the Periodically (usually each month), they report to the board of directors. And at the
board of directors annual meeting, the directors report to the stockholders.

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 4-5 Advantages and Disadvantages
of Corporations
When Warren Buffett started his first partnership more than 50 years ago, he Learning Objective
never dreamed he would wind up putting together a wildly diverse collection of 4-5 Describe the advantages
businesses under one corporate umbrella. It all started when Buffett set up a series and disadvantages of a corporation.
of partnerships with family and friends to pool cash for buying big blocks of stock
in companies he had researched. Not all of the companies Buffett chose paid off,
but many were so successful that Buffett quickly earned a worldwide reputation
for his ability to pick just the “right” company. Today, Berkshire Hathaway now
owns more than 50 different corporations, brings in almost $210 billion in annual
revenue, and employees 360,000 people.
Although Warren Buffett started with partnerships, he eventually chose the
corporate form of ownership because it provided a number of advantages when
compared to a partnership or the other forms of business ownership.

4-5a  Advantages of Corporations

Limited Liability  One of the most attractive features of corporate ownership is
limited liability. With few exceptions, each owner’s financial liability is limited to the
amount of money he or she has paid for the corporation’s stock. This feature arises
from the fact that the corporation is itself a legal person, separate from its owners.
If a corporation fails or is involved in a lawsuit and loses, creditors have a claim
only on the corporation’s assets. Because it overcomes the problem of unlimited
liability connected with sole proprietorships and general partnerships, limited
liability is one of the chief reasons why entrepreneurs often choose the corporate
form of organization. For example, Ford Motor Company and General Motors
are both incorporated because of the limited liability protection provided by the limited liability  a feature of
corporate ownership that limits
corporate form of ownership. The limited liability protection is often referred to as each owner’s financial liability to the
the “corporate veil,” and protects the personal assets of investors, executives, and amount of money that he or she
employees in case a corporation is sued. has paid for the corporation’s stock

Alibaba—the world’s largest

stock offering!  For some
businesses, the main reason
to choose the corporate form
of ownership is the ability
to sell stock to investors.
Although it is possible to
raise millions of dollars,
selling stock is more involved
and more expensive than
most people think. Despite
the hassle and expense,
Christopher Penler/Shutterstock.com

Chinese e-commerce giant

Alibaba raised $25 billion
when it sold stock to the
public. Yes, that’s right—
$25 billion with a big “B.”

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 Ease of Raising Capital  The corporation is one of the most effective forms of
business ownership for raising capital. Like sole proprietorships and partnerships,
corporations can borrow from lending institutions. However, they also can raise
additional sums of money by selling stock. In fact, the amount of capital that
can be raised by selling stock can be staggering. Alibaba, the Chinese e-commerce
company, raised $25 billion by selling stock in late 2014. This was the largest
global initial public stock offering—often referred to as an IPO—in history.7
Money from an IPO can be used by a corporation for expansion, to repay debt,
or for any valid reason. While not all IPOs are as large as Alibaba’s, individuals
are more willing to invest in corporations than in other forms of business because
of limited liability, and they can generally sell their stock easily—hopefully for
a profit.

Ease of Transfer of Ownership  Accessing a brokerage firm Web site or a

telephone call to a stockbroker is all that is required to put most stock up for sale.
Willing buyers are available for most stocks at the current market price. Ownership
is transferred when the sale is made, and practically no restrictions apply to the sale
and purchase of stock issued by an open corporation.

Perpetual Life  Since it is essentially a legal “person,” a corporation exists

independently of its owners and survives them. The withdrawal, death, or
incompetence of a key executive or owner does not cause the corporation to be
terminated. Sears, Roebuck and Co. was originally founded in 1893 and is one
of the nation’s largest retailing corporations, even though its original founders,
Richard Sears and Alvah Roebuck, have been dead for decades.

Specialized Management  Typically, corporations are able to recruit more

skilled, knowledgeable, and talented managers than proprietorships and
partnerships. Both Google and Apple can attract employees with the best
technology talent and skills in the industry because people want to work for
successful companies that have a history of developing new ideas or services.
Corporations—especially those in high-demand industries—also pay larger salaries,
offer excellent employee benefits, and are large enough to offer considerable
opportunity for advancement. Within the corporate structure, administration,
human resources, finance, marketing, operations, and manufacturing are placed
in the charge of experts in these fields.

4-5b  Disadvantages of Corporations

Like its advantages, many of a corporation’s disadvantages stem from its legal
definition as an artificial person or legal entity. The most serious disadvantages are
described in the following text. Also see Table 4-2 for a comparison of some of the
advantages and disadvantages of a sole proprietorship, general partnership, and
corporation.

Difficulty and Expense of Formation  Forming a corporation can be a relatively

complex and costly process. The use of an attorney is usually necessary to complete
the legal forms that are submitted to the secretary of state. Application fees, attorney’s
fees, registration costs associated with selling stock, and other organizational costs
can amount to thousands of dollars for even a medium-sized corporation. The costs
of incorporating, in terms of both time and money, discourage many owners of
smaller businesses from forming corporations. Before deciding to incorporate a
small business, you may want to review the material in the section “Forming a
Corporation” discussed earlier in this chapter.

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 Table 4-2  Some Advantages and Disadvantages of a Sole Proprietorship,
Partnership, and Corporation
Sole General Regular
Proprietorship Partnership C-Corporation
Protecting against Difficult Difficult Easy
liability for debts
Raising money Difficult Difficult Easy
Ownership transfer Difficult Difficult Easy
Preserving continuity Difficult Difficult Easy
Government regulations Few Few Many
Formation Easy Easy Difficult
Income taxation Once Once Twice

Government Regulation and Increased Paperwork  A corporation must

register and meet various government standards before it can sell its stock to the
public. Then it must file many reports on its business operations and finances
with local, state, and federal governments. In addition, the corporation must make
periodic reports to its stockholders. To prepare all the necessary reports, even small
corporations often need the help of an attorney, certified public accountant, and
other professionals on a regular basis. In addition, a corporation’s activities are
often restricted by law to those spelled out in its corporate charter.

Conflict Within the Corporation  Because a large corporation may employ

thousands of employees, some conflict is inevitable. For example, the pressure to
increase sales revenue, reduce expenses, and increase profits often leads to increased
stress and tension for both managers and employees. This is especially true when a
corporation operates in a competitive industry, attempts to develop and market new
products, or must downsize the workforce to reduce employee salary expense. For
example, recently Carrier announced plans to close a plant in Indiana that made
furnaces. At the time, the company’s original plan was to manufacture furnace
products in Mexico because of reduced labor costs. After some discussion with then
President-Elect Donald Trump, Carrier agreed to bring some of those same jobs back
to the United States. The company will also invest millions of dollars to upgrade
the Indiana plant and automate some systems required to manufacture its furnace
products. Ironically, new automated equipment could reduce the total number of
employees at the Indiana plant. Decisions of this type—especially reducing the
number of employees at a company—often create conflict and are always hard and
difficult to make.

Double Taxation  Corporations must pay a tax on their profits. In addition,

stockholders must pay a personal income tax on profits received as dividends.
Corporate profits thus are taxed twice—once as corporate income and a second
time as the personal income of stockholders. Note: Both the S corporation and
the limited-liability company (LLC) discussed in the next section eliminate the
disadvantage of double taxation and are a primary reason why business owners
c e pt ck ✓
Con Che
choose these special types of business ownership.

Lack of Secrecy  Because open corporations are required to submit detailed

reports to government agencies and to stockholders, they cannot keep all of their ▸▸ What are the advantages of a
operations confidential. Competitors can study these corporate reports and then corporation?
use the information to compete more effectively. In effect, every public corporation ▸▸ What are the disadvantages of
has to share some of its secrets about its management, finances, and other business a corporation?
activities with its competitors.

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 Who’s the best leader in the
United States?  Hard question
to answer. Tim Cook, the CEO
of Apple would be at the top
of some lists, but there are
many others. The truth is the
original question is hard for
even experts to answer but
the experts do agree there
are many skills and talents
that any manager needs to be
successful. Most experts also
agree that the corporation
can offer larger salaries and
employee benefits to obtain

Hadrian/Shutterstock.com
the specialized talent that is
needed to run a corporation
in today’s competitive global
world.

4-6  Special Types of Business Ownership

Learning Objective In addition to the sole proprietorship, partnership, and the regular corporate forms
4-6 Examine special types of organization, some entrepreneurs choose other forms of organization that meet
of businesses, including their special needs. Additional organizational options include S corporations,
S corporations, limited-liability Limited Liability Companies (LLCs), and not-for-profit corporations.
companies, and not-for-profit
corporations. 4-6a  S Corporations
If a corporation meets certain requirements, its directors may apply to the Internal
Revenue Service for status as an S corporation. An S corporation is a corporation
that is taxed as though it were a partnership. In other words, the corporation’s
income is taxed only as the personal income of its stockholders. Corporate profits
or losses “pass through” the business and are reported on the owners’ personal
income tax returns.
To qualify for the special status of an S corporation, the first step is to file
the necessary paperwork to become a corporation. A number of issues described
in the section “Forming a Corporation” must be decided and paperwork must
be filed with the secretary of state or appropriate state authority. Once the
corporation is established, the corporation must complete Form 2553 and
submit it to the IRS. In addition to completing the form, a firm must meet the
following criteria:8
1. No more than 100 stockholders are allowed.
2. Stockholders must be individuals, estates, or certain trusts.
3. The corporation has no nonresident, alien shareholders.
4. There can be only one class of outstanding stock.
5. The firm must be a domestic corporation eligible to file for S corporation
status.
6. All stockholders must agree to the decision to form an S corporation.
S corporation  a corporation
that is taxed as though it were a Becoming an S corporation can be an effective way to avoid double taxation
partnership while retaining the corporation’s legal benefit of limited liability.

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 Developing Entrepreneurial Skills

How Can a Small Business

Development Center Help?
Whether you’re working on a business plan for a The Illinois Metro East SBDC, hosted by Southern
new venture, or just want to ask a few questions as Illinois University, recently helped an entrepreneur
you think ahead to your entrepreneurial future, you realize his dream of launching a new clothing brand
may want to contact a Small Business Development and retailing his products. Danny Smith met with
Center (SBDC). In many areas, SBDCs are hosted SBDC experts for two years, formulating a solid busi-
by colleges and universities, with businesspeople, ness plan, receiving one-on-one counseling, and
faculty, and students offering advice and assistance to attending the center’s “How to Start a Business in
entrepreneurs in all industries. Some SBDCs also reach Illinois” workshop. He also sought professional advice
out to specific groups, such as women entrepreneurs, about protecting and promoting his brand. Soon Smith
with educational seminars on how to start or grow was able to open Built by Battle, a new online store
a business. featuring casual clothing for men and women. Can a
In Walla Walla, Washington, the SBDC helps dozens local SBDC help you?
of entrepreneurs launch businesses every year,
injecting millions of dollars into the local economy. Sources: Based on information in “SBDC Helps Man Open Clothing Store,”
Advisors coach entrepreneurs through the process of Edwardsville Intelligencer (IL), December 16, 2016, http://www.theintelligencer
.com/news/article/SBDC-helps-man-open-clothing-store-10801126.php; Vicki
formulating plans, applying for loans, obtaining per- Hillhouse, “Walla Walla Business Development Center Plays Role in 7 Startups,”
mits, and other steps needed to turn a business idea Union-Bulletin (WA), November 25, 2016, http://www.union-bulletin.com/local
_columnists/strictly_business/walla-walla-business-development-center-plays-role
into reality. They also help proprietors prepare to sell -in-startups/article_72470d1c-b33b-11e6-b2e1-53181b84ad16.html; Ken Showers,
their businesses to other entrepreneurs, an important “Dreambuilder Prepares the Next Group of Small Business Owners,” Eastern Arizona
Courier, November 26, 2016, http://www.eacourier.com/news/dreambuilder
step for owners who want to move on to other projects -prepares-the-next-group-of-small-business-owners/article_5bece910-b363
or retire. -11e6-9ada-575dc87563f7.html.

Pilot flying J—One of the

world’s most popular travel
centers.  Do you know what
form of business ownership
Pilot Flying J chose? Pilot
Flying J chose the limited
liability company (LLC) form
of business ownership. The
reason is simple: this form of
ownership provided limited
liability for investors and other
advantages when compared
to more common forms of
business ownership. Today,
after almost 60 years, this LLC
jejim/Shutterstock.com

is known for clean restaurants,

well-lit facilities, and safety—
factors that can be hard to find
on some interstate highways.

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 4-6b  Limited-Liability Companies
A limited-liability company (LLC) is a form of business ownership that combines the
benefits of a corporation and a partnership while avoiding some of the restrictions
and disadvantages of those forms of ownership. Chief advantages of an LLC are as
follows:
1. Like a sole proprietorship or partnership, an LLC enjoys pass-through taxation.
This means that owners—which are called members in an LLC—report their
share of profits or losses in the company on their individual tax returns and
avoid the double taxation imposed on most corporations. LLCs with at least
two members are taxed like a partnership. LLCs with just one member are taxed
like a sole proprietorship. LLCs can even elect to be taxed as a corporation or
S corporation if there are benefits to offset the corporate double taxation and
other restrictions.
2. Like a corporation, it provides limited-liability protection for acts and debts of
the LLC. An LLC thus extends the concept of personal-asset protection to small
business owners.
3. The LLC type of organization provides more management flexibility and fewer
restrictions when compared with corporations. A corporation, for example, is
required to hold annual meetings and record meeting minutes; an LLC is not.
Although many experts believe that the LLC is nothing more than a variation of
the S corporation, there is a difference. An LLC is not restricted to 100 stockholders—a
common drawback of the S corporation. Although the laws for forming an LLC are
slightly different in each state, the owners of an LLC may file the required articles of
organization in any state. Most choose to file in their home state—the state where
they do most of their business.
Even though most LLCs are small- to medium-sized businesses, an LLC doesn’t
have to be small. BMW of North America—an LLC that sells luxury automobiles
and motorcycles—chose the LLC type of business ownership because it provided
limited liability for investors and avoided some of the restrictions and disadvantages
of other forms of business ownership.
For help in understanding the differences between a regular corporation, an S
corporation, and an LLC, see Table 4-3.

4-6c  Not-for-Profit Corporations

A not-for-profit corporation (sometimes referred to as nonprofit) is a corporation
organized to provide a social, educational, religious, or other service rather than to
earn a profit. Various charities, museums, private schools, colleges, and charitable
organizations are organized in this way, primarily to ensure limited liability.

Table 4-3  Some Advantages and Disadvantages of a Regular Corporation,

an S Corporation, and a Limited-Liability Company
limited-liability company (LLC)  Regular Limited-Liability
a form of business ownership C-Corporation S Corporation Company
that combines the benefits of a Double taxation Yes No No
corporation and a partnership while
avoiding some of the restrictions
Limited liability and Yes Yes Yes
and disadvantages of those forms
personal asset protection
of ownership Management flexibility No No Yes
not-for-profit corporation  a Restrictions on the number No Yes No
corporation organized to provide of owners/stockholders
a social, educational, religious, or
other service rather than to earn Internal Revenue Service Many Many Fewer
a profit tax regulations

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 While the process used to organize a not-for-profit
corporation is similar to the process used to
create a regular corporation, each state
does have different laws. Once
approved by state authorities,
not-for-profit corporations must
meet specific Internal Revenue

L Hill/ Dreamstime.com
Service guidelines in order to
obtain tax-exempt status.
Today, there is a renewed
interest in not-for-profits because
these organizations are often
formed to improve communities
and change lives. For example, Habitat for Humanity is a not-for-profit corporation

pt ck ✓
and was formed to provide homes for qualified lower-income people who cannot
afford housing. Even though this corporation may receive more money than it
c e
Con Che
spends, any surplus funds are “reinvested” in building activities to provide low-cost
housing to qualified individuals.
Many not-for-profit cor­porations operate in much the same way as for-profit
▸▸ Explain the difference between
businesses. Employees of not-for-profit businesses are responsible for making sure
an S corporation and a limited-
the organization achieves its goals and objectives, ensuring accountability for liability company.
finances and donations, and monitoring activities to improve the performance of
both paid employees and volunteers. If you are interested in a business career, don’t ▸▸ How does a regular (C)
corporation differ from a not-
rule out the non-profit sector. You might consider volunteering in a local not-for-
for-profit corporation?
profit organization to see if you enjoy this type of challenge.

4-7  Joint Ventures and Syndicates

Today, two additional types of business organizations—joint ventures and Learning Objective
syndicates—are used for special purposes. Each of these forms of organization is 4-7 Discuss the purpose of a
unique when compared with more traditional forms of business ownership. joint venture and syndicate.

4-7a  Joint Ventures

A joint venture is an agreement between two or more groups to form a business
entity in order to achieve a specific goal or to operate for a specific period of time.
Both the scope of the joint venture and the liabilities of the people or businesses
involved usually are limited to one project. Once the goal is reached, the period of
time elapses, or the project is completed, the joint venture is dissolved.
Corporations, as well as individuals, may enter into joint ventures. Major oil
producers often have formed a number of joint ventures to share the extremely high
cost of exploring for offshore petroleum deposits. And many U.S. companies are
forming joint ventures with foreign firms in order to enter new markets around
the globe. Back in 1990, General Mills and Nestle formed the joint venture Cereal
Partners Worldwide to market breakfast cereals in 130 countries around the globe.
Today, more than 25 years later, the joint venture has 17 factories around the globe,
employs 4,600 employs, and accounts for over $2 billion in sales each year. This joint
joint venture  an agreement
venture has been a great success because it marries the production and marketing
between two or more groups to
expertise of General Mills and the worldwide presence of Nestle, which also has local form a business entity in order
market knowledge and distribution strength.9 to achieve a specific goal or to
operate for a specific period of time
4-7b  Syndicates syndicate  a temporary association
of individuals or firms organized to
A syndicate is a temporary association of individuals or firms organized to perform perform a specific task that requires
a specific task that requires a large amount of capital. The syndicate is formed a large amount of capital

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 Going Green

Looking to Grow? Get Certified Green

Seeking to grow, an increasing number of companies and its green image and saving money on electricity and water
nonprofits are differentiating themselves from competi- bills through rigorous conservation measures.
tors and attracting eco-conscious customers by obtaining Local certification programs help business of any size
green certification. Organizations of any size can spotlight gain public recognition for their environmental efforts. In
their green accomplishments by meeting the qualification Wisconsin, businesses can apply for green certification by
standards of an outside certification group. A restaurant, completing a detailed questionnaire from the Sustainable
for example, might seek certification from the Green Business Council. Only those scoring in the top 20 percent
Restaurant Association. That’s one way Hope Street Pizza earn the highest honor, that of “Green Master.” Some
distinguishes itself amid the crowd of pizza restaurants in Green Master businesses, including Lands’ End, have been
Providence, Rhode Island. To be certified, the restaurant recertified multiple times, and competition to reach this
had to comply with 500 environmental measures, includ- highest level is spurring applicants to be ever greener,
ing full-scale recycling, slashing water and energy usage, year after year.
and cleaning with safe, nonpolluting products.
Sources: Based on information in Thomas Content, “Wisconsin Companies Honored
Colleges also compete for students, which is why their as ‘Green Masters,’” Milwaukee Journal Sentinel, December 12, 2016, http://www
restaurants are interested in green credentials. The caf- .jsonline.com/story/money/business/energy/2016/12/08/wisconsin-companies
-honored-green-masters/95055788/; Gail Ciampa, “Rhode Island’s First Green
eteria of McHenry County College, near Chicago, recently Certified Restaurants Named,” Providence Journal, July 15, 2016, http://www
became the first community college food-service facility to .providencejournal.com/entertainmentlife/20160715/rhode-islands-first-green
-certified-restaurants-named; Donna Bieschke, “Cafeteria at MCC Earns Green
earn certification from the Green Restaurant Association. Restaurant Certification,” Daily Herald (IL), November 28, 2016, http://www
In helping to save the planet, the cafeteria is also polishing .dailyherald.com/article/20161128/submitted/161129073.

because no one person or firm is willing to put up the entire amount required for
the undertaking. Like a joint venture, a syndicate is dissolved as soon as its purpose
has been accomplished.
Syndicates are used most commonly to underwrite large insurance policies,

e p t ✓ loans, and investments. To share the risk of default, banks have formed syndicates to

o n c eck provide loans to developing countries. Stock brokerage firms usually join together

C Ch in the same way to market a new issue of stock. In early 2016, U.S. Foods Holding,
a corporation that markets and distributes fresh, frozen, and dry food and nonfood
▸▸ In your own words, define a products to customers in the United States, sold stock to investors. With the help of
joint venture and a syndicate. a syndicate including Goldman Sachs & Company, Morgan Stanley, J.P. Morgan,
▸▸ In what ways are joint ventures and other Wall Street firms, U.S. Foods raised just over $1 billion through its initial
and syndicates alike? In what public offering. (An initial public offering is the term used to describe the first time
ways do they differ? a corporation sells stock to the general public.) Once the stock was sold, U.S. Foods
used the money to improve its cash balance and fund growth and expansion.10

4-8  Corporate Growth

Learning Objective Growth seems to be a basic characteristic of business. One reason for seeking growth
4-8 Explain how growth has to do with profit: A larger firm generally has greater sales revenue and thus greater
from within and growth through profit. Another reason is that in a growing economy, a business that does not grow
mergers can enable a business is actually shrinking relative to the economy. A third reason is that business growth
to expand. is a means by which some executives boost their power, prestige, and reputation.
Growth poses new problems and requires additional resources that first must
be available and then must be used effectively. The main ingredient in growth is
capital—and as we have noted, capital is most readily available to corporations.

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 4-8a  Growth from Within
Most corporations grow by expanding their
present operations. Some introduce and sell
new but related products. Others expand the
sale of present products to new geographic
markets or to new groups of consumers in
geographic markets already served. Although
Walmart was started by Sam Walton in 1962
with one discount store, today Walmart has
over 11,500 stores in the United States and 27
other countries, serves 260 million customers
each week, and has long-range plans to increase
its online business activities and expanding

drserg/Shutterstock.com
into additional international markets.11
Growth from within, especially when
carefully planned and controlled, can have
relatively little adverse effect on a firm. For
the most part, the firm continues to do what
it has been doing, but on a larger scale. For
instance, Larry Ellison, co-founder, Executive Question: Who is this man?  There’s a good chance you may not recognize
Chairman of the Board, and Chief Technology this man’s face or even his name. You may not even recognize the products
Officer of Oracle Corporation of Redwood and services developed by the company he co-founded. And yet, under his
City, California, built the firm’s annual leadership, the company has grown through the years because it provides
revenues up from a mere $282 million in the software applications, servers, cloud storage, and other products to help
1988 to approximately $37 billion today.12 customers increase productivity.
Much of this growth has been fueled by two Answer: His name is Larry Ellison, Co-founder, Executive Chairman of
factors. First Oracle has worked hard to the Board, and Chief Technology Officer for Oracle. Both the man and the
take advantage of its leadership position in company are giants in the technology industry.
information management software to generate
more sales and profits. Second, Oracle has
used its profits to evaluate and then acquire other companies that can complement
its position in the information management software industry.

4-8b  Growth Through Mergers and Acquisitions

Another way a firm can grow is by purchasing another company. The combining of
two corporations or other business entities to form one business is called a merger.
An acquisition is essentially the same thing as a merger, but the term generally is
used in reference to a large corporation’s purchases of other corporations. In order
to pay for an acquisition, a leveraged buyout may be used. A leveraged buyout
occurs when borrowed money is used to pay for the company that is being taken
over. The buyer—another company, a corporate raider, or a group of investors—
acquiring the company borrows the money and uses the assets of the company being
acquired as collateral for the loan. Then loans are repaid from the profits earned by
the companies involved. merger  the combining of two
Although most mergers and acquisitions are often friendly, hostile takeovers corporations or other business
also occur. A hostile takeover is a situation in which the management and board entities to form one business
of directors of a firm targeted for acquisition disapprove of the merger. Whether leveraged buyout  a financing
mergers are friendly or hostile, they are generally classified as horizontal, vertical, method that uses borrowed money
to pay for the company that is
or conglomerate (see Figure 4-5).
being taken over

Horizontal Mergers  A horizontal merger is a merger between firms that make hostile takeover  a situation in
which the management and board
and sell similar products or services in similar markets. The merger between Dow of directors of a firm targeted
Chemical and DuPont is an example of a horizontal merger because both firms for acquisition disapprove of the
are in the chemical industry. This type of merger tends to reduce the number of merger

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 Figure 4-5  Three Types of Growth by Merger

Today, mergers are classified as horizontal, vertical, or conglomerate.

HORIZONTAL MERGER

Chemical Chemical
+
(Dow Chemical) (DuPont)

VERTICAL MERGER

Software and Technology Artificial Intelligence

(Microsoft)
+ (Swiftkey)

CONGLOMERATE MERGER

Financial Conglomerate Complex Metal Components

(Berkshire Hathaway)
+ (Precision Castparts)

firms in an industry—and thus may reduce competition. In this case, regulators

were concerned about the effect a merger would have on the firm’s customers. For
example, if regulators approved the merger of Dow Chemical and DuPont, the price
of commercial fertilizer that farmers need to improve agricultural productivity could
increase. Obtaining approval for a merger like this one can be difficult—especially
when customers could end up paying more for the same product because the market
or industry is less competitive after the merger. In this situation, the companies
must work with regulators in order to obtain approval. Still some mergers are never
completed because of opposition from regulators or many other reasons.

Vertical Mergers  A vertical merger is a merger between firms that operate at

different but related levels in the production and marketing of a product. Generally,
one of the merging firms is either a supplier or a customer of the other. A vertical
merger occurred when software giant Microsoft paid $250 million to purchase
London-based Swiftkey, the maker of a predictive keyboard powered by artificial
intelligence. Rather than develop its own predictive keyboard, Microsoft simply
purchased the Swiftkey company.13 Microsoft is one of many technology companies
including Google and Amazon that are using vertical mergers to acquire small
companies with products that use advanced artificial-intelligence.

Conglomerate Mergers  A conglomerate merger takes place between firms in

completely different industries. A conglomerate merger occurred when financial
conglomerate Berkshire Hathaway acquired Precision Castparts. While both companies
were recognized as successful companies that have a history of increasing sales revenues
and profits, they operate in different industries. Berkshire Hathaway, led by its CEO
Warren Buffett, has a long history of acquiring firms that have great financial potential.
Precision Castparts is a worldwide, diversified manufacturer of complex metal
components and products in the aerospace, power, and general industrial markets.14
The merger was a friendly merger because it was beneficial to both companies.

4-8c  Merger and Acquisition Trends for the Future

Economists, financial analysts, corporate managers, and stockholders still hotly
debate whether mergers and acquisitions are good for the economy—or for individual

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 companies—in the long run. Takeover advocates argue that for companies that have
been taken over, the purchasers have been able to make the company more profitable
and productive by installing a new top-management team, by reducing expenses, and
by forcing the company to concentrate on the firm’s most important business activities.
Takeover opponents argue that takeovers do nothing to enhance corporate
profitability or productivity. These critics argue that the only people who benefit
e p t ✓
from takeovers are investment bankers, brokerage firms, and takeover “artists,” who
o n c eck
receive financial rewards by manipulating corporations rather than by producing
tangible products or services.
C Ch
While there have always been mergers and acquisitions, the current economy has ▸▸ What happens when a firm
makes a decision to grow from
changed the dynamics of how and why firms merge. Most experts now predict that
within?
future mergers and acquisitions will be the result of cash-rich companies looking to
acquire businesses that will enhance their position in the marketplace or an industry. ▸▸ What is a hostile takeover? How
Analysts also anticipate more mergers that involve companies or investors from is it different from a friendly
other countries. Regardless of the companies involved or where the companies are merger or acquisition?
from, future mergers and acquisitions will be driven by solid business logic and the ▸▸ Explain the three types of
desire to compete in the international marketplace. mergers.
Whether they are sole proprietorships, partnerships, corporations, or some other ▸▸ Describe the current merger
form of business ownership, most U.S. businesses are small. In the next chapter, we trends and how they affect the
focus on these small businesses. We examine, among other things, the meaning businesses involved and their
of the word small as it applies to business and the place of small business in the stockholders.
American economy.

Summary
4-1 Describe the advantages and disadvantages of sole 4-3 Describe the advantages and disadvantages
proprietorships. of partnerships.
In a sole proprietorship, all business profits become the Although partnership eliminates some of the disadvantages of
property of the owner, but the owner is also personally sole proprietorship, it is the least popular of the major forms
responsible for all business debts. A successful sole pro- of business ownership. The major advantages of a partner-
prietorship can be a great source of pride for the owner. ship include ease of start-up, availability of capital and credit,
When comparing different types of business ownership, the personal interest, combined skills and knowledge, retention of
sole proprietorship is the simplest form of business to enter, profits, and possible tax advantages. The effects of manage-
control, and leave. It also pays no special taxes. Perhaps for ment disagreements are one of the major disadvantages of a
these reasons, 72 percent of all American business firms are partnership. Other disadvantages include unlimited liability (in
sole proprietorships. Sole proprietorships nevertheless have a general partnership), lack of continuity, and frozen invest-
disadvantages, such as unlimited liability and limits on one ment. By forming a limited partnership, the disadvantage of
person’s ability to borrow or to be an expert in all fields. As unlimited liability may be eliminated for the limited partner(s).
a result, this form of ownership accounts for only 4 percent This same disadvantage may be eliminated for partners that
of total revenues when compared with partnerships and form a limited liability partnership (LLP). Of course, special
corporations. requirements must be met if partners form either the limited
partnership or the LLP.
4-2 Explain the different types of partners and the
importance of partnership agreements. 4-4  Summarize how a corporation is formed.
Like sole proprietors, general partners are responsible for A corporation is an artificial person created by law, with
running the business and for all business debts. Limited most of the legal rights of a real person, including the right to
partners receive a share of the profit in return for investing in start and operate a business, to buy or sell property, to bor-
the business. However, they are not responsible for business row money, to be sued or sue, and to enter into contracts.
debts beyond the amount they have invested. Regardless With the corporate form of ownership, stock can be sold to
of the type of partnership, it is always a good idea to have a individuals to raise capital. The people who own a corpora-
written agreement (or articles of partnership) setting forth the tion’s common or preferred stock are called stockholders.
terms of a partnership. Stockholders are entitled to receive any dividends paid by

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 the corporation, and common stockholders can vote either in When compared with a regular corporation or an S corpora-
person or by proxy. tion, an LLC is more flexible. Not-for-profit corporations are
Most experts believe that the services of a lawyer are formed to provide social services and to improve communi-
necessary when making decisions about where to incorpo- ties and change lives rather than to earn profits.
rate and about obtaining a corporate charter, issuing stock,
holding an organizational meeting, and all other legal details 4-7 Discuss the purpose of a joint venture and syndicate.
involved in incorporation. In theory, stockholders are able to Two additional forms of business ownership—the joint ven-
control the activities of the corporation because they elect the ture and a syndicate—are used by their owners to meet
board of directors who appoint the corporate officers. special needs. A joint venture is formed when two or more
groups form a business entity in order to achieve a specific
4-5 Describe the advantages and disadvantages of a goal or to operate for a specific period of time. Once the goal
corporation. is reached, the period of time elapses, or the project is com-
Perhaps the major advantage of the corporate form is lim- pleted, the joint venture is dissolved. A syndicate is a tempo-
ited liability—stockholders are not liable for the corporation’s rary association of individuals or firms organized to perform
debts beyond the amount they paid for its stock. Other a specific task that requires large amounts of capital. Like a
important advantages include ease of raising capital, ease of joint venture, a syndicate is dissolved as soon as its purpose
transfer of ownership, perpetual life, and specialized manage- has been accomplished.
ment. A major disadvantage of a large corporation is double
taxation: All profits are taxed once as corporate income and 4-8 Explain how growth from within and growth through
again as personal income because stockholders must pay a mergers can enable a business to expand.
personal income tax on their dividend income. Other disad- A corporation may grow by expanding its present opera-
vantages include difficulty and expense of formation, govern- tions or through a merger or an acquisition. Although most
ment regulation, conflict within the corporation, and lack of mergers are friendly, hostile takeovers also occur. A hostile
secrecy. takeover is a situation in which the management and board
of directors of a firm targeted for acquisition disapprove of
4-6 Examine special types of businesses, including the acquisition. Mergers generally are classified as horizontal,
S corporations, limited-liability companies, and vertical, or conglomerate.
not-for-profit corporations. While economists, financial analysts, corporate managers,
S corporations are corporations that are taxed as though and stockholders debate the merits of mergers, some trends
they were partnerships but that enjoy the benefit of limited should be noted. First, experts predict that future mergers will be
liability. To qualify as an S corporation, a number of criteria the result of cash-rich companies looking to acquire businesses
must be met. An LLC is a form of business ownership that that will enhance their position in the marketplace or an industry.
provides limited liability and has fewer restrictions when com- Second, more mergers are likely to involve foreign companies or
pared to a regular corporation or an S corporation. LLCs also investors. Third, mergers will be driven by business logic and the
avoid the double taxation imposed on most corporations. desire to compete in the international marketplace.

Key Terms
You should now be able to define and give an example relevant to each of the following terms:

sole proprietorship (102) closed corporation (111) proxy (114) not-for-profit corporation
unlimited liability (104) open corporation (111) board of directors (114) (120)
partnership (106) domestic corporation (112) corporate officers (114) joint venture (121)
general partner (106) foreign corporation (112) limited liability (115) syndicate (121)
limited partner (106) alien corporation (112) S corporation (118) merger (123)
corporation (110) common stock (113) limited-liability company leveraged buyout (123)
stock (111) preferred stock (113) (LLC) (120) hostile takeover (123)
stockholder (111) dividend (113)

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 Discussion Questions
1. If you were to start a business, which ownership form 5. Is growth a good thing for all firms? How does manage-
would you choose? What factors might affect your ment know when a firm is ready to grow?
choice? 6. As an entrepreneur, you’ll face lots of tough and some-
2. Why might an investor choose to become a partner in a times ethical decisions. In the situation described below,
limited partnership instead of purchasing the stock of an what do you think is the right thing to do. A potential
open corporation? customers wants to visit your place of business. Should
3. Discuss the following statement: “Corporations are not you introduce friends as “employees” and “customers”
really run by their owners.” so your firm looks bigger and busier?
4. What kinds of services do not-for-profit corporations
provide? Would a career in a not-for-profit corporation
appeal to you?

Video Case
Project Repat Gives Old T-Shirts New Life

Ross Lohr and Nathan Rothstein have built a thriving small manufacturers that paid and treated their workers well. The
business from the idea of giving old T-shirts new life by hav- new business plan reflects this change in direction. Simply
ing them cut into squares and sewn into comfortable fleece- put, Project Repat gets the old tees from customers, cuts
backed quilts. The Boston-based company is named Project the T-shirts into squares, sews them together with fleece
Repat because it is dedicated to repatriating textile-industry backing, and ships out a highly personal finished quilt—a
jobs and helping U.S. workers earn a living wage by sewing collage of their own T-shirts.
T-shirt quilts made to order. Project Repat was set up as a regular corporation
To start, customers visit the Project Repat Web site because it was seeking funding from venture capital-
(www.projectrepat.com) and select the size of their quilt, ists and angel investors. One of the original cofounders
based on the number of T-shirts they want sewn together. and a designer received some shares in the corporation.
Then they choose the color of fleece for the backing, enter However, the current management team of CEO Ross
their payment information, and place the order. Project Repat Lohr and President Nathan Rothstein—who together
responds with detailed instructions for preparing the T-shirts are the primary shareholders—would have preferred to
and shipping them to one of its two contract manufacturing establish Project Repat as an S corporation or an LLC, in
centers, the one in Fall River, Massachusetts, or the one in part because the tax bill would be a little lower. Lohr and
Valdeze, North Carolina. Once the T-shirts arrive, the com- Rothstein have also taken Project Repat through the pro-
pany confirms the receipt of the T-shirts by sending an email cess of qualifying as a B corporation, which signals their
to the customer. Within about a month, the new quilt made commitment to pursuing social responsibility goals as well
of old T-shirts is on its way back to the customer, ready to as financial goals.
be enjoyed for the warmth and the memories. Now Project Repat is reaching out to potential custom-
The original business plan was to make good use of ers via social media sites like Facebook, Twitter, YouTube,
T-shirts that had been discarded by U.S. consumers and Pinterest, and Instagram. The business is growing and the
wound up in Kenya. The cofounders raised money via number of T-shirt quilts it produces has grown each year
crowdfunding to pay for designing fashion accessories since the company started back in 2012. The best part of
including tote bags and scarves made from old T-shirts. the business is that it is a way for customers to use their
Once designs were completed, local Kenyan artisans were beloved T-shirts in a new form and relive happy memories
then employed to turn the designs into finished products every time they use the quilt. With over $4 million in annual
that were then shipped to America for sale. However, revenue, the company has been responsible for recycling
feedback from U.S. customers quickly led the company over a million T-shirts that might otherwise have been rel-
to refocus on creating something new from customers’ egated to landfills. Just as important, Project Repat’s rapid
own T-shirts that had nostalgic value. So Project Repat growth has resulted in the creation of dozens of jobs for
switched from production of fashion accessories in Kenya U.S. workers, an economic benefit to the local communities
to production of T-shirt quilts in America through contract where they live and work.15

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 Questions
1. Considering the tax benefits, why would investors not 3. Imagine you’re an angel investor looking to invest in
want Project Repat to be an S corporation? young companies. What questions would you ask the
2. One of the cofounders of Project Repat is no longer management team at Project Repat before making a
with the company, although he retains a small owner- final decision about investing in it?
ship stake. What complications might this change have
caused if Project Repat was set up as a partnership
rather than a corporation?

Building Skills for Career Success

1. Social Media Exercise group’s agreement with other groups from your class, as
well as to examine their agreements.
Not-for-profit organizations have used social media to redefine
3. Summarize your group’s answers to these questions,
how they can get funding for their missions. There are even a
and present them to your class.
few that exist totally online. Check out www.donorschoose.org
and www.kiva.org. Both of these depend on crowds (called
3. Researching Different Careers
crowdfunding) to either fund educational projects (Donors
Choose) or lend money to support projects all over the world Many people spend their entire lives working in jobs that they
(Kiva) using the microfinancing model. do not enjoy. Why? Often, it is because they have taken the
first job they were offered without giving it much thought.
a. Take a minute to explore both sites and view some of
How can you avoid having this happen to you? First, you
the projects up for funding. Do you think social media
is an effective method of raising money for worthwhile should determine your “personal profile” by identifying and
projects? Why or why not? analyzing your own strengths, weaknesses, things you enjoy,
and things you dislike. Second, you should identify the types
b. Both Donors Choose and Kiva are not-for-profits; do
you think crowdfunding could be useful for “for-profit” of jobs that fit your profile. Third, you should identify and
businesses? Why or why not? research the companies that offer those jobs.

2. Building Team Skills Assignment

Suppose that you have decided to quit your job as an insur- a. Take two sheets of paper and draw a line down the
middle of each sheet, forming two columns on each
ance adjuster and open a bakery. Your business is now
page. Label column 1 “Things I Enjoy or Like to Do,”
growing, and you have decided to add a full line of catering
column 2 “Things I Do Not Like Doing,” column 3 “My
services. This means more work and responsibility. You will Strengths,” and column 4 “My Weaknesses.”
need someone to help you, but you are undecided about
b. Record data in each column over a period of at least
what to do. Should you hire an employee or find a partner? If
one week. You may find it helpful to have a relative or
you add a partner, what type of decisions should be made to friend give you input.
create a partnership agreement?
c. Summarize the data, and write a profile of yourself.
Assignment d. Take your profile to a career counselor at your college
or to the public library and ask for help in identify-
1. In a group, discuss the following questions:
ing jobs that fit your profile. Your college may also
a. What are the advantages and disadvantages of add- offer testing to assess your skills and personality. The
ing a partner versus hiring an employee? Internet is another resource.
b. Assume that you have decided to form a partnership. e. Research the companies that offer the types of jobs
What articles should be included in a partnership that fit your profile.
agreement?
f. Write a report on your findings.
c. How would you go about finding a partner?
2. As a group, prepare an articles-of-partnership agree-
ment. Be prepared to discuss the pros and cons of your

128 Part 2 Business Ownership and Entrepreneurship

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