4. Section Focus: 1. What are the different types of business organizations ? 2. Describe the characteristics of sole proprietorships, partnerships, and corporations. 3. Analyze the advantages and disadvantages of business organizations. 4. What is the difference between stocks [owner] and bonds [lender] ? 5. What are the advantages and disadvantages of franchises ? 6. What makes McDonald’s the greatest franchise ever ? [not the greatest hamburgers, just the greatest franchise]

5. Total Business Sales Sole Proprietorships 5% $434 billion [Ave. $60,000] Partnerships 11% $500 billion [Ave. $250,000] Corporations [Ave. $3 M] 84% $8 trillion 45 made over $20 bil. 143 Made over $10 bil. Only 20 nations have GDPs greater than Wal-Marts $379 bil. 22 Million businesses Sole Proprietorships 72%-over 16 million Partnerships 8% - 1.5 million Corporations 20% - 4 million Business Organizations Let’s start a dance company.

6. THE BUSINESS POPULATION Business Shares of Domestic Output Corporations20% P artnerships 8% SoleProprietorships72% Partnerships 11% Corporations84% Percentage of Firms Percentage of Sales Farmer Sole Proprietorship 5%

7. Business Failures Over 500,000 small businesses are launched each year. One third of these start-ups fail within two years.

8. simplest to form Examples They are the simplest to form because of the small amount of capital needed to start up. Examples are beauticians, dentists, lawyers, dry-cleaning and lawn care and lemonade stands. Sole proprietorshipsoneindividual 72% 5% 1. Sole proprietorships – one individual in business for himself. They make up 72% of all businesses and take in 5% of total profits.

9. Distribution of Sole Proprietorships Based on Annual Sales and Industry

10. AEasy A. Easy to quit the business if the owner decides to do so. There are no co-owners to consult. Bentire B. Owners receive the entire profit. CEasy C. Easy to form– no complicated legal documents or complicated tax forms, small amount of capital needed. Personal satisfaction (psychological-being your own boss) prestige and a sense of accomplishment. DTotal D. Total control – can make decisions quickly, can hire and fire easily, can respond quickly to trends. 2. Advantages of a Sole Proprietorship

11. AUnlimited A. Unlimited liability (debt) - have to forfeit their personal possessions as well as their businesses. (auto, other business, house, savings) B.sole B. Burden of sole responsibility – must have business sense. C.Limited collateral C. Limited potential for growth – collateral (any thing of value to guarantee a loan [like giving up your personal possessions) [Let’s say you put home your home up for collateral but have to give it up] D.Difficult D. Difficult to attract qualified employees–can’t offer fringe benefits. [Let’s say you ask for more benefits] E.Short E. Short life span – depends on owner’s health dies and competence. If the owner dies, it is over. 3. Disadvantages of Sole proprietorships I want medical benefits!

12. 4 Partnership least common 8%11% 4 Partnership - business operated by 2 or more people. They are the least common with only 8% and take in only 11% of profits. 6 Limited 6 2. Limited – some non-active partners join as an investment (and thus have limited liability-just the “silent” investment, not the property). He is a “silent” partner. I gave $30,000 as a silent partner, so I don’t have to do anything. Two Forms of Partnerships 5 General unlimited liability 5 1. General – equal decision making & unlimited liability among partners. Let’s say your silent partner puts up $30,000 to insure the loan.

13. Specialization Specialization – specific duties assigned to different partners. A. Sharing A. Sharing of losses. Can borrow more and can sustain heavier losses. B. Easy B. Easy to form. Small amount of money to start & operate. C. Shared C. Shared decision making – more informed decisions. D. Personal satisfaction – sense of accomplishment. Advantages of Partnerships [“Two heads are better than one.”] Two Heads better than One Head Two Heads better than One Head 7

14. Distribution of Partnerships Based on Annual Sales & Industry

15. 8. Disadvantages of Partnerships A. Disagreements A. Disagreements among partners – conflicts delay decisions, lower employee morale, & lessen efficiency. Each partner is responsible for the acts of all other partners. Must choose good partners. B. share B. Have to share the profits. Unlimited C. Unlimited liability – can lose their business and personal possessions. Limited life D. Limited life – sickness, conflicts, or death can end the partnership. Take That!

16. Demonstration of “ Unlimited Liability ” NodoePoorRich Harold Nodoe, Gloria Poor and Jack Rich owned the Trio Dress Shoppe Trio Dress Shoppe as a partnership. Under the terms of Nodoe and Poor Their partnership agreement, Nodoe and Poor were 40% of the profits entitled each to 40% of the profits, while the remaining 20%Richfirm collapsed 20% went to Rich. Last month the firm collapsed. After owed selling off everything it owned, the company still owed its creditors $10,000Nodoe and Poorno its creditors $10,000. Since Nodoe and Poor had no assetscreditors recovered the total assets of their own, the creditors recovered the total amountJack Rich’s personal bank amount owed to them from Jack Rich’s personal bank account account. Harold Nodoe Gloria Poor Jack Rich

17. Largest Corporate Profits - 2007 1.Wal-Mart $379 B 2.Exxon Mobil359 3.Chevron204 4.Conoco187 5.General Motors173 6.GE173 7.Ford172 8.Citigroup 146 9. B ank of A merica 116 10. AIG110 11. HP104 12. J.P. Morgan100 13. Berkshire-Hath 99 14. Verizon 93 15. HP 92 16. IBM 99 17. Valero 91 18. Home Depot 90 19. McKesson 88 20. Citigroup 82 Largest Employers Wal-Mart1.35 M “associates” 1. Wal-Mart1.35 M “associates” [1.6 million ‘associates” worldwide] [1.6 million ‘associates” worldwide] 2. Sears Holding400,000 3. General Motors386,000 4. McD’s364,000 5. UPS359,000 6. IBM316,000 7. GE313,000 Wal-Mart Wal-Mart has 4,179 total stores in the U.S.; 1,868 Wal-Mart stores, 1,586 Wal-Mart Super Centers, & 725 Sam’s Clubs in the U.S. The GDPs for the Virgin Islands is $1.8 billion; for Djibouti, it is $582 million; and for Afghanistan, it is $21 billion.

18. Wal-Mart example 300,000 shares $16.50 per shareWal-Mart’s IPO was in 1972. 300,000 shares were sold at $16.50 per share. split 11 times 2 for 1 splitsThe stock has split 11 times (2 for 1 splits) since then – last split was in 1999. 100 shares spent $1,650If you purchased 100 shares of Wal-Mart on the day of the IPO you would have spent $1,650. 204,000 sharesof stockToday you would have 204,000 shares of stock. Today current value of your shares would be $11,044,560 $11,044,560 (stock closed at $54.14 yesterday). $136,680dividend of.67Annual income for dividends$546,720Each quarter you would be receiving a check for $136,680 (at current dividend of.67). Annual income for dividends alone would be $546,720!

19. 9 Corporations 9 Corporations – a business organization recognized as a separate legal entity (existence). 10 Stockholders 10 Stockholders – are the owners of a corporation who invest by buying shares. Stockcertificate of ownership Stock – the certificate of ownership. 9 20% 9 Corporations make up about 20% of business organizations 90% but produce over 90% of total sales. Corporations can operate like a sole proprietor. Inc. means the business is a corporation. [Treated by the courts as an “artificial person”. “artificial person”. They can sue, be sued, enter into contracts, and pay taxes. Two Types of Corporations 11Publicly 11 Publicly owned – anyone can invest by buying shares, unlimited so unlimited # of owners. Includes most corporations. 12Closedlimited 12 Closed – is owned by a limited number of stockholders. Ford Motor Company was family owned (closed) until 1956. They went public in 1956 & issued 10,200,000 shares of stock. 13 13 Wal-Mart leads all other corporations in sales at $371 billion.

20. Corporate Trivia Corporate Trivia can be sued stockholderscan not be suedA corporation can be sued but the people who own the corporation (stockholders) can not be sued. potentially perpetual lifeA corporation has potentially perpetual life. Nearly all large companies are corporations1.) Nearly all large companies are corporations. Nearly all corporations are small companies2.) Nearly all corporations are small companies. a small minority of corporations constitute nearly all the large companies3.) Therefore, a small minority of corporations constitute nearly all the large companies. 4 million corporations2,000 are large companies2,000 large corporations constitute the vast majority of the nation’s large companiesIn other words, of 4 million corporations, about 2,000 are large companies, and these 2,000 large corporations constitute the vast majority of the nation’s large companies. 15% of corporations that do more than $1 million in sales take in in 85% of the receipts of corporationsAlso, the 15% of corporations that do more than $1 million in sales take in in 85% of the receipts of corporations.

21. Where The Jobs Are And Were 20071980 2007 1980 1.Wal-Mart 1,350,000GM853,000 2.McDonald’s 418,000Ford495,000 3.Sears Holding 400,000GE405,000 4.UPS 355,000 I T&T368,000 4. UPS 355,000 I T&T368,000 5. Ford 327,500 [International Telephone & Telegraph] 6. GM 325,000IBM337,000 Then there are new jobs in new technologies that Cisco34,000Microsoft didn’t exist in 1980. Cisco has 34,000; Microsoft 55,000Oracle40,000Dell46,000 has 55,000; Oracle has 40,000; & Dell has 46,000 Surviving as a business is no small feat. no longer exist 1/3 of the firms in the Fortune 500 list in 1970 no longer exist.

23. If a company had only 200 shares and you bought a share, you would own 1/200 th of the company.

24. 14Stockholders ownersenders 14 Stockholders (owners) and bondholders (lenders) For companies, stocks and bonds are 2 ways to raise money. F or consumers, they are a way to earn money. 15Common stockvoters 15 Common stock – (owners are voters) gives a voice in how the corporation is run and a share in variable dividends – high dividends if profits are high. The Board of Directors may wish to withhold all dividends if the money is needed for plant expansion or payment on debts. Because they can vote, they determine how a corporation is managed. They get one vote for every share they own. higher In a good year, they will receive a higher dividend than preferred stockholders. (Preferred stock dividends are fixed, common stock is not, so they are taking more risk. Preferred Stocknon-voters Preferred Stock – (non-voters) guaranteed dividends that are paid from profits before the company pays any dividends on common stock. If the company is unable to pay this fixed dividend in full, it makes up the difference when the company’s profits like a silent partner increase. They are like a silent partner because they can not vote and have no say in how the business is run.

25. 16Corporate Bonds 16 Corporate Bonds – a certificate issued by a corporation in exchange for money borrowed from investors. There is a written promise to repay the amount borrowed at a later I.O.U. date (an I.O.U.) lending money for 10, 20, or 30 years. Bondholderscreditors Bondholders are creditors, not owners. 17Advantages of Corporations from a Stockholders Viewpoint 17 Advantages of Corporations from a Stockholders Viewpoint A Limited A 1. Limited liability – limited to the amount invested. His personal assets may not be seized to pay corporate debts. B without B 2. May earn a profit without working. 18Advantages From the Corporation’s Viewpoint 18 Advantages From the Corporation’s Viewpoint ASeparation of ownership from management A 1. Separation of ownership from management – can hire the best management available. Specialized talent can be hired in all areas. BEasy to raise capital B 2. Easy to raise capital – can issue stocks or sell bonds allowing the corporation to tap the savings of thousands. C Longevityindependent C 3. Longevity – they have a life independent of their owners.

26. Disadvantages of a Corporation Disadvantages from the stockholders point of view Disadvantages from the stockholders point of view. 1.When stockholders earn a profit, they feel no great sense of pride. BMany government restrictions B 2. Many government restrictions – must follow regulations of the SEC, comply with laws on merging and maintain many records. CHeavy organizing expenses C 3. Heavy organizing expenses – pay for its charter and then depending on the state, expenses can run from a few hundred to thousands of dollars. DDouble taxation D 4. Double taxation – when a company distributes profits (dividends) to its stockholders, they have to pay personal income tax on dividends in excess of $100. Corporations earnings are subject to taxation. 15 % The income tax on corporations is 15 % on the first $50,000; 25%34 % 25% from $50,001- $75,000; 34 % from $75,001-$100,000; 39%35% 39% from $100,001-$335,000; 35% from 335,001-$10 mil. 38%35% 38% from 10M-18.3million; & a flat 35% over$18.3 million. 19Disadvantages from the corporation’s point of view 19 Disadvantages from the corporation’s point of view. Slow in decision making – must go thru chain of command A 1. Slow in decision making – must go thru chain of command.

27. Bull and Bear Markets kangaroo market. Then there is the kangaroo market.

28. Sam Walton On this day, Sam Walton, the richest man in the world, paperloss of $1.5 billion had a paper loss of $1.5 billion. 508 points 24 % drop in one day 10-19-87

29. DateDecline% Decline 10/19/87508 points 24% 10/28/29 38 points 13% 10/29/29 31 points 12% 11/26/29 26 points 10% 12/18/1899 6 points 8% 8/12/32 6 points 8% 3/14/07 7 points 8% 10/26/87156 points 8% 7/21/33 8 points 8% 10/18/37 11 points 8% 2/01/17 7 points 7% 10/27/97554 points 7% [$700 billion lost in one day] 4/14/2000661 points 6% $7.7 trillion was lost 3/2000-2/2003 $7.7 trillion was lost $17 trillion [Market value was worth $17 trillion]

30. Advantages/Disadvantages of Sole Proprietorships Ease of Formation Single Taxation Unlimited Liability Lack of Continuity AdvantagesDisadvantages Unlimited Liability Freedom Low Start - up Costs Difficulty Raising Money Reliance On One Person Ownership Transfer Difficult Possibility of Conflict Larger Talent Pool Larger Money Pool Advantages/Disadvantages of General Partnership AdvantagesDisadvantages

31. Advantages/Disadvantages of Corporations Stockholder Revolts High Start-up cost High Cost of Regulation Double Taxation AdvantagesDisadvantages Easier Access to Money Greater likelihood of professional Management Continuity Limited Liability

32. A Horizontal “competitors” A Horizontal Combinations – (a grouping of “competitors”) a merger between corporations that make the same product. banksrailroads This would be a merger of two or more banks, or railroads, airline companies or airline companies, etc. Firms may merge to catch up with or eliminate their rivals. Chevron-Texaco bought Unical Oil. Royal Caribbean CruisesCelebrity Cruise Line Royal Caribbean Cruises acquired Celebrity Cruise Line and Carnival doubled in size, & became the 2 nd largest cruise line behind Carnival. StaplesOffice Depot Staples tried to acquire Office Depot but the government reduce competition blocked it on the grounds that it would reduce competition. Morgan-Chase-Bank One 58 B Cingular-AT&T Wireless 41 B Compaq-HP 23 B GTE-Bell Atlantic71 B Chevron-Texaco 43 B Daimler-Chrysler-Benz41 B Sprint-Nextel 35 B Bank of Am.-FleetBoston Finan. 47 B Chrysler American Motors Chrysler 3 Types of Corporate Combinations 20 merger 3 Types of Corporate Combinations 20 1. What are the three ways corporate merger combinations can take place? (A merger is when one company absorbs another) 2. What is the current trend in corporate combinations?

34. Standard Oil Trust: John D. Rockefeller had become rich during the Civil War supplying grain and meat, but he realized the potential the discovery of oil would bring about. In 1863, he built a refinery in Ohio which brought in quick profits 1870Standard Oil Company of Ohio In 1870, he and some associates formed the Standard Oil Company of Ohio. Because Rockefeller had no need for storage and insurance fees, he negotiated with the railroad for refunds which allowed him to reduce the cost of oil, underselling his competitors horizontal consolidation When Rockefeller had enough capital, he intended to “buy out” his competitors refineries (horizontal consolidation), but most state laws prevented one company from buying stock in another Rockefeller’s lawyer, Samuel Dodd, found a loophole In 1882, the owners of Standard Oil and the “allied” companies would combine their operations. Companies would turn over their assets to 9 trustees and in turn would get a share of the profits This new type of monopoly trust would be called a trust comprising 40 companies

35. B Vertical Combinations “suppliers” B Vertical Combinations – merger of companies that are involved in different phases of production of the same product. [Purchasing one of your “suppliers”] Examples 1. Automakertire factory 1. Automaker buys a tire factory 2. Bridgestone Tirerubber plantation 2. Bridgestone Tire buying a rubber plantation 3. Campbell Soupmushroom farms 3. Campbell Soup buying mushroom farms 4. Funeral Homecemeteryfloral shop 4. Funeral Home bought a cemetery and a floral shop 5. Fordsteel mill 5. Ford bought a steel mill to produce steel needed for autos USX (Steel) Steel Mills Transportation [shipping & RR co’s] Resources [ore, coal, & iron] ShellOil Co Shell Oil Co. owns 1.Oil fields 2.Refineries, and 3.Retail gasoline stations

37. Carnegie Steel: At the age of 30, Andrew Carnegie wisely decided to invest his wealth into steel shortly after the Bessemer Steel process came to light. In the 1870’s, he set up the first American steel mills in Pittsburg, PA. 1889Carnegie Steel Company By 1889, the Carnegie Steel Company was established. had enough money to buy the companies that performed each phase of production (mines, pig iron furnaces, shipping companies, rail lines…)vertical consolidation He soon had enough money to buy the companies that performed each phase of production (mines, pig iron furnaces, shipping companies, rail lines…) This is known as vertical consolidation This allowed Carnegie Steel to keep low production costs and therefore low prices for consumers. economies of scale This was because of the phenomenon known as economies of scale As production increases, costs are lowered Small companies could not compete because they did not own all phases of production.

38. CConglomerate four or more companies subsidiaries not been required to abandon their corporate identity. C Conglomerate (Unrelated) Combination – merger between four or more companies producing unrelated products. None is responsible for the majority of sales. These mergers may include a number of subsidiaries – acquired companies that have not been required to abandon their corporate identity. Tobacco Products Distilled Spirits American Brands, Inc.

39. $3 trillion in mergers About $3 trillion in mergers worldwide each year worldwide & about $1.6 trillionU.S. $1.6 trillion in the U.S. Diversification Diversification is a good reason for conglomerate mergers. You are not “putting all of your eggs in one basket.” in one basket.” Your over- all sales and profits will be protected. R.J. R eynolds- R.J. R eynolds- one of biggest 1. Sea-land 1. Sea-land (containerized shipping) 2. KFC 2. KFC (2 nd largest fast-food chain) 3. Del Monte 3. Del Monte (fruit processor) 4. Heublein 4. Heublein (distilled spirits) Pfizer Pfizer makes Viagra & Lipitor. 1. Chewing gum 1. Chewing gum (Trident,Dentyne) 2. Razors 2. Razors (Schick) 3. Cough drops 3. Cough drops (Halls) Breath mints 4. Breath mints (Clorets, Certs) Antacids 5. Antacids (Rolaids)

40. “ trends in mergers ” vertical and horizontal combinations failures mismatched corporations conglomerate mergers The “ trends in mergers ” in the 90s was toward vertical and horizontal combinations. The biggest cause of merger failures was mismatched corporations, therefore, conglomerate mergers were the ones most likely to fail. Advantages of Corporate Mergers 1.Efficiency 1.Efficiency – eliminates overlapping jobs, can share resources lower consumer and marketing skills. Mergers may lead to lower consumer pricescompete prices making them better able to compete in world markets. Less expensive 2. Less expensive, compared to having to build new plants and hire new employees. acquired corporations 3. Stockholders in the acquired corporations normally benefit 30% by having stock go up in value by about 30%. 4. Increased size means they can borrow more money.

41. 1. Managers of merged corporationsnot have 1. Managers of merged corporations may not have necessary supervisoryskills the necessary supervisory skills. Added unemployment 2. Added unemployment when some positions are eliminated. 12,500 were laid off in Fleet Boston- Bank of America merger saving $650M. Cingular bought AT&TWireless10,000 When Cingular bought AT&T Wireless, 10,000 were laid off. Purchasing corporation’s stock normally declines 3. Purchasing corporation’s stock normally declines. Higher prices and fewer choices 4. Higher prices and fewer choices for consumers. corporation normallydebt 5. Acquiring corporation normally goes into debt.

42. What Town is This?

43. 22Franchise 22 Franchise gives an individual an agreement to market a royalty company’s product in return for a percentage (royalty) of the profits. Semi-independent business. franchiserfranchisee The company is the franchiser and the individual is the franchisee. Singer Company The 1 st franchise operation was started by Singer Company in 1851 to sell sewing machines. In the last 40 years, franchising has really Ray KrocMcDonald’s taken off, led by Ray Kroc of McDonald’s. Today we have franchising for everything from hemorrhoid clinics [“You bend, we mend”] [“You bend, we mend”] to auto clinics. A typical large city in the U.S. will have its share of Burger Kings, Foto-Mat, KFCs, Goodyear, Taco Bell, Pizza Hut, Dunkin Donuts, and others. 3,000franchises670 industries600,000 outlets There are 3,000 franchises in 670 industries, with 600,000 outlets. train your personnelmarketing The franchiser will train your personnel, take care of marketing accountingfranchiseetried-and-tested business and accounting. The franchisee receives a tried-and-tested business method method.

44. 23 Advantages of Franchises Atrade name A 1. Benefits of a well known trade name, systemized managementnational management, and national advertisement. B5% B 2. Less than 5% fail each year (65% of all independently owned businesses fail within the first 5 years). Cown yourbusinessrisk C 3. Chance to own your own business with minimum risk. 24Disadvantages of Franchises 24 Disadvantages of Franchises Atoo many A 1. May be too many restrictions imposed so independence is sacrificed. Blot B 2. Takes a lot of money for start-up 3. May lose your investment if the company goes bankrupt. Some franchises such as pizza, video rentals, frozen yogurt, instant printing, & tanning parlors will not make it too competitivetoo unhealthy because they are either too competitive or too unhealthy. Tanning beds Tanning beds are very dangerous. There are two major types of ultraviolet radiation-UV-A [think of A=Aging]. They have a longer wavelength & penetrate more deeply into the dermis and damage collagen & elastin giving you the dry, leathery, wrinkly look. UV-B [think of B = Burning] are a shorter wavelength & cause sunburn. Both cause melanoma, damage the DNA of the skin surface and cause skin cancer.

45. 25Cooperatives 25 Cooperatives – voluntary association of people formed to carry on some kind of economic activity benefiting members. Different Types of Cooperatives: Producer Coop 1. Producer Coop – group of farmers who join to get better prices for their goods. They eliminate the middle-man charges. Housing Coop 2. Housing Coop – formed by members to buy the building they live in. Purchasing Coop 3. Purchasing Coop – retail store owned and operated by its customers. Credit Union 4. Credit Union – members pool their savings so they can most common form of coop borrow from it at lower rates (the most common form of coop) Service Coop 5. Service Coop – provides service to its members (electrical or telephone) Baby-Sitting Coop 6. Baby-Sitting Coop – families swap baby-sitting duties without ever exchanging money. 26Nonprofit Organizations 26 Nonprofit Organizations – provides products without making a profit. Churches are the most common. (Boy Scouts, Y.M.C.A., Salvation Army, & Goodwill)