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

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

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

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.

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

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

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

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

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

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

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

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

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

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

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, http://money.cnn.com/magazines/fortune (April 2008) ©Time Inc. All rights reserved. 3

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

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

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

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

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

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

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

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

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, http://www.ncba.coop Copyright ©NCBA. All rights reserved. Reproduced by permission.

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

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

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

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

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 http://entrepreneur.com/franchises/rankings/franchise500-115608/2008.html with permission of Entrepreneur.com, Inc. Entrepreneur.com, Inc. All rights reserved.

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

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

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 http://entrepreneur.com/magazine/entrepreneur/2005/January/74990 -2.html with permission of Entrepreneur.com, Inc. 5

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

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

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 2006. 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

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

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

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

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

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