Forms of Business Ownership

Chapter 5

Introduction to Business

Learning Goals
1 What are the strengths and weaknesses of the sole proprietorship form of business organization? 2 What are the advantages of operating as a partnership, and what downside risks should partners consider? 3 How does the corporate structure provide advantages and disadvantages to a company, and what are the major types of corporations? 4 Does a company have other business organization options in addition to sole proprietorships, partnerships, and corporations?
Chapter 5

Copyright 2005 by South-Western, a division of Thomson Learning. All rights reserved

Learning Goals
5 What makes franchising an appropriate form of organization for some types of business, and why is it growing in importance?

6 Why are mergers and acquisitions important to a companys overall growth?

7 How will current trends affect the business organizations of the future?

Chapter 5

Copyright 2005 by South-Western, a division of Thomson Learning. All rights reserved

Principles of Business Ownership

Financing? Employees? Business taxes? Debt liability?

Operating control?
Chapter 5

Ownership?
Copyright 2005 by South-Western, a division of Thomson Learning. All rights reserved

Learning Goal 1

What are the strengths and weaknesses of the sole proprietorship form of business organization?

Chapter 5

Copyright 2005 by South-Western, a division of Thomson Learning. All rights reserved

SOLE PROPRIETORSHIPS
A business that is established, owned, operated, and often financed by one person.

Sole Proprietorship

Chapter 5

Copyright 2005 by South-Western, a division of Thomson Learning. All rights reserved

1 Advantages

SOLE PROPRIETORSHIPS
Disadvantages
Unlimited liability Difficulty in raising capital Limited managerial expertise Trouble finding qualified employees Personal time commitment Unstable business life Losses are owners responsibility
7

Chapter 5

Easy and inexpensive to form Profits go to the owner Direct control of the business Freedom from government regulations No special taxation Ease of dissolution

Copyright 2005 by South-Western, a division of Thomson Learning. All rights reserved

Learning Goal 2

What are the advantages of operating as a partnership, and what downside risks should partners consider?

Chapter 5

Copyright 2005 by South-Western, a division of Thomson Learning. All rights reserved

PARTNERSHIPS
An association of two or more individuals who agree to operate a business together for profit.

Partnership

Chapter 5

Copyright 2005 by South-Western, a division of Thomson Learning. All rights reserved

2
Advantages

PARTNERSHIPS
Disadvantages

Chapter 5

Ease of formation Availability of capital Diversity of skills and expertise Flexibility No special taxes Relative freedom from government control

Unlimited liability Potential for conflicts between partners Sharing of profits Difficulty exiting or dissolving

Copyright 2005 by South-Western, a division of Thomson Learning. All rights reserved

10

Learning Goal 3

How does the corporate structure provide advantages and disadvantages to a company, and what are the major types of corporations?

Chapter 5

Copyright 2005 by South-Western, a division of Thomson Learning. All rights reserved

11

CORPORATIONS
A legal entity with an existence and life separate from its owners, who are not personally liable for the entitys debts.

Corporation

Chapter 5

Copyright 2005 by South-Western, a division of Thomson Learning. All rights reserved

12

The 10 Largest U.S. Corporations

Chapter 5

Copyright 2005 by South-Western, a division of Thomson Learning. All rights reserved

13

The Incorporation Process

Select companys name Write articles of incorporation Pay required fees and taxes Hold organizational meeting

Chapter 5

Adopt bylaws, elect directors, pass operating resolutions

Copyright 2005 by South-Western, a division of Thomson Learning. All rights reserved

14

The Corporate Structure

Stockholders

Elect Directors

Hire
Officers
President
Chapter 5

VP

Treasurer

Secretary

Copyright 2005 by South-Western, a division of Thomson Learning. All rights reserved

15

3
Advantages

CORPORATIONS
Disadvantages

Limited liability Ease of transferring ownership Unlimited life Tax deductions Ability to attract financing

Double taxation of profits Cost and complexity of formation More government restrictions

Chapter 5

Copyright 2005 by South-Western, a division of Thomson Learning. All rights reserved

16

Types of Corporations
C Corporation
Conventional or basic corporate form of organization

S Corporation

A hybrid entity that is organized like a corporation, but taxed like a partnership

Chapter 5

Limited Liability Company (LLC)

A hybrid organization that offers the same liability protection as a corporation but may be taxed as either a partnership or a corporation
17

Copyright 2005 by South-Western, a division of Thomson Learning. All rights reserved

Learning Goal 4

Does a company have other business organization options in addition to sole proprietorships, partnerships, and corporations?

Chapter 5

Copyright 2005 by South-Western, a division of Thomson Learning. All rights reserved

18

Cooperatives
Legal entities formed by people with similar interests, to reduce costs and gain economic power.

Cooperatives

Seller Cooperatives
Buyer Cooperatives

Individual producers join together to compete more effectively with large producers A group of cooperative members who unite for combined purchasing power
19

Chapter 5

Copyright 2005 by South-Western, a division of Thomson Learning. All rights reserved

Learning Goal 5

What makes franchising an appropriate form of organization for some types of business, and why is it growing in importance?

Chapter 5

Copyright 2005 by South-Western, a division of Thomson Learning. All rights reserved

20

Franchising
A form of business organization based on a business arrangement between a franchisor, which supplies the product concept and the franchisee, who sells the goods or services of the franchisor in a certain geographic area.

Franchising

Chapter 5

Copyright 2005 by South-Western, a division of Thomson Learning. All rights reserved

21

5
Advantages

Franchises
Disadvantages
Loss of control Cost of franchising Restricted operating freedom

Chapter 5

Increased ability for franchisor to expand Recognized name, product, and operating concept Management training and assistance Financial assistance

Copyright 2005 by South-Western, a division of Thomson Learning. All rights reserved

22

Top 10 Fastest-Growing Franchises

Chapter 5

Copyright 2005 by South-Western, a division of Thomson Learning. All rights reserved

23

Learning Goal 6

Why are mergers and acquisitions important to a companys overall growth?

Chapter 5

Copyright 2005 by South-Western, a division of Thomson Learning. All rights reserved

24

MERGERS AND ACQUISITIONS

The combination of two or more firms to form a new company, which often takes on a new corporate identity.

Merger

Acquisition
Chapter 5

The purchase of a corporation by another corporation or investor group.

Copyright 2005 by South-Western, a division of Thomson Learning. All rights reserved

25

Types of Mergers
Horizontal Merger Vertical Merger Conglomerate Merger Leveraged Buyout
Copyright 2005 by South-Western, a division of Thomson Learning. All rights reserved

Chapter 5

26

Selected Megamergers

Chapter 5

Copyright 2005 by South-Western, a division of Thomson Learning. All rights reserved

27

Learning Goal 7

How will current trends affect the business organizations of the future?

Chapter 5

Copyright 2005 by South-Western, a division of Thomson Learning. All rights reserved

28

Trends in Business Ownership

Changing Demographics

Franchise Innovations

Mergers
Chapter 5

Copyright 2005 by South-Western, a division of Thomson Learning. All rights reserved

29

Franchise Innovations
Multiple-concept franchises Expanded product offerings Cross-branding

Franchise Differentiation

New ideas
Chapter 5

Copyright 2005 by South-Western, a division of Thomson Learning. All rights reserved

30

Identifying Merger Opportunities

A purchase price that is low enough A target that is smaller than the buyer, and that the buyer understands A buyer who pays in cash and not overinflated stock

Evidence the deal isnt the brainchild of an egocentric CEO

Chapter 5

Copyright 2005 by South-Western, a division of Thomson Learning. All rights reserved

31

Chapter 5

Copyright 2005 by South-Western, a division of Thomson Learning. All rights reserved

32