Business Ownership Chapter 8

1. Business OwnershipChapter 8 It’s just paper. All I own is a pickup truck and a little Walmart stock. ………………………………..Sam Walton

2. Lesson 1: Forms of Business Organization Essential Question: How are businesses formed and how do they grow?

5. Sole Proprietorship A business owned and managed by one individual; the business and the owner are one and the same in the eyes of the law

6. Sole Proprietorship Advantages • Easy to start up • Ease of management • Owner keeps the profits • Owner does not have to pay separate business income tax • Psychological satisfaction • Easy to discontinue

7. Sole Proprietorship Disadvantages • Unlimited liability • Limited access to raising financial capital • Small size-may have limited inventory • Limited managerial experience • Difficulty of attracting qualified employees • Limited life

9. Partnership An association of two or more people who co-own a business for the purpose of making a profit A partnership agreement or the Uniform Partnership Act

10. Partnership Advantages • Ease of start up • Ease of management • Lack of special taxes on partnership’s income • Larger pool of capital • Ability to attract limited partners • More efficient operations that come from larger size

11. Partnership Disadvantages • Unlimited liability of at least one partner • Limited life • Lack of continuity • Potential for personality and authority conflicts

12. Special Partnerships • Limited partnership-one or more partners are not active in the running of the business, and whose liability for the partnership’s debt is restricted to the amount invested in the business • General partnership- all partners are jointly responsible for management and debts(most common form) • Articles of Partnership: contract between partners spelling out the rules of partnership. Dividing profit Dividing responsibility Admitting new partners Buying out partners

13. Corporations A separate legal entity apart from its owners which receives the right to exist from the state in which in which it is incorporated • Domestic • Foreign • Alien • Publicly held • Closely held

14. Corporations- 20% of Business 74%-profits

15. Corporations Certificate of Incorporation • Name • Statement of purpose • Time horizon • Names and addresses of incorporators • Place of business • Capital stock authorization’ • Capital required at time of incorporation • Provisions for preemptive rights • Restrictions on transferring shares • Names and addresses of officers • By-laws

16. Corporate Structure

17. Stock Common stock – (owners are voters) gives a voice in how the corporation is run and a share in variable dividends – high dividends if profits are high. The Board of Directors may wish to withhold all dividends if the money is needed for plant expansion or payment on debts. Because they can vote, they determine how a corporation is managed. They get one vote for every share they own. In a good year, they will receive a higher dividend than preferred stockholders. (Preferred stock dividends are fixed, common stock is not, so they are taking more risk.)

18. Stock (cont) • Preferred Stock – (non-voters) guaranteed dividends that are paid from profits before the company pays any dividends on common stock. If the company is unable to pay this fixed dividend in full, it makes up the difference when the company’s profits increase. They are like a silent partner because they can not vote and have no say in how the business is run.

19. 508 points 24% drop in one day 10-19-87 On this day, Sam Walton, the richest man in the world, had a paperloss of$1.5 billion.

20. Corporations Advantages • Ease of raising financial capital • Limited liability for its owners • Board of directors can hire professional managers to run the firm • Unlimited life • Ease of transferring ownership of the corporation

21. Corporations Disadvantages • Double taxation of corporate profits • Difficulty and expense of getting a charter • Shareholders (owners) have little voice in how the business is run • Subject to more government regulations than others forms of business

22. Franchises • Franchising is a form of business organization in which a firm that already has a successful product or service (franchisor) licenses its trademark and method of doing business to another business or individual (franchisee) in exchange for a franchise fee and an ongoing royalty payment. • Some franchisors are established firms (like McDonald’s) while others are first-time enterprises being launched by entrepreneurs.

23. Franchisor- actual owner of the business that lets other investors rent or lease its name, business profile, and way of doing business Franchisee- investor who rents or leases the business model from the franchisor and then hope to recoup his/her investments by selling the franchisor’s goods or service

24. Advantages and Disadvantages of Buying a Franchising Advantages • A proven product or service • within an established market. • An established trademark or business system. • Franchisor’s training, technical support, and managerial expertise. • An established marketing network. • Availability of financing (varies). • Potential for business growth.

25. Disadvantages • Cost of the franchise. • Restrictions on creativity. • Duration and nature of commitment. • Risk of fraud, misunderstandings, or of franchisor commitment. • Poor performance on the part of other franchisees. • Potential for failure.

26. Stop and Think • If you started your own business what would it be? • What are some of the 4 Factors of production you would need. • 2 examples for each

27. Chapter 8, lesson 1 questions • Define unlimited liability, inventory, limited life, charter, common stock, preferred stock, dividend, bond, principal, interest, double taxation • Name and describe the two types of partnerships

28. From Poop To Profit • Watch video, discuss, answer questions – turn in for a grade

29. Lesson 2: Business Growth and Expansion Essential Question: How are businesses formed and how do they grow?

30. Growth through Reinvestments • Business revenue can be used for • Investment in factories • Machinery • Technologies • Before reinvestments: • Must estimate its cash flow. • First records its total sales and then subtracts all expenses, taxes, and depreciation = net income • Net income + depreciation = cash flow (or the bottom line) real measure of business profit. • Decide to reinvest part of cash flow or additional sales and more profits

32. Growth Through Mergers (cont) • Horizontal mergers: joining of firms that make the same product (Nextel and Sprint) • Vertical Merger: joining of firms involved in different stages of manufacturing or marketing

33. Growth Through Mergers • Firms merge, one gives up it separate legal identity • Company may merge with another to • Grow faster • Become more efficient (synergy) • Economies of scale (larger size) • Acquire or deliver a better product (diversification) • Eliminate a rival • Change or lose its corporate identify

34. Growth Through Mergers (cont) • Conglomerate: composed of four or more businesses • Marketing unrelated products • None are responsible for a majority of sales • Multinational: corporation with manufacturing and service operations in several countries • -Subject to each nation’s business regulations

35. Entrepreneurial Startup: Incubators • Incubator: Program designed to support successful development of startups by providing business resources. • business, marketing, and networking advice • computing resources (computers, net access, servers) • financial advisors • management teams • access to loans and banks • access to angel investors and/or venture capitalists • legal advisors (such as for intellectual property rights)

36. Venture Capitalists • venture capital ("VC"): Financialresources given to early-stage companies. • given to startups by VC firms (groups) • VC firm gets % of profits or equity (stock) • different from bank loans; does not need to be paid back

37. Venture Capitalists (cont) • Stages of VC financing: • seed funding: initial minimal funds; often given by angels • start-up: early funds from VC firm for marketing/dev • growth ("series A"): large investment ($1-2M) for preferred stock • second round: company is successful, but not profiting • expansion ("mezzanine"): $ given to a newly profitable company • exit/bridge: VC firm sells stock once company matures

38. Angel Investors • Angel investor: An affluent individual whoprovides initial capital for a business start-up. • amount is generally smallish (~$10-30k) • gets company off the ground to prototype stage • often decided quickly and on a fairly informal proposal • angels are accredited investors to comply with SEC regulations • in US, many angels (≥40%) are in Silicon Valley • other sources: NYC, Seattle, Austin, Boston, NC Research Triangle

39. Angel Investors (cont) • angels are compensated with: • ownership equity (a percentage of ownership of the company) • implies company's value (e.g. $10k for 5% stock => $200k value) • convertible debt (options to buy stock in the company later)

40. Crowdfunding? Crowdfunding is a method for obtaining project funding, by soliciting contributions from a large group of people, and especially from an online community.

41. Why Does it Work? Small donations from many people can raise a lot of money. By tapping into your online social connections, you can reach a much broader audience in less time than traditional fundraising processes.

42. Be a Thinker • With a neighbor develop 2 examples of each type of merger • Vertical • Horizontal • Conglomerate • Why would companies ever want to merge????

43. ttps://www.youtube.com/watch?v=LNkuWBvZ1E4 What is a corporation – watch video – discuss, answer questions - turn in for a grade

44. Lesson 3: Nonprofit Organizations Essential Question: How does a market economy support nonprofit organizations?

45. Community and Civic Organizations • Nonprofit Organization: business to promote its members’ collective interest, not seek financial gain (Bill Gates foundations) • Incorporate to take advantage of a corporation’s unlimited life and limited liability • If money remains after expenses are paid, the B.O.D. may apply to other projects

46. Cooperatives • Voluntary association of people who carry on an economic activity that benefits its members • Consumer Cooperatives: buy food and other necessities in bulk • Members donate time to the co-op • Members pay lower prices for goods • Service Co-ops: credit unions, offer services to its members at lower rates • Producer Co-ops: help members, farmers, promote or sell their products

47. Labor, Professional, and Business Organizations • Labor unions: represent workers’ interest and negotiate with management through collective bargaining • Professional association: set standards for those in the profession and influence government policies on issues concern members’ interest (NCSS) • Business Associations: industries or trade associations that represent specific businesses (BBB)

48. Government • Direct Role • Agencies produce and distribute goods and services to consumers such as the TVA (electricity) or US Postal Service • Gov’t Corp: • Board of directors • Congress’ money v. investors’ money • Indirect Role: • Regulates public utilities • Grants money to people in form of Social Security and student financial aid

49. Chapter 8 activity: Define key terms for lesson 3, pg. 232 Turn in for a grade