Forms of Business Ownership CHAPTER 4 The Future of Business The Essentials 4 th Edition Gitman &...

Forms ofBusiness

Ownership

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The Future of BusinessThe Essentials 4th EditionGitman & McDaniel

Prepared byDeborah Baker

Chapter 4Copyright ©2009 by South-Western, a division of Cengage Learning. All rights reserved

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Learning Goals

CH

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R 41 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?

3

Learning Goals (continued)

CH

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R 44 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?

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Sole proprietorships

Partnerships

Corporations

Business Ownership

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Sole Proprietorships

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What are the advantages and disadvantages of the sole proprietorship form of business organization?

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sole proprietorship

A business that is established, owned, operated, and often financed by one person.

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AdvantagesAdvantages

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

DisadvantagesDisadvantages

Unlimited liability Difficulty raising capital Limited managerial

expertise Trouble finding

qualified employees Personal time commitment Unstable business life Losses are owner’s

responsibility


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8

CONCEPT check

1

What is a sole proprietorship?

Why is this a popular form of business organization?

What are the drawbacks to being a sole proprietor?

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Partnerships

2

What are the advantages of operating as a partnership, and what downside risks should partners consider?

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10

partnership

An association of two or more individuals who agree to operate a business together for profit.

Partnerships

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Partnerships

AdvantagesAdvantagesAdvantagesAdvantages

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

DisadvantagesDisadvantagesDisadvantagesDisadvantages

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CONCEPT check

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?

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Corporations

3

How does the corporate structure provide advantages and disadvantages to a company, and what are the major types of corporations?

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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.

Corporations

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The 10 Largest U.S. Corporations

1. Wal-Mart Stores

2. ExxonMobil

3. Chevron Texaco

4. General Motors

5. ConocoPhillips

6. General Electric

7. Ford Motor

8. Citigroup

9. Bank of America Corp.

10. AT&T

Ranked by 2007 Sales

Source: “The 2008 Fortune 500,” Fortune, http://money.cnn.com/magazines/fortune

(April 2008)©Time Inc. All rights reserved.

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Articles of Incorporation

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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

Exhibit 4.4

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Corporations


Limited liability Ease of transferring

ownership Unlimited life Tax deductions Ability to attract

financing

Double taxation of profits

Cost and complexityof formation

More government restrictions


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Types of Corporations

C CorporationC Corporation A conventional or basic corporate form of organization

A conventional or basic corporate form of organization

S CorporationS Corporation A hybrid entity that is organized like a corporation, but taxed like a partnership

A hybrid entity that is organized like a corporation, but taxed like a partnership

Limited LiabilityCompany (LLC)

Limited LiabilityCompany (LLC)

A hybrid organization that offers the same liability protection as a corporation but may be taxed as either a partnership or a corporation

A hybrid organization that offers the same liability protection as a corporation but may be taxed as either a partnership or a corporation

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CONCEPT check

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?

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Specialized Forms of Business Organization

4

What other options for business organization does a company have in addition to sole proprietorships, partnerships, and corporations?

4

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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

Specialized Forms of Business Organization

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Cooperatives

SellerCooperatives

SellerCooperatives

Individual producers join togetherto compete more effectively withlarge producers

Individual producers join togetherto compete more effectively withlarge producers

Buyer Cooperatives

Buyer Cooperatives

A group of cooperative members unite for combined purchasing power

A group of cooperative members unite for combined purchasing power

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Benefits of Cooperatives

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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

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Cooperative Principles

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Voluntary and open membership Democratic member control Member economic participation Autonomy and independence Education, training, and information Cooperation among cooperatives Concern for community

Source: “What Are Cooperatives,” Press Kit, National Cooperative Business Association, http://www.ncba.coopCopyright ©NCBA. All rights reserved. Reproduced by permission.

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joint venture

Two or more companies that form an alliance to pursue a specific project usually for a specified time period.

Joint Ventures

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CONCEPT check

Describe the two types of cooperatives and the advantages of each.

What are the benefits of joint ventures?

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Franchising

5

What makes franchising an appropriate form of organization for some types of business, and why does it continue to grow in importance?

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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

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Top Franchises for 2008

1. 7-Eleven Inc.

2. Subway

3. Dunkin’ Donuts

4. Pizza Hut

5. McDonald’s

6. Sonic Drive In Restaurants

7. KFC Corp.

8. InterContinental Hotels Group

9. Domino’s Pizza LLC

10.RE/MAX Int’l. Inc.

Exhibit 4.8Source: 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.

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Franchise Agreements

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FranchiseeAgreement

FranchiseeAgreement

FranchisorAgreement

FranchisorAgreement

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

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Franchises


Increased ability for franchisor to expand

Recognized name, product, and operating concept

Management training and assistance

Financial assistance

Loss of control Cost of franchising Restricted operating freedom


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Franchise Purchase Tips

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

Exhibit 4.11Source: 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.

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CONCEPT check

Describe franchising and the main parties to the transaction.

Summarize the major advantages and disadvantages of franchising.

Why has franchising proved so popular?

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Mergers and Acquisitions

6

Why are mergers and acquisitions important to a company’s overall growth?

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merger

The combination of two or more firms to form a new company, which often takes on a new corporate identity.


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acquisition

The purchase of a corporation by another corporation or by an investor group; the identity of the acquired company may be lost.


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Merger Motives

Improve overall performance of the merged firms through cost savings, elimination of overlapping operations, improve purchasing power, increase market share, or reduce competition.

Company growth Broaden product lines Acquire technology / skills Acquire new markets

Financial restructuring: cutting costs selling off units laying off employees refinancing company

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CONCEPT check

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.

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39

Trends in Business Ownership

7

What current trends will affect the business organizations of the future?

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40

CONCEPT check

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?

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