1. Forms of Business Ownership Chapter 5

2. Chapter 5 Learning Goals 1.W 1.What are the three main forms of business organization, and what factors should a company’s owners consider when selecting a form? 2.W 2.What are the advantages and disadvantages of sole proprietorships? 3.W 3.Why would a new business venture choose to operate as a partnership, and what downside would the partners face?

3. Chapter 5 Learning Goals (cont’d.) 4.H 4.How does the corporate structure provide advantages and disadvantages to a company and what are the major types of corporations? 5.D 5.Does a company have any business organization options besides sole proprietorship, partnership, and corporation? 6.W 6.Why is franchising growing in importance? 7.W 7.Why would a company use mergers and acquisitions to grow? 8.W 8.What trends will affect business organization in the future?

4. Learning Goal 1 WWhat are the three main forms of business organization, and what factors should a company’s owners consider when selecting a form? Sole proprietor Partnership Corporation Sole proprietor Partnership Corporation –Choose a form of organization by evaluating: Owner’s liability for firm’s debts The ease and cost of forming the business The ability to raise funds The taxes The degree of operating control the operator can retain The ability to attract employees

5. Comparisons of Forms of Business Organization Sole proprietorships Partnerships Corporations

6. Learning Goal 2 AdvantagesAdvantages –Ease and low cost of formation –Owner’s rights to all profits –Owner’s control of the business –Relative freedom from government regulation –Absence of special taxes –Ease of dissolution DisadvantagesDisadvantages –Unlimited liability of the owner for debts –Difficulty in raising capital –Limited managerial expertise –Large personal time commitment –Unstable business life –Difficulty in attracting qualified employees –Owner’s personal absorption of all losses W What are the advantages and disadvantages of sole proprietorships?

7. 1. Sole proprietorships Advantages easy and inexpensive to form & dissolve profits all go to owner direct control of business freedom from government regulations no special taxation Disadvantages hard to raise capital unlimited liability & potential loss limited expertise in all areas trouble finding employees large personal time commitment unstable business life

8. Learning Goal 3 General PartnershipsGeneral Partnerships –Partners co-own assets and share profits –Each partner is individually liable for all debts and contracts of the partnership Limited PartnershipsLimited Partnerships –Controlled by one or more general partners who have unlimited liability –Partners’ liability is is limited to their investment –Do not participate in the firm’s operations W Why would a new business venture choose to operate as a partnership, and what downside would the partners face?

9. Learning Goal 3 (cont’d.) Advantages of PartnershipsAdvantages of Partnerships –Ease of formation –Availability of capital –Diversity of managerial expertise –Flexibility to respond to changing business conditions –Relative freedom from government control Disadvantages of PartnershipsDisadvantages of Partnerships –Unlimited liability for general partners –Potential for conflict between partners –Limited life –Sharing of profits –Difficulty in leaving a partnership W Why would a new business venture choose to operate as a partnership, and what downside would the partners face?

10. 2. Partnerships Advantages easy and inexpensive to form diverse skills and expertise flexibility relative freedom from government regulations no special taxation Disadvantages potential conflicts between partners unlimited liability & potential loss sharing profits hard to leave or end partnership

11. Topics to Cover in a Partnership Agreement Purpose & duration of partnership Roles, responsibilities, compensation Contributions Procedures for adding/removing partners Buy-out procedures Dispute resolution Financial arrangements Dissolving the partnership Valuation Source: American Express Small Business Exchange, home3.americanexpress.com/smallbusiness

12. Learning Goal 4 Advantages of CorporationsAdvantages of Corporations –Limited liability –Ease of transferring ownership –Stable business life –Ability to attract financing Disadvantages of CorporationsDisadvantages of Corporations –Double taxation of profits –Cost of complexity of formation –Government restrictions H How does the corporate structure provide advantages and disadvantages to a company, and what are the major types of corporations?

13. Learning Goal 4 (cont’d.) HHow does the corporate structure provide advantages and disadvantages to a company, and what are the major types of corporations? –Stockholders Own the corporation Can sell or transfer shares at any time Entitled to receive profits in the form of dividends –Board of Directors Elected by stockholders Govern the firm –Officers Carry out the goals and policies set by the board –C Corporations, S Corporations & Limited Liability Companies Major types of corporations

14. Corporation : A legal entity with an existence and life separate from its owners, who therefore are not personally liable for its debts; it can own property, enter into contracts, sue and be sued, and operate under terms of its state charter.

15. 3. Corporations Advantages limited liability easy to get financing easy to transfer ownership unlimited life-span tax deductions Disadvantages double taxation of profits costly & complex to form government restrictions

16. Steps of Forming a Corporation 1. 1. Select company’s name 2. 2. Write and file Articles of Incorporation paperwork 3. 3. Pay fees and taxes 4. 4. Hold organizational meeting 5. 5. Adopt bylaws, elect directors, pass operating resolutions

17. Organizational Structure of Corporations Stockholders Directors Officers (Top Management) President Vice Treasurer Secretary President elect

18. Types of Hybrid Corporations 1.S corporations 1. S corporations organized like a corporation, but avoids double taxation of profits by routing income and losses through stockholders 2.Limited liability companies (LLC) 2. Limited liability companies (LLC) offers same limited liability as a corporation, but may be taxed as either a partnership or corporation

19. Some Pros and Cons of LLC’s Pros Protection of personal assets Avoid double- taxation of profits Flexible management & organization Good for foreign investorsCons Often required to have a limited life (< 30 years) Not corporations, so can not issue stock Source: The Company Corporation, www.incorporate.com

20. Learning Goal 5 DDoes a company have any business organization options besides sole proprietorship, partnership, and corporation? –Limited Liability Company Provides limited liability for its owners Taxes like a partnership –Cooperatives Collectively owned by individuals or businesses with similar interests Combine to achieve more economic power –Joint venture An alliance of two or more companies Formed to undertake a special project –Franchises Business arrangement between a franchisor and franchisee Franchisee uses business name and logo of franchisor

21. Specialized Forms of Business Organization 1. 1. Cooperatives 2. 2. Joint ventures 3. 3. Franchises

22. 1. Cooperatives Formed by people with similar interests, such as customers and suppliers  lower costs  increased economic power  share in profits Members/owners pay annual fees Common in: –agriculture –hardware/lumber –grocery

23. 2. 2. Joint Ventures Joint Venture: 2 or more companies form an alliance to pursue a specific project, usually for a specific time period

24. Learning Goal 6 WWhy is franchising growing in importance? –Business owner does not have to start from scratch –Buys a business concept with a proven product and operating methods –Franchisor provides: Management training and assistance Use of a recognized brand name, product, and operating concept Financial assistance

25. 3. 3. Franchising Franchising: business organization in which a franchisor supplies the product concept to the franchisee, who sells the goods or services

26. Top 10 Franchises for 2000 Ranking based on factors such as financial strength & stability, growth rate & size 1. 1. McDonald’s 2. 2. Subway 3. 3. Jackson Hewitt Tax Service 4. 4. 7-Eleven Convenience Stores 5. 5. Jiffy Lube Int’l Inc. 6. 6. Snap-on Tools 7. 7. Mail Boxes Etc. 8. 8. Radio Shack 9. 9. Sonic Drive-In Restaurants 10. 10. GNC Franchising Inc. Source: Entrepreneur, Jan., 2000, p. 195.

27. Franchises Advantages increased opportunity to expand (franchisor) recognized name, product, and operating concept (franchisee) management training and assistance (franchisee) financial assistance (franchisee) Disadvantages loss of control (franchisor) costs of franchising restricted operating freedom (franchisee)

28. Learning Goal 7 WWhy would a company use mergers and acquisitions to grow? –Companies use mergers and acquisitions for strategic reasons such as Growth or diversification of product lines Increased market share Economies of scale Financial restructuring to increase company value to stockholders

29. Growth Through Mergers & Acquisitions Merger: The combination of 2 or more firms to form a new company, which often takes a new corporate identityAcquisition: The purchase of a corporation by another corporation or investment group

30. Benefits of Mergers Reduced:  costs  overlap in operations  competitionIncreased:  purchasing power  market share

31. Types of Mergers Horizontal mergers 1. Horizontal mergers –same industry, same stage of production Vertical mergers 2. Vertical mergers –same industry, different stages of production Conglomerate mergers 3. Conglomerate mergers –different industries Leveraged buyouts 4. Leveraged buyouts –corporate takeovers with borrowed money

32. Seagram’s Transformation $10 billionSince 1993, Seagram has changed from a beverage company with a large stake in DuPont with $10 billion in total assets... $35 billionTo an entertainment conglomerate in 1998 with $35 billion in total assets, including PolyGram and a large stake in MCA Source: Fortune, Mar. 1, 1999, pp. 112-124.

33. Learning Goal 8 WWhat trends will affect business organization in the future? –Service sector is growing to meet demand for convenience from working women and two-income families Providing service for children and senior citizens Resale shops and other specialty markets –Established franchisors are remaining competitive by Offering multiple concepts New types of outlets and expanded products

34. Trends Affecting Business Organization Increases in:  Niche markets  Variety in franchises  Expect more franchised goods & services that ease consumers’ busy lives (Source: Entrepreneur, Jan. 2000, p. 157)  Consolidation through mergers & acquisitions  Mergers across national borders