Nickels McHugh McHugh And Kendra

1. Nickels Cover Nickels McHugh McHugh And Kendra

2. Chapter Choosing a Form of Business Ownership 5 5-2

3. Learning Goals • Sole proprietorships • Partnerships • Corporations • Corporate mergers • Franchises • Cooperatives

4. Basic Forms of Ownership • Sole Proprietorship • Partnership • Corporation Number Sales 72% 6% 8% 13% 20% 81%

5. 1) Sole Proprietorship • Sole Proprietorship – A business that is owned, and usually managed, by one person. • Unlimited Liability- The responsibility of business owners for all of the debts of the business.

6. Ease of start/end Be your own boss Pride of ownership Leave Legacy Retain profit No special taxes Unlimited liability Limited financial resources Difficulty in mgmt. Time commitment Few fringe benefits Limited growth Limited life span Sole Proprietorship Advantages Disadvantages

7. 2.) Partnership • Partnership- A legal form of business with two or more owners. • General partnership- partnership in which all owners share an operating business and in assuming liability for the business’s debt. • General Partner- An owner who has unlimited liability and is active in managing the firm. • Limited Partnership- A partnership with one or more general partners and one or more limited partners.

8. Partnerships (continued) • Limited Partner- An owner who invests money in the business but does not have any management responsibility or liability for losses beyond the investment. • Limited Liability- Responsibility of a business’s owners for losses only up to the amount they invest; limited partners and share holders have limited liability.

9. Types of Partnerships General Limited GP Passive Investor Passive Investor GP GP GP GP Passive Investor

10. Partnership Cont. • Limited Liability- Responsibility of a business’s owners for losses only up to the amount they invest; limited partners and share holders have limited liability. • Master Limited Partnership (MLP)- A partnership that looks much like a corporation (in that it acts like a corporation and is traded on a stock exchange) but is taxed like a partnership and thus avoids a corporate income tax. • Limited Liability Partnership (LLP)- A partnership that limits partner’s risk of losing personal assets to only their own acts and omissions and to the acts to the omissions of people under their supervision.

11. New Forms of Partnerships • Master Limited Partnership • Traded Publicly • Taxed As A Partnership • Limited Liability Partnership

12. Partnership Advantages Disadvantages • More financial resources • Shared mgmt. • Longer survival • No Special Taxes • Unlimited liability • Division of profits • Disagreements among partners • Difficult to terminate

13. 3.) Corporation • Corporation- A legal entity with authority to act and have liability separate from its owners. • S corporation- A unique government creation that looks like a corporation but is taxed like sole proprietorships and partnerships. • Limited Liability Company (LLC)- A company similar to an S corporation but without the special eligibility requirements.

14. Corporations • Private- Not Traded on Any Stock Exchange • Public- Shares Are Traded on 1 or More Stock Exchanges • Non-Profit- Performs Public Service, Has Special Tax Considerations To Encourage Formation

15. How Owners Affect Management

16. Corporation Advantages Disadvantages • More money for investment • Limited liability • Separation of ownership/mgmt. • Ease of ownership change • Perpetual life • Size • Initial cost • Paperwork • Two tax returns • Termination difficult • Stockholder & Board Conflict • Double taxation

17. World’s Largest Corporations 2002 Revenue (Millions) • Wal-Mart Stores $246,525 • Royal Dutch/Shell 235,598 • Exxon/Mobil 204,506 • General Motors 186,763 • BP 178,721 • Ford Motor 163,420 • DaimlerChrysler 156,838 Source: Zacks Reports & Fortune

18. Largest U.S. Companies Revenue 2002 (In Millions) • Wal-Mart Stores $246,525 • Exxon/Mobil 204,506 • General Motors 186,763 • Ford Motor 163,420 • General Electric 131,698 • IBM 81,186 Source: Web100 & Fortune

19. Types of Corporations • Regular ‘C’ • S Corporation • Limited Liability Companies

20. No more than 75 shareholders Individual or Estates U.S. citizens or residents 1 class of stock <25% of income can be passive Slower-growing companies Benefits change with new tax rules S Corporations

21. Limited Liability Tax Choice Flexible Ownership Rules Flexible Profit & Loss Distribution Operating Flexibility No Stock Limited Life Span Fewer Incentives Taxes Paperwork Limited Liability Companies Advantages Disadvantages

22. 4.) Corporate Expansion • Merger- The result of two firms forming one company. • Acquisition- One company’s purchase of the property and obligations of another company. • Vertical Merger- The joining of two companies involved in different stages of related businesses. • Horizontal Merger- The joining of two firms in the same industry.

23. Types of Mergers Horizontal Vertical Conglomerate

24. Mergers (continued) • Conglomerate Merger- The joining of firms in completely unrelated industries. • Leveraged Buy-out (LBO)- An attempt by employees, management, or a group of investors to purchase an organization primarily through borrowing.

25. Leveraged Buyout Individual + Loan = Purchase of Company Purchase Loan Company = Collateral

26. Why Mergers Don’t Work • Companies Overpay to Acquire Another Firm • Acquiring Company Overestimates Cost Savings and Synergies • After Merger, Managers Disagree About Integrating Operations • After Merger, Cost Cutting Obsession Hurts Business Costing Top Employees & Customers

27. GM’s Ownership In: Source: USA TODAY

28. 5.) Franchises • Franchise- The right to use a specific business’s name and sell its products or services in a given territory. • Franchise Agreement- An arrangement where by someone with a good idea for business sells the right to use the business name and sell a product or service to others in a given territory. • Franchisor- A company that develops a product concept and sells others the rights to make and sell the products. • Franchisee- A person who buys a franchise.

29. Franchise System • Franchise Agreement • Franchisor • Franchisee

30. Franchise Contract Franchisor, Inc. Branded Product/Service Performance Monitoring $$$$$ Franchisee

31. Assigns Territory May Provide Financial Aid/Advice Offers Merchandise/ Supplies at Competitive Price Provides Training/Support Business Expansion Using O.P.M. Franchisor

32. Franchisee • Pays Up-Front Costs • Makes Monthly Payment to Franchisor • Runs Business by Franchisor’s Rules/Procedures • Buys Materials from Franchisor/ Approved Supplier

33. Fastest Growing Franchises (2002) Source: Entrepreneur, 2003

34. 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 Franchises Advantages Disadvantages

35. Cost of Fast-Food Franchise

36. How to Avoid aFranchise Lemon • Research officers & their business experience • Get summary of any bankruptcy & litigation • Estimate all costs to set up franchise • Review franchise contract & three most recent financial statements

37. Benefits of aHome-Based Franchise • Flexible work hours • Quality lifestyle • Doing the work of your choice • Opportunity to expand using technology • Self-motivation .

38. Franchising & E-Commerce • Technology- Faster Customer Service • Access to International Markets

39. 6.) Cooperatives • Cooperative- A business owned and controlled by the people who use it-producers, consumers, or workers with similar needs who pool their resources for mutual gain.

40. Cooperatives • Farm Cooperative • Owned & Controlled by People Who Use It • Pool of Resources • Economic Power