Chapter 4 � Forms of Business Ownership by wantyou


									Chapter 4 – Forms of
Business Ownership
Chapter 4 Learning Goals
1.   What are the three main forms of
     business organization, and what factors
     should a company’s owners consider
     when selecting a form?
2.   What are the advantages and
     disadvantages of sole proprietorships?
3.   Why would a new business venture
     choose to operate as a partnership, and
     what downside would the partners face?
4.   How does the corporate structure
     provide advantages and disadvantages
     to a company and what are the major
     types of corporations?
Chapter 4 Learning Goals (cont’d.)
5.   Does a company have any business
     organization options besides sole
     proprietorship, partnership, and
6.   Why is franchising growing in
7.   Why would a company use mergers and
     acquisitions to grow?
8.   What trends will affect business
     organization in the future?
             Business Organizations
   3 main types
    • Sole Proprietorship
    • Partnership
    • Corporation
   Considerations for choosing the best type
         Owner’s liability for firm’s debts
         The ease and cost of forming the business
         The ability to raise funds
         The taxes
         The degree of operating control the operator can
         The ability to attract employees
   Comparisons of Forms of
    Business Organization
N um ber                S ales   P rofits

 Sole proprietorships
         Sole Proprietorships
   Advantages
    • Easy and inexpensive to form & dissolve
    • Profits all go to the owner
    • Direct control of business
    • Freedom from government regulations
    • No special taxation
     Sole Proprietorships, cont.
   Disadvantages
    • Hard to raise capital
    • Unlimited liability & potential loss
    • Limited expertise in all areas
    • Trouble finding employees
    • Large personal time commitment
    • Unstable business life
   Types of partnerships
    • General Partnerships
         Partners share responsibilities, profits, etc
         Unlimited liability
    • Limited Partnerships
         General partners have unlimited liability and
          are responsible for its operations.
         Limited partners have limited liability and do
          not participate in the company’s operations.
         Partnerships, cont.
   Advantages
    • Ease of formation
    • Availability of capital
    • Diversity of skills & expertise
    • Flexibility to respond to changing
      business conditions
    • Relative freedom from government
    • No special taxes
          Partnerships, cont.
   Disadvantages
    • Unlimited liability for general
    • Potential for conflict between
    • Limited life
    • Sharing of profits
    • Difficulty in leaving a partnership
          Topics to Cover
    in a Partnership Agreement
   Purpose & duration of partnership
   Roles, responsibilities, compensation
   Contributions
   Procedures for adding/removing
   Buy-out procedures
   Dispute resolution
   Financial arrangements
   Dissolving the partnership
   Valuation
               Source: American Express Small Business Exchange,
   Legal entities with a separate
    existence from its owners.
   Types of Corporations
    • C – corporations
         conventional
    • S – corporations
         Taxed like a partnership
         Creating a corporation
   Pick a company name
   Write articles of organization and file
    them with the state
   Pay fees & taxes
   Have an organizational meeting
   Adopt by-laws, elect directors, pass
    operating resolutions
          Corporate Structure
   Stockholders
    • Own the corporation
    • Can sell or transfer shares at any time
    • Entitled to receive profits in the form of
   Board of Directors
    • Elected by stockholders
    • Govern the firm
   Officers
    • Carry out the goals and policies set by
      the board
       Organizational Structure of

Stockholders                                         elect


  Officers (Top
                  President     Vice Treasurer Secretary
          Corporations, cont.
   limited liability
   easy to get financing
   easy to transfer ownership
   unlimited life-span
   tax deductions
          Corporations, cont.
   double taxation of profits
   costly & complex to form
   government restrictions
        Other forms of business
   Limited Liability Companies (LLC)
   Cooperatives
   Joint Ventures
   Franchises
     Limited Liability Companies
   Offer limited liability to owners
   Easy to set up
   Subject to few restrictions
   Taxed as either a corporation or
    Some Pros and Cons of LLC’s
Pros                      Cons
   Protection of         • Often required to
    personal assets         have a limited life (<
   Avoid double-           30 years)
    taxation of profits   • Not corporations, so
   Flexible                can not issue stock
    management &
   Good for foreign      Source: The Company Corporation,
   Formed by people with similar
   Goals: to reduce costs and gain
    economic power
   Profits go to member-owners in
    proportion to contributions
   Have corporate features
    • Limited liability
    • Unlimited life
    • Board of Directors
            Cooperatives, cont
   Common in
    • Agriculture
    • Hardware/Lumber
    • Grocery
   Types of Cooperatives
    • Seller Cooperatives
    • Buyer Cooperatives
            Joint Ventures
   Alliance formed by 2 or more
    companies for a project
   Allows companies to gain access to
    new markets, products, technology
   Individually owned companies that
    operate like they are part of chain of
   Franchisor supplies management training,
    operating assistance, brand name,
    product, financial assistance, etc
   Franchisee pays a fee for the franchise
    and sells the goods or services of the
   Allows an individual to own a business
    without starting from nothing – buys a
    proven product and operating methods
        Franchises, cont.
 increased opportunity to expand
 recognized name, product, and
  operating concept (franchisee)
 management training and
  assistance (franchisee)
 financial assistance (franchisee)
        Franchises, cont.
 loss of control (franchisor)

 costs of franchising

 restricted operating freedom
    Top 10 Franchises for 2005
   Ranking based on factors such as
    financial strength & stability, growth
    rate & size
 1. Subway
 2. Curves
 3. Quizno’s
 4. Jackson Hewitt Tax Service
 5. The UPS Store
 6. Sonic Drive-In Restaurants
 7. Jani-King
 8. 7-Eleven Convenience Stores
 9. Dunkin’ Doughnuts
10. RE/MAX International Source:
       Mergers & Acquisitions
   Mergers – combine 2 or more
    companies to form a new company
   Acquisitions – one company
    purchases another
   Used for strategic purposes
    • Improve performance
    • Growth/Increase product offering
    • Increase company value
      Mergers & Acquisitions, cont.
   Benefits
    • Increased purchasing power
    • Increased market share
    • Reduced costs
    • Reduced competition
    • Reduced overlap in production
    • Faster and less risky than developing a new
      product or expanding internationally
          Types of Mergers
   Horizontal Mergers
   Vertical Mergers
   Conglomerate Mergers
   Leveraged Buyout (LBO)
   Catering to niche markets
   Growth and variety of franchises
    • Have to find ways to differentiate
    • Expect more franchised goods &
      services that ease consumers’ busy lives
     (Source: Entrepreneur, Jan. 2000, p. 157)

   Increased consolidation
   International Franchises and Mergers
   Review
    • Sole Proprietorships
    • Partnerships
    • Corporations
    • LLC’s
    • Cooperatives
    • Joint Ventures
    • Franchises
    • Mergers & Acquisitions

   Looking Ahead
    • Entrepreneurship
    • Small Businesses

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