* * *

5-1 1-1 McGraw-Hill/Irwin

Understanding Business, 8e © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.

Nickels McHugh McHugh

* * Choosing a

Form of Business Ownership 5

CH

APTE

R *

* *

* * *

Survey • If I were to be involved in a business

someday, I would prefer to start:

1. A business owned and managed by me only. 2. Be a partner in a business with my best buddy. 3. Invest in a publically traded company.

• Can you think of 1 advantage and 1 disadvantage for choosing each option?

5-2

* * *

Form of Ownership • Sole Proprietorship: Business owned

and operated by one person.

• Partnership: Business owned and/or run by two or more owners.

• Corporation: Business “Owned” by multiple people with liabilities separate from owners.

5-3

* * *

5-4

Basic Forms of Business Ownership

Source: US Internal Revenue Service

Type of Ownership % of Total Businesses

Percent of Revenues

Sole Proprietorship 72% 6%

Partnership 8% 13%

Corporation 20% 81%

Why do more people choose Sole Proprietorship?

* * *

5-5

Sole Proprietorship

• Ease of start/end

• Be your own boss

• Pride of ownership

• Leave a legacy

• Retain profit

• No special taxes

• Unlimited liability • Limited financial

resources • Management difficulty • Time commitment • Few fringe benefits • Limited growth • Limited life span

Advantages Disadvantages

* * *

5-6

Types of Partnerships

General

GP

GP

GP

GP

Limited

GP

Passive Investor

Passive Investor

Passive Investor

Each partner has equal decision-making

Which would you prefer? Why?

* * *

5-7

Partnership

• More financial resources • Shared management • Longer survival • No Special Taxes

• Unlimited liability • Division of profits • Disagreements among partners • Difficult to terminate

Advantages Disadvantages

* * *

5-8

Type of Corporations • Private: Not Traded on Any Stock

Exchange.

• Public: Shares are Traded on One or More Stock Exchanges.

• Non-Profit: Performs Public Service, Has Special Tax Considerations.

* * *

5-9

Corporation

• Limited liability • More money for investment • Size • Perpetual life • Ease of ownership change • Ease of drawing talented employees • Separation of ownership/mgmt.

• Extensive paperwork • Double taxation • Two tax returns • Size • Termination is difficult • Conflict with Stockholder & Board • Initial cost

Advantages Disadvantages

* * *

Which of the following is a disadvantage of a Sole Proprietorship?

A) Keeping all profits B) Time commitment C) Ease of starting D) Unlimited liability

5-10

* * *

Which of the following is/are an advantage of a Sole Proprietorship? (Choose all that apply)

A) Keeping all profits B) Pride of ownership C) Time commitment D) Limited resources E) Ease of starting

5-11

* * *

Which of the following is a disadvantage of a Partnership?

A) Shared management B) Longer survival C) Financial resources D) Disagreement between partners

5-12

* * *

Which of the following is/are an advantage of a partnership? (Choose all that apply)

A) Financial resources B) Partner disagreement C) Shared management D) Unlimited liability E) Division of profit

5-13

* * *

Which of the following would be considered a disadvantage of corporations

A) Limited liability B) Ownership change C) Double taxation D) Perpetual life

5-14

* * *

Which of the following would be considered advantages of a corporation.

A) Perpetual life B) Double taxation C) Getting talented employees D) Initial cost E) Limited liability

5-15

* * *

Which of the following is most likely to be a partnership?

A) A company manufacturing on-board computer part for Honda

B) A store selling flowers C) Doctors medical office D) A hot dog cart

5-16

* * *

5-17

Details Sole Proprietorship General Partnership C Corporation

Business Formation

City tax license may be required. No state filing required.

No State filing required. An Agreement between two or more parties. Partnership agreement should be created.

Required to file formation documents with the State filing agency. Most states require annual meetings and bylaws.

Number of owners Only one sole proprietor Minimum two general partners

Most states allow one person corporations; some require two to serve as officers.

Raising Capital Owner typically contributes all funds.

Partners contribute capital. More capital can be raised by adding new partners.

Sell stock to raise capital.

Length of existence Terminated if business ceases or upon owner’s death

Dissolves upon partner’s death or withdrawal, unless stated in the partnership agreement.

Perpetual as a separate legal entity

Management Sole Proprietor has full control of management and operations.

Typically each partner has an equal voice, unless otherwise arranged.

Managed by directors, who are elected by the shareholders.

Liability Unlimited liability.

Unlimited liability. A partner can be held liable for the acts of the other partners, increasing personal liability

Shareholders are typically not personally liable for the debts of the Corporation

Taxation Taxed once. Owner is responsible for any taxes due.

Taxed once. Partners are responsible for any taxes due.

Double; both the corporation and shareholders are taxed.

* * *

World’s Largest Corporations

5-18

Rank Company name

Primary Industry

2009 Revenue

(USD Billion)

Market capitalization (USD million)

Employees Headquartes

1 Wal-Mart Retailing $413.8 $210,973 2,100,000 United States

2 Exxon Mobil Oil and gas $310.5 $452,505 90,800 United States

3 Royal Dutch Shell Oil and gas $278.1 $220,110 112,000 Netherlands and

United Kingdom

4 BP plc Oil and gas $246.1 $191,844 97,600 United Kingdom

5 Saudi Aramco Oil and gas $216.0 $781,000 51,356 Saudi Arabia

6 Toyota Motor Automotive $205.0 $172,166 316,121 Japan

7 Samsung Conglomerate $178.3 $110,100 277,000 South Korea

8 Chevron Corp. Oil and gas $171.6 $177,265 61,533 United States

9 Sinopec Oil and gas $165.4 $135,317 400,513 China

10 ING Group Financial services $164.39 $84,358 115,000 Netherlands

* * *

5-19

How Owners Affect Management

* * *

5-20

Superintendent

Principals

Teachers and Staff

Community Members

LUHSD School Board

Liberty Union High School

* * *

5-21

Franchise System

• Franchise Agreement

• Franchisor • Franchisee

* * *

5-22

Franchise Contract Franchisor, Inc.

Franchisee

Branded Product/Service

Performance

Monitoring

$$$$$

* * *

5-23

Franchisor

• Assigns Territory • May Provide

Financial Aid/Advice • Offers Merchandise/

Supplies at Competitive Price

• Provides Training/Support

• Business

Expansion

* * *

5-24

Franchisee

• Pays Up-Front Costs

• Makes Monthly Payment to Franchisor

• Runs Business by Franchisor’s Rules/Procedures

• Buys Materials from Franchisor/ Approved Supplier

* * *

5-25

Franchises

• Management & marketing assistance

• Personal ownership • Recognized name • Financial advice &

assistance • Lower failure rate

• High start-up costs • Shared Profit • Management regulation • Coattail effects • Restrictions on selling • Fraudulent franchisors

Advantages Disadvantages

* * *

5-26

Cost of Fast-Food Franchise Company Initial Fee Royalty Locations

KFC $45,000 5% 18,000 +

McDonald’s $45,000 8% 34,000 +

Taco Bell $45,000 5.5% 5,000 +

Pizza Hut $25,000 6% 14,000 +

Subway $15,000 8% 39,000 +

Dunkin Donut $40,000 + 6% 10,000 +