OTHER FORMS OF BUSINESS

In addition to the proprietorship, partnership, and corporate forms of business, an enterprise may be conducted using other forms of business, such as the master limited partnership, the professional corporation, the limited liability company, and the joint venture.

A master limited partnership is a partnership with limited partner ownership interests that are traded on an organized exchange. For example, more than two dozen master limited partnerships are listed on the New York Stock Exchange, including the Boston Celtics, Cedar Fair,  and Red Lion Inns partnerships. 

Ownership interests, which represent a specified ownership percentage, are traded in much the same way as the shares of stock of a corporation. One difference, however, is that a corporation can raise new capital by issuing new ownership interests, whereas a master limited partnership cannot. It is not possible to sell more than a 100% interest in the partnership, yet it is possible to sell additional shares of stock in a corporation. Another difference is that the income of a master limited partnership is taxed only once, as partners’ individual income.

Another variant of the corporate form of business is the professional corporation. A professional corporation is an organization that is formed under state law and treated as a corporation for federal tax law purposes, yet that has unlimited liability for its owners—the owners are personally liable for the debts of the corporation. Businesses that are likely to form such corporations are those that provide services and require state licensing, such as physicians’, architects’, and attorneys’ practices, since it is generally felt that it is in the public interest to hold such professionals responsible for the liabilities of the business.

More recently, companies are using a hybrid form of business, the limited liability company (LLC), which combines the best features of a partnership and a corporation. In 1988 the Internal revenue Service ruled that the LLC be treated as a partnership for tax purposes, while its owners are not liable for its debts. Since this ruling, every state has passed legislation permitting limited liability companies.

Though state laws vary slightly, in general, the owners of the LLC have limited liability. The IRS considers the LLC to be taxed as a partnership if the company has no more than two of the following characteristics: (1) limited liability, (2) centralized management, (3) free transferability of ownership interests, and (4) continuity of life. If the company has more than two of these, it will be treated as a corporation for tax purposes, subjecting the income to taxation at both the company level and the owners’.

A joint venture, which may be structured as either a partnership or as a corporation, is a business undertaken by a group of persons or entities (such as a partnership or corporation) for a specific business activity and, therefore, does not constitute a continuing relationship among the parties.

For tax and other legal purposes, a joint venture partnership is treated as a partnership and a joint venture corporation is treated as a corporation.

U.S. corporations have entered into joint ventures with foreign corporations, enhancing participation and competition in the global marketplace.

For example, the Coca-Cola Company entered a joint venture with FEMSA, Mexico’s largest beverage company, in 1993, expanding its opportunities within Mexico. Joint ventures are an easy way of entering a foreign market and of gaining an advantage in a domestic market. For example, Burger King, the second largest fast food chain in America, entered the Japanese market through a joint venture with Japan Tobacco Inc., which is two-thirds owned by Japan’s Ministry of Finance, to form Burger King Japan. This joint venture gives Burger King (owned by the British firm, Grand Metropolitan PLC) a fighting chance in competing against McDonald’s almost 2,000 outlets in Japan.

Joint ventures are becoming increasingly popular as a way of doing business. Participants—whether individuals, partnerships, or corporations—get together to exploit a specific business opportunity. Afterward, the venture can be dissolved. Recent alliances among communication and entertainment firms have sparked thought about what the future form of doing business will be. Some believe that what lies ahead is a virtual enterprise—a temporary alliance without all the bureaucracy of the typical corporation—that can move quickly and decisively to take advantage of profitable business opportunities.

Prevalence

The advantages and disadvantages of the three major forms of business from the point of view of financial decision-making are summarized in Exhibit 1.1. Firms tend to evolve from proprietorship to partnership to corporation as they grow and as their needs for financing increase. Sole proprietorship is the choice for starting a business, whereas the corporation is the choice to accommodate growth. The great majority of business firms in the United States are sole proprietorships, but most business income is generated by corporations.

The Objective of Financial Management

So far we have seen that financial managers are primarily concerned with investment decisions and financing decisions within business organizations. The great majority of these decisions are made within the corporatebusiness structure, which better accommodates growth and is responsible for 89% of U.S. business income. Hence, most of our discussion in the remainder of this book focuses on financial decision-making in corporations, but many of the issues apply generally to all forms of business.

EXHIBIT 1.1 Characteristics of the Three Basic Forms of Business