Part I: Organization of a Business Introduction to Business 3e 2 Copyright © 2004 South-Western....

Copyright © 2004 South-Western. All rights reserved.

Part I: Organization of a BusinessPart I: Organization of a Business

Jeff MaduraIntroduction to

Business 3e

Introduction to Business 3e

22Selecting a Form of Selecting a Form of Business OwnershipBusiness OwnershipSelecting a Form of Selecting a Form of Business OwnershipBusiness Ownership

Copyright © 2004 South-Western. All rights reserved. 2–2

Learning GoalsLearning Goals•Explain how business owners select a form of ownership.

•Explain how the potential return and risk of a business are affected by its form of ownership.

•Describe methods of owning existing businesses.


Business Ownership Business Ownership DecisionsDecisions

•Advantages and disadvantages of each type of business ownership

• Impact of the form of business ownership on return on investment

• Impact of the form of business ownership on risk

•Methods to obtain ownership of existing businesses


Impact of Forms of Impact of Forms of OwnershipOwnership


Forms of Business Forms of Business OwnershipOwnership

•Sole Proprietorship– Owned by a single owner.

•Partnership– Co-owned by two or more people.– Co-owners must register with the state and

may need an occupational license.

•Corporation– State chartered entity that pays taxes and is

legally distinct from its owners.


Sole ProprietorsSole Proprietors•Must be willing to accept full responsibility for firm performance

•Business profits are not shared with creditors

•Need strong leadership skills, must be well organized, and communicate well with employees


Sole ProprietorshipSole Proprietorship•Advantages

– All earnings go to the sole proprietor

– Easy organization– Complete control– Lower taxes

•Disadvantages– Sole proprietor

incurs all losses– Unlimited liability– Limited funds– Limited skills


Types of PartnershipsTypes of Partnerships• General Partnerships

– All partners have unlimited liability.

• Limited Partnerships– Some partners have personal liability that is limited

to the cash or property they invested in the firm.– One or more general partners who actively manage

the business, receive a salary, share in profits and losses, have unlimited liability.

– Personal earnings received from the partnership are subject to personal income taxes.


PartnershipsPartnerships•Advantages

– Additional funding– Losses are shared– More specialization

•Disadvantages– Control is shared– Unlimited liability for

general partners– Profits are shared


Other Business FormsOther Business Forms•S Corporation

– Firm has 75 or fewer employees.– Owners have limited liability, but are taxed

as if the firm were a partnership.

•Limited Liability Corporation (LLC)– Has all the favorable features of a general

partnership but also offers limited liability for the partners.


Your Portion of Earnings (or Your Portion of Earnings (or Losses) on Losses) on

a Proprietorship versus a a Proprietorship versus a PartnershipPartnership

Exhibit 2.1a


Your Portion of Earnings (or Your Portion of Earnings (or Losses) on Losses) on

a Proprietorship versus a a Proprietorship versus a PartnershipPartnership

Exhibit 2.1b


Relative Contributions to Business Revenue of Relative Contributions to Business Revenue of Sole Proprietorships, Partnerships, and Sole Proprietorships, Partnerships, and

CorporationsCorporations

Exhibit 2.2


business onlinebusiness online ee -- businessbusiness


CorporationsCorporations• Individual or group must adopt corporate charter and file it with the state– Describes name of the firm, stock issued,

firm’s operations– Must also establish bylaws– Shareholders have limited liability– Shareholders elect members of board of

directors


StockholdersStockholders•Elect members of board of directors who are responsible for establishing general policies of the firm– Elect president and other key officers who

run the business

•Earn return on investment in two ways– May receive dividends– Stock may increase in value


CorporationsCorporations•Advantages

– Limited liability– Access to funds– Transfer of

ownership

•Disadvantages– High organizational

expense– Financial disclosure– Agency problems– High taxes


Illustration of Double TaxationIllustration of Double Taxation

Exhibit 2.3


Comparison of Tax Effects on Comparison of Tax Effects on Corporations and Sole ProprietorshipsCorporations and Sole Proprietorships

Exhibit 2.4


Small Business Administration’s Home Small Business Administration’s Home PagePage

Exhibit 2.5


List of SBA Publications on the InternetList of SBA Publications on the Internet

Exhibit 2.6


The Company Corporation Home PageThe Company Corporation Home Page

Exhibit 2.7


Private Vs. PublicPrivate Vs. Public•Ownership of privately held corporations is restricted to a small group of investors.

•Publicly held shares can be easily purchased or sold by investors.– Act of initially selling stock is called “going

public.”– Publicly held corporations obtain additional

funds by issuing new common stock.


Impact of Ownership on Impact of Ownership on ReturnReturn

•Return on Investment (ROI)– After-tax earnings represent the return in

dollars to the business owners.

•Return on Equity (ROE)– Reflects earnings as a proportion of the

firm’s equity– Equity is the total investment by the firm’s

stockholders.


Return on Equity for The Children’s Return on Equity for The Children’s PlacePlace

Exhibit 2.8


Impact of Ownership on Impact of Ownership on RiskRisk

•Risk represents uncertainty about the firm’s future earnings– Depends on future revenues and expenses

•Sole proprietorships tend to be riskier than larger businesses, such as partnerships and corporations.– Limited funding restricts ability to diversify

and spread business risk


Ownership of Existing Ownership of Existing BusinessBusiness

•Assuming Ownership of a Family Business

•Purchasing an Existing Business– Assess expertise– Compare expected benefits with initial outlay– Be cautious about basing future earnings

expectations on historical data

•Franchising


FranchisingFranchising•Business owner (franchisor) allows another (the franchisee) to use its trademark, trade name, or copyright, under specified conditions.

•Each franchise operates as an independent business.

•Typically owned by a sole proprietor.


Well Known FranchisesWell Known Franchises• McDonald’s• Thrifty Rent-a-Car System• Mail Boxes Etc.• Dairy Queen• Super 8 Motels Inc.• TGI Fridays• Pearle Vision Inc.• Baskin-Robbins


Types of FranchisesTypes of Franchises• Distributorship

– Dealer is allowed to sell a product produced by a manufacturer.

• Chain-Style Business– Firm is allowed to use the trade name of a

company and follows guidelines related to the pricing and sale of the product.

• Manufacturing Arrangement– Firm is allowed to manufacture a product using

the formula provided by the franchisor.


FranchisesFranchises•Advantages

– Proven management style

– Name recognition– Financial support

•Disadvantages– Sharing profits– Less control


B2B FranchisesB2B Franchises•Franchises serving other businesses that have grown substantially:– Hiring services– Consulting services– Training services

•Require smaller initial investment because they can be operated by computer from a home office.


Ownership of Foreign Ownership of Foreign BusinessesBusinesses

• Purchase a franchise created by a U.S. firm in a foreign country– Return may be higher than in U.S. if there is less

competition

• Purchase a business being sold by the foreign government– Reputation for inefficiency often leads to low prices– Can be high risk due to instability of foreign

government


SummarySummary• Entrepreneurs can select a form of ownership:

– Sole proprietorship– Partnership– Corporation

• Return and risk depend on form of business ownership.

• Common methods for obtaining ownership of existing businesses:– Family business– Purchase existing business– Franchising

Part I: Organization of a Business Introduction to Business 3e 2 Copyright © 2004 South-Western....

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