ARELLANO UNIVERSITY

     SENIOR HIGH SCHOOL DEPARTMENT

S.Y. 2019 – 2020

BUSINESS ORGANIZATION

SOLE PROPRIETORSHIP

What is a Sole Proprietorship?

A sole proprietorship is the simplest business structure in which one person is the owner and operator of the
business. This sole proprietor is responsible for all aspects of the business and reaps all profits of the
business.

Because there is no legal distinction between the business and the owner/operator, the owner/operator is in
direct control of the proprietorship’s activities and is accountable for all its debts.

What are the Advantages of Sole Proprietorships?

 Beginning a sole proprietorship is easy. Unlike other business structures, starting a sole proprietorship
requires less paperwork and time to create a legal sole proprietorship.

 It is cheap to start a sole proprietorship. Where other business structures have increased fees and
filings to open for business, sole proprietorships tend to be affordable models to start and maintain.

 There are some tax benefits for a sole proprietorship. Instead of the business having to file its own
tax return, sole proprietors claim businesses gains and losses on their own individual tax return. Also,
the sole proprietorship is taxed using individual income tax rates rather than corporate making it
simpler and cheaper to comply with your tax obligations.Sole proprietors

 can employ others and grow their business. Sole proprietorships can hire others and enjoy the tax
benefits from doing so. Additionally, spouses of the owner can work for the sole proprietorship
without being declared as an employee.

 Owners have complete and direct control over all decision making. Because the owner is the business,
the owner makes all decisions for the business rather than sharing power with a partner or corporate
board. This allows owners the freedom to drive the business in the direction they desire
What are the Disadvantages of Sole Proprietorships

 Owners are fully liable. If business debts become overwhelming, the individual owner’s finances will be
impacted. When a sole proprietorship fails to pay its debts, the owner’s home, savings, and other
individual assets can be taken to satisfy those debts.

 Self-employment taxes apply to sole proprietorships. Owners must pay self-employment taxes on the

business income.

 Business continuity ends with the death or departure of the owner. Because the owner and the sole
proprietorship are one, if the owner dies or becomes incapacitated then the business dies with them
and the money and assets of the business become part of the individual’s estate. The assets and
money are subjected to inheritance taxes and can have a great impact on employees of the sole
proprietorship.

 Raising capital is difficult. Initial funds of the business are generated by the owner and raising funds
for the business can be hard since they cannot issue stocks or other investment income. Loans may
also be difficult if the owner does not have enough credit to secure additional money

PARTNERSHIP

What is Partnership?

Consider a partnership if the number of people involved is small (up to about 20) and limited liability is not
necessary.

Advantages of a partnership include that:

 Two heads (or more) are better than one

 Your business is easy to establish and start-up costs are low
 More capital is available for the business
 You’ll have greater borrowing capacity
 High-calibre employees can be made partners
 There is opportunity for income splitting, an advantage of particular importance due to resultant tax
savings
 Partners’ business affairs are private
 There is limited external regulation
 It's easy to change your legal structure later if circumstances change

Disadvantages of a partnership include that:

 The liability of the partners for the debts of the business is unlimited
 Each partner is ‘jointly and severally’ liable for the partnership’s debts; that is, each partner is liable
for their share of the partnership debts as well as being liable for all the debts
 There is a risk of disagreements and friction among partners and management
 each partner is an agent of the partnership and is liable for actions by other partners
 If partners join or leave, you will probably have to value all the partnership assets and this can be
costly.
  To end or dissolve a partnership in Tasmania we recommend seeking legal advice regarding what is
required.

CORPORATION

What is Corporation?

Corporation is a type of business which is formally registered as a public owned company it is recognized as a
sperate entity from its owners.

Advantages

 The popularity of corporations is due to following advantages:

 The liability of the owners towards the creditors is limited to their investment in the company
 This means that in case of liquidation of the company, if the company's assets are insufficient to
meet the liability, nothing is required to be contributed by the owners. Only the owners' contribution
is at stake rather than their personal assets.
 The corporation is considered a legal person with perpetual existence. It exists until it is liquidated
and death or change in ownership has no effect on the corporation.
 Additional capital can be raised easily through stock markets, etc.
 The ownership is represented by the number of share certificates held by a person, and this makes
the transfer of ownership very easy.

Disadvantages of Corporation:

 Establishing a corporation is a complex process and requires registration with the central regulatory
authority and listing on a stock exchange which required fulfillment of certain requirements related to
the amount of capital, number of directors, etc.
 Normally the corporations have a large number of shareholders; they delegate the governance
function to a body of persons called board of directors. The board of directors hires management to
look after the day to day affairs of the corporation. The management is an agent and the owners are
principal. It is quite possible that the management may act to further their own interests rather than
the interest of the owners of the corporation. When this happens it is called an agency problem.
 In case of corporations there is double taxation. First of all the corporate income is taxed at a flat
rate and then the dividends paid to the shareholders is taxed.

What is Mergers & Acquisitions?

Mergers and acquisitions (M&A) are defined as consolidation of companies. Differentiating the two
terms, Mergers is the combination of two companies to form one, while Acquisitions is one company taken over
by the other. M&A is one of the major aspects of corporate finance world. The reasoning behind M&A
generally given is that two separate companies together create more value compared to being on an individual
stand. With the objective of wealth maximization, companies keep evaluating different opportunities through
the route of merger or acquisition
Acquisitions are commonly made by using cash or debt to purchase outstanding stock, but companies canA also
use their own stock by exchanging it for the target firm's stock. Acquisitions can be either
 
hostile or friendly. For example: Let's assume Company XYZ wants to acquire Company ABC.
 

Jollibee - Filipino-style fast food restaurant with American-influenced dishes specializing in burgers,
spaghetti, chicken and some local Filipino dishes.
Greenwich - The fast food restaurant features a variety of Italian main and side dishes specializing in pizzas
and pastas.
Red Ribbon - The bakeshop offers a wide array of baked goods specializing in cakes.
Chowking - The fast food serve Chinese food menu predominantly selling noodle soups, dim sum and rice bowls
with toppings.
Mang Inasal - Barbecue fast food restaurant chain.
Burger King Philippines - JFC is managing the operations of the American hamburger fast food chain in the
Philippines.
Smashburger - American fast-casual hamburger restaurant chain.
Yonghe King - Chinese fast-food restaurant that specializes in noodles.
Hongzhuangyuan - Chinese fast food chain.
Tortas Frontera - US-based Mexican food restaurant by chef Rick Bayless, owns 47% stake.[39]
Panda Express Philippines - Joint venture with a Chinese-American fast food restaurant's parent
company, Panda Restaurant Group through JBPX Foods, Inc.[6] and operates its Philippine chain, owns 50%
stake.[42]
The Coffee Bean & Tea Leaf - American coffee chain founded in 1963, purchased by JFC in 2019

Mergers and acquisitions (M&A) are defined as consolidation of companies. Differentiating the two
terms, Mergers is the combination of two companies to form one,

Horizontal Merger:

 Horizontal mergers means two businesses within the same industry combine together to make a bigger
company that operates in the same industry.

Reasons for a Horizontal Merger

 Increase market share and reduce competition in the industry

 Further utilize economies of scale (thus reducing costs)
 Increase diversification
 Reshape the company’s competitive scope by reducing intense rivalry
 Realize economies of scope
 Share complementary skills and resources
Example

 A potential merger between Pepsi and Coca-Cola would be one of the mergers of the century. Both
companies compete in the same industry, and the combination would create a new, larger company with
a higher market share. Furthermore, as the two firms have very similar operations, a horizontal
integration would allow them to lower their costs. This would be the case for McDonalds and Burger
King or for Daimler-Benz and Chrysler as well.

 On the other hand, mergers between large organizations are perceived as monopolistic. A firm that
capitalizes on its financial, technological, and human resources can become a monopoly. Also, if one
firm has 35% of the market and the other firm has 15% of the market, the new firm will have 50% of
the market. This is a relatively unfair competitive advantage for these firms as they create an
oligopoly through merging.

Horizontal Integration:

 Two or more conpanies produce the same good or service.

 (Horizontal Integration is also known as a horizontal Merger.)

Vertical Merger

A vertical merger is a combination of two or more companies that are into the same industry but produce
different products or services along the value chain. It provides a strategic tool for companies to grow their
businesses and acquire more control over the steps supporting the supply chain.
There are many players involved in a supply chain mainly including suppliers who provide the raw materials,
manufacturers produce the product, distributors then provide it to the retailers who finally sell the product
and services to the end customers. So why do companies get into vertical mergers?

Vertical Merger

- Merger between two companies producing different goods or services for one specific
finished product.
- A vertical merger occurs when two or more firms, operating at different levels within an
industry's supply chain, merge operatons.
- Most often the logic behind the merger is to increase synergies created by merging firms
that would be more efficient

Problems in Achieving Merger Success

Although there are many benefits to a horizontal merger, they may not be fully realized and the merger may
not actually create added value. Merging companies face problems such as:
Integration difficulties: Merging two different corporate cultures can be difficult.
Difficulty in building a working relationship: Due to differing management styles, it may be difficult to build a
working relationship.
Inability to achieve synergies: The expected synergies may never be realized and this may end up reducing
overall value.
Bureaucratic controls: There may be legal repercussions if the horizontal merger creates a company that may
be considered a monopoly. Horizontal mergers are scrutinized in the US because the combination of
competitors can create a monopoly and raise prices for the consumer.

Vertical mergers allow companies to use the synergies that ultimately helps in operating efficiently, costs
getting reduced and business expansion. It also allows companies to grow their operations into different
phases of the supply chain. The opposite of a vertical merger would be a horizontal merger which involves a
merger between two or more companies creating competing products or providing competing services and
operate in the same stage of the supply chain.

 Example of Vertical Merger

A very good example of a vertical merger would be a car manufacturing company merging with a tire company.
It would not only benefit in reducing the cost for the automaker but also help in expanding the business by
supplying the tires to other car manufacturers. So this type of merger not only will make the profit margins
better by reducing the costs but also boost the top line i.e. the revenue through business expansion.
 
an example of a vertical merger is a car manufacturer purchasing a tire company. ... A notable vertical merger
was the 1996 merger of Time Warner Inc., a major cable company, and the Turner Corporation, a major media
company responsible for CNN, TNT, Cartoon Network, and TBS.May 6, 2019

Vertical Merger

 A vertical merger is one in which a firm or company combines with supplier or distributor
- This can be viewed as anticompetitive because it cqn often rob business from it can often ron
business fron its competitors.
 Example
- Grocery store buys a trucking company as well as an organic farm
- Honda bought Goodyear Tires as well as a major rubber production company
#This may violate anti-trust laws because Goodyear supplies tires to competitorsof Honda.

Horizontal Merger vs. Vertical Merger

Though one is often confused with the other, there is a distinct difference between the two types of mergers.
Horizontal merger: When companies that sell similar products merge together.
Vertical merger: Occurs between companies at different stages in the production process (between companies
where one buys or sells something from or to the company).