Forms of Business Ownership

1. Forms of Business Ownership Sole Proprietorship Partnership Corporations

2. Forms of Ownership Comparison

3. Sole Proprietorships • Oldest and Most Common dated by to colonial times • Owner and Managed by one individual with minimum amount of help • $$$ capital used to start business comes from the owner’s savings or getting a loan.

4. Advantages and Disadvantages of Sole Proprietorships Advantages Disadvantages • Ease of Starting • Control • Own all Profits • Use Owners Abilities • Tax Breaks – are tax exemptions that help reduce your taxable income by claiming business expenses. Tax breaks are incentives made by the government to entice people to go into business for themselves (free economy) • Secrecy • Ease of dissolving • Unlimted Liability - means you are responsible for the debts that are incurred by the business and if the debt goes beyond what the business is worth, you could loose your personal property, such as your house, etc.) • Difficult to Raise Capital – people who own a sole proprietorship start their business with either their own personal savings and a bank load. • Limited Management Abilities • Time Demands - most people who own their own business spend 60-80 hours a week at work for the first 3 years. • Employee hiring and retention

5. Partnerships • Two or more people own a partnership • They share everything • Can be based on a written, oral, or implied agreement (legally) • Two types of partners • General partner – has unlimited liability • Limited partner – has limited liability ** Terms of each partner are specifically defined in the Articles of Partnership.

6. Types of Partnerships • MLP (Master Limited Partnership) • Sells units traded on recognized stock exchange • Limited liability • Transferability of ownership • Pays no corporate taxes because the earnings are passed directly to unit holders. They pay their own individual income taxes. • Example is the NBA (National Basketball Association. • Joint Venture • a partnership formed for a special purpose or project. When the project is completed, the joint venture is dissolved.

7. Articles of Partnership(the partnership contract) • Name of the business partnership • Type of business • Locations of the business • Expected life of the partnership or re-evaluation date. • Procedures for distributing profits and covering losses • Responsibilities and duties of each partner • Procedures for withdrawal of funds • Procedures for dissolving a partnership • Time length of a partnership is determined by the language in the Articles of partnership. Investments are usually frozen at least 3 years.

8. Advantages and Disadvantages of Partnerships Advantages Disadvantages • More financial capital • Combined managerial skills • Ease of starting • Clear legal status • Tax Breaks/advantages • Limited liability for limited partners • Unlimited Liability for general partners • Difficult to Raise Capital • Frozen investment • Instability • Potential disagreements

9. Corporations • A corporation is a business that is a legal entity separate from its owners. It has legal rights of an individual. It can: • Own property • Owe money (take out loans) • Hire and terminate employees • Sue or be sued by other persons and/or other corporations • A corporation is owned by shareholders/stockholders.

10. Types of Corporations • Domestic Corporation – a corporation that conducts business in the state in which it was incorporated. • Foreign Corporation – A corporation that conducts business in a state other than the state it was incorporated in.

11. Steps to Incorporation • Fill out the Articles of Incorporation – application for a charter. • The form gets reviewed by state government officials • The State sends back a charter (a state’s written agreement giving a corporation the right to operate a business. • All shareholders meet and elect a Board of Directors • BOD approve the bylaws (rules and regulations of a corporation) • Select managers and make any new decisions needed to start the business. Managers make the day to day decisions while the BOD make periodic decisions. • A corporate policy is established by a BOD which is elected by the shareholders. (The more shares you own, the more votes you have.

12. What is a proxy? A proxy is a written statement signed by a shareholder of a corporation allowing someone else to cast his or her number of votes.

13. Mergers and Acquisitions • Merger – a process in which one firm buys the assets and assumes the obligations of another company. • Horizontal Merger – occurs when competitive firms in the same market merge into a single firm. • Vertical Merger – when a firm mergers together with its supplier or distributor • Conglomerate Merger – firms merging together selling goods in unrelated markets. • Acquisition – the process in which one firm buys the assets and assumes the obligations of another company.

14. Sissie’s Dairy Sonny’s Fruit Orchard Hickory Tree Verticlal Merger Conglomerate Merger Pop’s Ice Cream Homerun Baseball Company Mom’s Apple Pie Grannie’s Restaurant Gramp’s Restaurant Sports Town USA Horizontal Merger

15. Other types of Corporations • S Corporation – a corporation with 35 or fewer owners that files an income tax return as a partnership to take advantage of lower tax rates. • Cooperative (Co-op) – an organization in which people collectively own and operate a business in order to compete with big competitors. • Professional Service Association: Professional People (doctors, dentists, lawyers) joined together to form an organization under professional association laws treated as corporations for tax purposes. (profit sharing, benefits, pension plans limited liability)

16. Advantages and Disadvantages of Corporations. • Advantages • Limited liability – investors (shareholders) can only loose what they have invested. They will not loose any personal property if the company goes bankrupt. • Skilled Managers - BOD hire qualified people to run each department. • Transfer of Ownership – You can sell your stock at any time and shares can also be willled. • Greater capital base - Selling stocks helps corporations raise money to put into their business. • Stability • Legal-entity status • Disadvantages • Startup difficulty and costs • Lack of control • Multiple taxation - same profits get taxes twice. • Lack of secrecy – • Lack of personal interest • Credit limitations

17. FranchisingFranchisee – one who buys a franchise store.Franchisor – one who sells a franchise store (corp) • Define: a business that has signed an agreement with a franchiser (McDonalds, KFC, Dunkin Donuts) to use their name, operating plan, and overall procedures used in the firm to sell its products or services. • Three components must be present to a franchise to exist: • A uniform system of operations • Utilization of trademark or service mark • Fee (one time fee as well as monthly fees)

18. Categories of Franchises

19. Franchise Trivia • What was the first franchise in US? • Singer Sewing Machine • What popular beverage held the next franchise in 1900? • Cocacola • What was the next to franchise in 1902? • Rexall Drug Store • During 1930-1935 what industry became big in Franchising? • Gasoline (Aammco) • What decade was considered the franchise boom? • 1950’s (90 percent of the franchise that started during the franchise boom still exist today.

20. Franchise Advantages and Disadvantages! • Advantages • Guidance • Promoted brand name • Proven product • Financial Assistance • Disadvantages • Franchise fees • External control • Overdependence • Poor local reputation can spread

21. Entrepreneur An innovative Risk taker that is responsible for most of the economic growth in our country. They often own their own business and/or create their own inventions. Popular entrepreneurs include Henry Ford, Bill Gates, Jerry Greenfield, Ben Cohen, and Donald Trump.

22. Intrapreneur An entrepreneur that works for a company. Art Frye is an entrepreneur. He works for the 3M Corporation and invented the post it note.

23. Other BusinessTerms: • Small Business – • one that is independently owned and operated and is no dominant in its field of operation. • A small business does not control a large market share. • There are sales limits. • Maximum amount of employees – 500 • Minimum amount of employees – 250 • Maximum amount of sales.

24. Small Business cont. • Advantages • Personal gratification • Independence • Financial gain • Disadvantages • Some risks are out of the entrepreneur’s control such as fashion changes, competition, and labor problems. • Irregular income – may have zero profit (should count on not taking profits out of business for at least 3 years) • Long hours – hard on family (60-80 hours a week)

25. Other business terms cont. • Business Incubator – a facility in which young businesses can share space, costs, services, and information to help them get started. Once strong enough, they go out on their own.

26. Other business terms cont. • Small Business Administration • Define: an independent agency of the Federal gvt. Created in l953 to protect the interests of small business owners: Their four primary area of assistance are in: • Giving Loans/financial advice and assistance • Management assistance • Women and small business • Minorities and small business