2. Chapter 5
Options for Organizing Business

4. Zingerman’s Deli- Innovation, quality, & growth
Thanks to the Internet, haggling has never been easier, especially in the area of online apparel sales.

5. Forms of Business Ownership
Sole proprietorship
Partnership
Corporation

6. Comparing the Forms of Business Ownership
Source: U.S. Bureau of the Census, Statistical Abstract of the U.S. 2003, (Washington, D.C.: U.S. Government Printing Office, 2004), p. 459.
5-6

7. Various Forms of Business Ownership

8. Forms of Business Ownership
Sole Proprietorship
Businesses owned and operated by one individual; the most common form of business organization in the United States

9. Forms of Business Ownership
Sole Proprietorship
Many restaurants
Hair salons
Flower shops
Dog kennels
Independent grocery stores

10. Forms of Business Ownership
Sole Proprietorship -- Facts
15-20 million in the U.S.
80% of all businesses
Men 2x more likely than women to start own business

11. Forms of Business Ownership
Advantages of a Sole Proprietorship
Ease and cost of formation
Secrecy
Distribution and use of profits
Flexibility and control of the business
Government regulation
Taxation

12. Forms of Business Ownership
Disadvantages of a Sole Proprietorship
Unlimited liability
Limited sources of funds
Limited skills
Lack of continuity
Lack of Qualified Employees
Taxation

13. Forms of Business Ownership
Partnership
A form of business organization defined by the Uniform Partnership Act as “an association of two or more persons who carry on as co-owners of a business for profit”

14. Forms of Business Ownership
Types of Partnerships
General partnership
Limited partnership

15. Forms of Business Ownership
General partnership
A partnership that involves a complete sharing in both the management and the liability of the business

16. Forms of Business Ownership
Limited partnership
A business organization that has at least one general partner, who assumes unlimited liability, and at least one limited partner whose liability is limited to his or her investment in the business.

17. Articles of Partnership
Legal documents that set forth the basic agreement between partners.

18. Articles of Partnership
Name, purpose, location
Duration of the agreement
Authority and responsibility of each partner
Character of partners (i.e., general or limited, active or silent)
Amount of contribution from each partner
Division of profits or losses
Salaries of each partner

19. Articles of Partnership
How much each partner is allowed to withdraw
Death of partner
Sale of partnership interest
Arbitration of disputes
Required and prohibited actions
Absence and disability
Restrictive covenants
Buying and selling agreements

20. Partnerships Advantages & Disadvantages
Ease of organization
Capital & credit
Knowledge & skills
Decision making
Regulatory controls
Disadvantages
Unlimited liability
Business responsibility
Life of the partnership
Distribution of profits
Limited sources of funds
Taxation of partnerships

21. Keys to Success in Business Partnerships
Keep profit sharing and ownership at 50-50
Partners should have different & complementary skill sets
Honest is critical
Maintain face-to-face communications
Transparency – sharing information
Awareness of funding constraints and limited resources
To be successful, you need experience
Family is priority; limit associated problems
Do not become too infatuated with “the idea” think implementation
Couple optimism with realism in sales and growth expectations

22. Forms of Business Ownership
Corporations
Legal entities created by the state whose assets and liabilities are separate from its owners..

23. Forms of Business Ownership
Corporations
Typically owned by many individuals and/or organizations who own shares of the business – stock (shareholders or stockholders)

24. Corporations
Stock & Dividends
Stock – shares of a corporation that may be bought or sold
Dividends – profits of a corporation that are distributed in the form of cash payments to stockholders.

25. Corporations
Creating a Corporation
A Corporation is created (incorporated) under the laws of the state in which it incorporates. The individuals creating the corporation are called incorporators.

26. Corporations
Articles of Incorporation
Legal documents filed with basic information about the business with the appropriate state office (often the secretary of state).

27. Articles of Incorporation
Common Elements
Name & address of corporation
Objectives of the corporation
Classes of stock (common, preferred, voting, nonvoting)
Number of shares of each class of stock
Financial capital required at time of incorporation
Provisions for transferring shares of stock
Regulation of internal corporate affairs
Address of business office
Names and addresses of the initial board of directors
Names and addresses of the incorporators

28. Corporations Private corporation Public corporation
Types of Corporations
Private corporation
Public corporation
Quasi-public corporation
Non-profit corporation

29. Corporations
Types of Corporations
Private corporation – a corporation owned by just one or a few people who are closely involved in managing the business

30. Corporations
Types of Corporations
Public Corporation– a corporation whose stock anyone may buy, sell, or trade.

31. Corporations Types of Corporations
Initial Public Offering (IPO) – A private corporation who wishes to go “public” to raise additional capital and expand. The IPO is selling a corporation’s stock on public markets for the first time.

32. Corporations
Types of Corporations
Quasi-public corporation – Corporation owned and operated by the federal, state, or local government --
(NASA, U.S. Postal Service).

33. The Largest U.S. Corporations Fortune’s 2007 rankings of America’s largest corporations
Company
Revenues ($millions) 1
Wal-Mart
$378,799 2
Exxon Mobil
$372,824 3
Chevron
$210,783 4
General Motors
$182,347 5
Conoco Phillips
$178,558 6
General Electric
$176,656 7
Ford Motor
$172,468 8
Citigroup
$159,229 9
Bank of America
$119,190 10
AT&T
$118,928

34. Corporations
Types of Corporations
Non-profit corporation – focuses on providing a service rather than earning a profit but are not owned by a government entity (American Red Cross)

35. Board of directors Preferred stock Common stock
Corporations
Elements of a Corporation
Board of directors
Preferred stock
Common stock

36. Corporations
Board of Directors
Board of Directors – a group of individuals elected by the stockholders to oversee the general operation of the corporation who set the corporation’s long-range objectives.

37. Corporations Board of Directors
Inside Directors – individuals who serve on the board and are employed by the corporation (usually executives of the corporation).
Outside Directors – individuals who serve on the board who are not directly affiliated with the corporation (usually Executives of other corporations).

38. Corporations Stock Ownership
Preferred stock – a special type of stock whose owners, though not generally having a say in running the company, have a claim to profits before other stockholders do.
Common Stock – stock whose owners have voting rights in the corporation, yet do not receive preferential treatment regarding dividends.

39. Corporations Advantages: Disadvantages: Limited liability
Transfer of ownership
Perpetual life
External sources of funds
Expansion potential
Disadvantages:
Double taxation
Forming a corporation
Disclosure of information
Employee-owner separation

40. Other Types of Business Ownership
Joint Ventures
S Corporations (S-Corp)
Limited Liability Companies (LLC’s)
Cooperatives (Co-op’s)

41. Other Types of Business Ownership
Joint
Venture
Joint Venture -- a partnership established for a specific project or for a limited time
(Audi & Volkswagen joint venture)

42. Other Types of Business Ownership
S-Corporation (S-Corp) – corporation taxed as though it were a partnership with restrictions on shareholders. Very popular with entrepreneurs.

43. Other Types of Business Ownership
Limited Liability Company (LLC)– form of ownership that provides limited liability and taxation like a partnership but places fewer restrictions on members. (Segway)

44. Other Types of Business Ownership
Cooperative (Co-Op)– an organization composed of individuals or small businesses that have banded together to reap the benefits of belonging to a larger organization.

45. Trends in Business Ownership
Mergers
Acquisitions

46. Other Types of Business Ownership
Merger – the combination of two companies (usually corporations) to form a new company
Acquisition – the purchase of one company by another, usually by buying its stock and/or assuming its debt.

47. Types of Business Ownership
Major Mergers and Acquisitions Worldwide Transaction in millions of U.S. dollars
Rank
Year
Acquirer
Target
Transaction Value 1
2000
AOL
Time Warner
$164,747 2
Glaxo Welcome
SmithKline Beecham PLc
$75,961 3
2004
Royal Dutch Petroleum
Shell Transport & Trading
$74,559 4
2006
AT&T
BellSouth Corp
$72,671 5
2001
Comcast
AT&T Broadband
$72,041

48. Other Types of Business Ownership
Leveraged buyout (LBO) – a purchase in which a group of investors borrows money from banks and other institutions to acquire a company (or a division of one) using the assets of the purchased company to guarantee repayment of the loan.