1. Forms of Business Ownership
Chapter 4
Forms of Business Ownership
Forms of Business Ownership
CHAPTER 4
© iStockphoto.com / Rich Yasick
The Future of Business
The Essentials 4th Edition Gitman & McDaniel
Prepared by Deborah Baker
Chapter 4
Copyright ©2009 by South-Western, a division of Cengage Learning. All rights reserved

2. Learning Goals CHAPTER 4
Forms of Business Ownership
1 What are the advantages and disadvantages of the sole proprietorship form of business organization?
2 What are the advantages of operating as a partnership, and what downside risks should partners consider?
3 How does the corporate structure provide advantages and disadvantages to a company, and what are the major types of corporations?
CHAPTER 4

3. Learning Goals (continued)
Chapter 4
Forms of Business Ownership
4 What other options for business organization does a company have in addition to sole proprietorships, partnerships, and corporations?
5 What makes franchising an appropriate form of organization for some types of business, and why does it continue to grow in importance?
6 Why are mergers and acquisitions important to a company’s overall growth?
7 What current trends will affect the business organizations of the future?
CHAPTER 4

4. Business Ownership Sole proprietorships Partnerships Corporations
Chapter 4
Forms of Business Ownership
Sole proprietorships
Partnerships
Corporations
You’ve decided to start a business, and you need to decide what form of business organization will best suit your needs. Would you prefer to go it alone as a sole proprietorship, or do you want the challenges of a partnership? Or how about the limited liability protection of a corporation, or the flexibility of a limited liability company? Then, other questions rise. Financing, employees, business taxes, debt liability…
Chapter 4 discussed sole proprietorships, partnerships, and corporations, as well as other forms of business ownership. Advantages and disadvantages of each form are discussed.

5. Sole Proprietorships
Chapter 4
Forms of Business Ownership 1
What are the advantages and disadvantages of the sole proprietorship form of business organization? 1

6. Sole Proprietorships 1 sole proprietorship
Chapter 4
Forms of Business Ownership
sole proprietorship
A business that is established, owned, operated, and often financed by one person.
Sole proprietorships are the most popular form of business ownership, accounting for 72 percent of all businesses. Partnerships account for 9 percent and corporations 19 percent. 1

7. Sole Proprietorships 1 Advantages Easy and inexpensive to form
Chapter 4
Forms of Business Ownership
Advantages
Easy and inexpensive to form
Profits go to the owner
Direct control of the business
Freedom from government regulations
No special taxation
Ease of dissolution
Disadvantages
Unlimited liability
Difficulty raising capital
Limited managerial expertise
Trouble finding qualified employees
Personal time commitment
Unstable business life
Losses are owner’s responsibility
A sole proprietorship may be a suitable choice for a one-person start-up operation with no employees and little risk of liability exposure. Although a sole proprietorship offers the freedom to operation the business as the owner wishes, sole proprietors also face disadvantages. Advantages and disadvantages are listed here. 1

8. CONCEPT check 1 What is a sole proprietorship?
Chapter 4
Forms of Business Ownership
What is a sole proprietorship?
Why is this a popular form of business organization?
What are the drawbacks to being a sole proprietor? 1

9. Partnerships
Chapter 4
Forms of Business Ownership 2
What are the advantages of operating as a partnership, and what downside risks should partners consider? 2

10. Partnerships 2 partnership
Chapter 4
Forms of Business Ownership
partnership
An association of two or more individuals who agree to operate a business together for profit.
For individuals who do not want to “go it alone,” a partnership is simple to set up and offers a shared form of business ownership. It is a popular choice for professional-service firms, such as lawyers, accountants, and real estate companies.
The two basic types of partnerships are general and limited. In a general partnership, all partners share in the management and the profits. A limited partnership has two types of partners: one or more general partners who have unlimited liability, and one or more limited partners whose liability is limited to the amount of their investment. Limited partners agree not to take part in the everyday management of the firm. 2

11. Partnerships 2 Advantages Ease of formation Availability of capital
Chapter 4
Forms of Business Ownership
Advantages
Ease of formation
Availability of capital
Diversity of skills and expertise
Flexibility
No special taxes
Relative freedom from government control
Unlimited liability
Potential for conflicts between partners
Complexity of profit-sharing
Difficulty exiting or dissolving partnership
Disadvantages 2

12. CONCEPT check
Chapter 4
Forms of Business Ownership
How does a partnership differ from a sole proprietorship?
Describe the three main types of partnerships and explain the difference between a limited partner and a general partner.
What are the main advantages and disadvantages of a partnership? 2

13. Corporations
Chapter 4
Forms of Business Ownership 3
How does the corporate structure provide advantages and disadvantages to a company, and what are the major types of corporations?
Corporations range in size from large multinationals to midsize or even smaller firms with few employees and revenues under $25,000. Although corporations account for only 19% of businesses, 84% of sales and 64% of profits are due to this business structure. 3

14. Corporations 3 corporation
Chapter 4
Forms of Business Ownership
corporation
A legal entity with an existence and life separate from its owners, who are not personally liable for the entity’s debts.
A corporation is chartered by the state in which it is formed and can own property, enter into contracts, sue and be sued, and engage in business operations under the terms of its charter. 3

15. The 10 Largest U.S. Corporations
Chapter 4
Forms of Business Ownership
The 10 Largest U.S. Corporations
Wal-Mart Stores
ExxonMobil
Chevron Texaco
General Motors
ConocoPhillips
General Electric
Ford Motor
Citigroup
Bank of America Corp.
AT&T
Corporations account for only 19 percent of all businesses, but generate 84 percent of all revenues and 64 percent of profits.
A list of the 10 largest U.S. corporations includes many familiar names that affect our daily lives.
Ranked by 2007 Sales Source: “The 2008 Fortune 500,” Fortune,
(April 2008) ©Time Inc. All rights reserved. 3

16. Articles of Incorporation
Chapter 4
Forms of Business Ownership
Name of corporation
Company’s goals
Types of stock and number of shares issued
Life of the corporation
Minimum investment by owners
Methods for transferring shares
Address of the corporate office
Names and addresses of the first board of directors
Articles of incorporation are prepared on a form authorized or supplied by the state of incorporation. Although they may vary slightly from state to state, all articles of incorporation include these items. 3
Exhibit 4.4

17. Corporations 3 Advantages Limited liability
Chapter 4
Forms of Business Ownership
Advantages
Limited liability
Ease of transferring ownership
Unlimited life
Tax deductions
Ability to attract financing
Double taxation of profits
Cost and complexity of formation
More government restrictions
Disadvantages
The corporate structure allows companies to merge resources into enterprises with great potential for growth and profits. Advantages and disadvantages are shown on this slide. 3

18. Limited Liability Company (LLC)
Types of Corporations
Chapter 4
Forms of Business Ownership
C Corporation
A conventional or basic corporate form of organization
S Corporation
A hybrid entity that is organized like a corporation, but taxed like a partnership
Limited Liability Company (LLC)
A hybrid organization that offers the same liability protection as a corporation but may be taxed as either a partnership or a corporation
Three types of corporate business organization provide limited liability. 3

19. CONCEPT check
Chapter 4
Forms of Business Ownership
What is a corporation? Describe how corporations are formed and structured.
Summarize the advantages and disadvantages of corporations. Which features contribute to the dominance of corporations in the business world?
Why do S corporations and limited liability companies (LLCs) appeal to small businesses? 3

20. Specialized Forms of Business Organization
Chapter 4
Forms of Business Ownership 4
What other options for business organization does a company have in addition to sole proprietorships, partnerships, and corporations?
In addition to the three main forms, several specialized types of business organization play an important role in our economy. These include cooperatives and joint ventures, followed by franchising. 4

21. Specialized Forms of Business Organization
Chapter 4
Forms of Business Ownership
cooperative
A legal entity typically formed by people with similar interests, such as suppliers or customers, to reduce costs and gain economic power.
A cooperative has:
limited liability
an unlimited life span
an elected board of directors
an administrative staff
profit distribution to member-owners
A cooperative is a legal entity with several corporate features, such as limited liability, an unlimited life span, an elected board of directors, and an administrative staff. Cooperative members pay annual fees and share all profits, which are distributed to members in proportion to their contributions.
There are currently 750,000 cooperatives with 760 million members in more than 100 countries worldwide. Familiar products, such as Sunkist oranges and Land O’Lakes butter are cooperatives. Ace Hardware is one of the nation’s largest cooperatives.
Cooperatives are autonomous businesses owned and controlled by their members, not by investors. 4

22. Chapter 4
Forms of Business Ownership
Cooperatives
Seller Cooperatives
Individual producers join together to compete more effectively with large producers
Buyer Cooperatives
A group of cooperative members unite for combined purchasing power
Two types of cooperatives are seller and buyer cooperatives. Seller cooperatives are popular in agriculture. 4

23. Benefits of Cooperatives
Chapter 4
Forms of Business Ownership
Benefits of Cooperatives
Empower people to improve their quality of life
Enhance economic opportunities through self-help
Provide members with services, including:
credit
finance
energy
consumer goods
housing
telecommunications
Cooperatives empower people to improve their quality of life and enhance their economic opportunities through self-help. 4

24. Cooperative Principles
Chapter 4
Forms of Business Ownership
Cooperative Principles
Voluntary and open membership
Democratic member control
Member economic participation
Autonomy and independence
Education, training, and information
Cooperation among cooperatives
Concern for community
Cooperatives follow the basic principles of operation shown on this slide. 4
Source: “What Are Cooperatives,” Press Kit, National Cooperative Business Association, Copyright ©NCBA. All rights reserved. Reproduced by permission.

25. Joint Ventures 4 joint venture
Chapter 4
Forms of Business Ownership
joint venture
Two or more companies that form an alliance to pursue a specific project usually for a specified time period.
Both large and small companies can benefit from joint ventures: a project may be too large for one company. Additionally, joint ventures afford companies access to new markets, products, or technology. 4

26. CONCEPT check
Chapter 4
Forms of Business Ownership
Describe the two types of cooperatives and the advantages of each.
What are the benefits of joint ventures? 4

27. Franchising
Chapter 4
Forms of Business Ownership 5
What makes franchising an appropriate form of organization for some types of business, and why does it continue to grow in importance? 5

28. Franchising 5 franchising
Chapter 4
Forms of Business Ownership
franchising
A form of business organization based on a business arrangement between a franchisor, which supplies the product concept and the franchisee, who sells the goods or services of the franchisor in a certain geographic area.
Franchising comes in all sizes, from McDonald’s to newer franchises, such as those shown in Exhibit 4.10.
Franchising, one of the fastest segments of the economy, provides a way to own a business without starting it from scratch. 5

29. Top Franchises for 2008 5 7-Eleven Inc. Subway Dunkin’ Donuts
Chapter 4
Forms of Business Ownership
7-Eleven Inc.
Subway
Dunkin’ Donuts
Pizza Hut
McDonald’s
Sonic Drive In Restaurants
KFC Corp.
InterContinental Hotels Group
Domino’s Pizza LLC
RE/MAX Int’l. Inc.
Choosing a franchise can be challenging. With 2,500 different franchised businesses in the U.S., there are many choices. An important factor in choosing a franchise is money.
Franchised businesses provide about 18 million jobs in over 760,000 businesses. 5
Exhibit 4.8 Source: Top 10 Franchises in 2008 excerpted from “2008 Franchise 500 Rankings.” Reprinted from with permission of Entrepreneur.com, Inc. Entrepreneur.com, Inc. All rights reserved.

30. Franchise Agreements 5 Franchisee Agreement Franchisor Agreement
Chapter 4
Forms of Business Ownership
Franchisee Agreement
Franchisor Agreement
Follow operating rules
Buy standard equipment
Keep up sales/service levels
Take part in franchisor promotions
Maintain a relationship with franchisor
Use of proven company brand
Help finding a site
Building plans
Training and management assistance
Managerial and accounting procedures
Employee training
Wholesale prices for supplies
Financial assistance 5

31. Franchises 5 Advantages Disadvantages Loss of control
Chapter 4
Forms of Business Ownership
Advantages
Disadvantages
Loss of control
Cost of franchising
Restricted operating freedom
Increased ability for franchisor to expand
Recognized name, product, and operating concept
Management training and assistance
Financial assistance 5

32. Franchise Purchase Tips
Chapter 4
Forms of Business Ownership
Act fast, yet proceed with caution
Put the franchisor to the test
Know what you’re getting into
Don’t invest more than you can afford to lose
Don’t fall in love with a trend
Changing demographics drive franchise industry growth. Areas of technology and personal computing drive eBay drop-off stores and Geeks on Call. Other growth industries are the specialty coffee market, children’s enrichment and tutoring programs, senior care, weight control, and fitness franchises. Tips shown on this slide help determine the appropriate franchise purchase strategy.
Exhibit 4.11
Source: Franchise Purchase Tips excerpted from “All the Rage—Tech & eBay.”
Reprinted from -2.html with permission of Entrepreneur.com, Inc. 5

33. CONCEPT check
Chapter 4
Forms of Business Ownership
Describe franchising and the main parties to the transaction.
Summarize the major advantages and disadvantages of franchising.
Why has franchising proved so popular? 5

34. Mergers and Acquisitions
Chapter 4
Forms of Business Ownership 6
Why are mergers and acquisitions important to a company’s overall growth? 6

35. Mergers and Acquisitions
Chapter 4
Forms of Business Ownership
merger
The combination of two or more firms to form a new company, which often takes on a new corporate identity.
Worldwide merger activity in 2007 exceeded $4.5 trillion, an increase of 24 percent from Exhibit 4.12 lists the top 10 U.S. merger transactions for 2007.
Motives for mergers and acquisitions are similar, regardless of the company’s size. The goal is often strategic: to improve overall performance of the merged firms through cost savings, elimination of overlapping operations, improved purchasing power, increased market share, or reduced competition. 6

36. Mergers and Acquisitions
Chapter 4
Forms of Business Ownership
acquisition
The purchase of a corporation by another corporation or by an investor group; the identity of the acquired company may be lost. 6

37. Merger Motives 6 Financial restructuring: cutting costs
Chapter 4
Forms of Business Ownership
Improve overall performance of the merged firms through cost savings, elimination of overlapping operations, improve purchasing power, increase market share, or reduce competition.
Financial restructuring:
cutting costs
selling off units
laying off employees
refinancing company
Company growth
Broaden product lines
Acquire technology / skills
Acquire new markets 6

38. CONCEPT check 6 Differentiate between a merger and an acquisition.
Chapter 4
Forms of Business Ownership
Differentiate between a merger and an acquisition.
What are the most common motives for corporate mergers and acquisitions?
Describe the different types of corporate mergers. 6

39. Trends in Business Ownership
Chapter 4
Forms of Business Ownership 7
What current trends will affect the business organizations of the future? 7

40. CONCEPT check
Chapter 4
Forms of Business Ownership
What are some of the demographic trends currently impacting American business?
As a prospective business owner what could you do to capitalize on these trends?
What other economic trends are influencing today’s business organizations? 7