CHAPTER 4 i Stockphoto com Rich

CHAPTER 4 © i. Stockphoto. com / Rich Yasick Forms of Business Ownership The Future of Business The Essentials 4 th Edition Gitman & Mc. Daniel Chapter 4 Copyright © 2009 by South-Western, a division of Cengage Learning. All rights reserved Prepared by 1 Deborah Baker

1 What are the advantages and disadvantages 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? CHAPTER 4 Learning Goals 3 How does the corporate structure provide advantages and disadvantages to a company, and what are the major types of corporations? 2

4 What other options for business organization does a company have in addition to sole proprietorships, partnerships, and corporations? 5 What makes franchising an appropriate form of organization for some types of business, and why does it continue to grow in importance? CHAPTER 4 Learning Goals (continued) 6 Why are mergers and acquisitions important to a company’s overall growth? 7 What current trends will affect the business organizations of the future? 3

Business Ownership § Sole proprietorships § Partnerships § Corporations 4

Sole Proprietorships 1 1 What are the advantages and disadvantages of the sole proprietorship form of business organization? 5

Sole Proprietorships sole proprietorship A business that is established, owned, operated, and often financed by one person. 1 6

Sole Proprietorships Disadvantages Advantages § § § 1 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 § § § § Unlimited liability Difficulty raising capital Limited managerial expertise Trouble finding qualified employees Personal time commitment Unstable business life Losses are owner’s responsibility 7

CONCEPT check What is a sole proprietorship? Why is this a popular form of business organization? What are the drawbacks to being a sole proprietor? 1 8

Partnerships 2 2 What are the advantages of operating as a partnership, and what downside risks should partners consider? 9

Partnerships partnership An association of two or more individuals who agree to operate a business together for profit. 2 10

Partnerships Advantages § § § 2 Ease of formation Availability of capital Diversity of skills and expertise Flexibility No special taxes Relative freedom from government control Disadvantages § § Unlimited liability Potential for conflicts between partners Complexity of profit-sharing Difficulty exiting or dissolving partnership 11

CONCEPT check How does a partnership differ from a sole proprietorship? Describe three main types of partnerships and explain the difference between a limited partner and a general partner. What are the main advantages and disadvantages of a partnership? 2 12

Corporations 3 3 How does the corporate structure provide advantages and disadvantages to a company, and what are the major types of corporations? 13

Corporations corporation A legal entity with an existence and life separate from its owners, who are not personally liable for the entity’s debts. A corporation is chartered by the state in which it is formed and can own property, enter into contracts, sue and be sued, and engage in business operations under the terms of its charter. 3 14

The 10 Largest U. S. Corporations 1. Wal-Mart Stores 2. Exxon. Mobil 3. Chevron Texaco 4. General Motors 5. Conoco. Phillips 6. General Electric 7. Ford Motor 8. Citigroup 9. Bank of America Corp. 3 Ranked by 2007 Sales Source: “The 2008 Fortune 500, ” Fortune, http: //money. cnn. com/magazines/fortune (April 2008) ©Time Inc. All rights reserved. 10. AT&T 15

Articles of Incorporation § Name of corporation § Company’s goals § Types of stock and number of shares issued § Life of the corporation § Minimum investment by owners § Methods for transferring shares § Address of the corporate office § Names and addresses of the first board of directors 3 Exhibit 4. 4 16

Corporations Advantages § § § 3 Limited liability Ease of transferring ownership Unlimited life Tax deductions Ability to attract financing Disadvantages § § § Double taxation of profits Cost and complexity of formation More government restrictions 17

Types of Corporations C Corporation S Corporation A hybrid entity that is organized like a corporation, but taxed like a partnership Limited Liability Company (LLC) 3 A conventional or basic corporate form of organization A hybrid organization that offers the same liability protection as a corporation but may be taxed as either a partnership or a corporation 18

CONCEPT check What is a corporation? Describe how corporations are formed and structured. Summarize the advantages and disadvantages of corporations. Which features contribute to the dominance of corporations in the business world? Why do S corporations and limited liability companies (LLCs) appeal to small businesses? 3 19

Specialized Forms of Business Organization 4 4 What other options for business organization does a company have in addition to sole proprietorships, partnerships, and corporations? 20

Specialized Forms of Business Organization cooperative A legal entity typically formed by people with similar interests, such as suppliers or customers, to reduce costs and gain economic power. A cooperative has: § limited liability § an unlimited life span § an elected board of directors § an administrative staff § profit distribution to member-owners 4 21

Cooperatives Seller Cooperatives Buyer Cooperatives 4 Individual producers join together to compete more effectively with large producers A group of cooperative members unite for combined purchasing power 22

Benefits of Cooperatives § Empower people to improve their quality of life § Enhance economic opportunities through self-help § Provide members with services, including: § credit § finance § energy § consumer goods § housing § telecommunications 4 23

Cooperative Principles § § § § 4 Voluntary and open membership Democratic member control Member economic participation Autonomy and independence Education, training, and information Cooperation among cooperatives Concern for community Source: “What Are Cooperatives, ” Press Kit, National Cooperative Business Association, http: //www. ncba. coop Copyright ©NCBA. All rights reserved. Reproduced by permission. 24

Joint Ventures joint venture Two or more companies that form an alliance to pursue a specific project usually for a specified time period. 4 25

CONCEPT check Describe the two types of cooperatives and the advantages of each. What are the benefits of joint ventures? 4 26

Franchising 5 5 What makes franchising an appropriate form of organization for some types of business, and why does it continue to grow in importance? 27

Franchising 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. 5 28

Top Franchises for 2008 1. 7 -Eleven Inc. 2. Subway 3. Dunkin’ Donuts 4. Pizza Hut 5. Mc. Donald’s 6. Sonic Drive In Restaurants 7. KFC Corp. 8. Inter. Continental Hotels Group 9. Domino’s Pizza LLC 10. RE/MAX Int’l. Inc. 5 Exhibit 4. 8 29 Source: Top 10 Franchises in 2008 excerpted from “ 2008 Franchise 500 Rankings. ” Reprinted from http: //entrepreneur. com/franchises/rankings/franchise 500 -115608/2008. html with permission of Entrepreneur. com, Inc. All rights reserved.

Franchise Agreements Franchisee Agreement § § § Follow operating rules Buy standard equipment Keep up sales/service levels Take part in franchisor promotions Maintain a relationship with franchisor Franchisor Agreement § § § § 5 Use of proven company brand Help finding a site Building plans Training and management assistance Managerial and accounting procedures Employee training Wholesale prices for supplies Financial assistance 30

Franchises Advantages § § 5 Increased ability for franchisor to expand Recognized name, product, and operating concept Management training and assistance Financial assistance Disadvantages § § § Loss of control Cost of franchising Restricted operating freedom 31

Franchise Purchase Tips § Act fast, yet proceed with caution § Put the franchisor to the test § Know what you’re getting into § Don’t invest more than you can afford to lose § Don’t fall in love with a trend Exhibit 4. 11 Source: Franchise Purchase Tips excerpted from “All the Rage—Tech & e. Bay. ” Reprinted from http: //entrepreneur. com/magazine/entrepreneur/2005/January/74990 -2. html with permission of Entrepreneur. com, Inc. 5 32

CONCEPT check Describe franchising and the main parties to the transaction. Summarize the major advantages and disadvantages of franchising. Why has franchising proved so popular? 5 33

Mergers and Acquisitions 6 6 Why are mergers and acquisitions important to a company’s overall growth? 34

Mergers and Acquisitions merger The combination of two or more firms to form a new company, which often takes on a new corporate identity. 6 35

Mergers and Acquisitions acquisition The purchase of a corporation by another corporation or by an investor group; the identity of the acquired company may be lost. 6 36

Merger Motives Improve overall performance of the merged firms through cost savings, elimination of overlapping operations, improve purchasing power, increase market share, or reduce competition. § § 6 Company growth Broaden product lines Acquire technology / skills Acquire new markets Financial restructuring: § cutting costs § selling off units § laying off employees § refinancing company 37

CONCEPT check Differentiate between a merger and an acquisition. What are the most common motives for corporate mergers and acquisitions? Describe the different types of corporate mergers. 6 38

Trends in Business Ownership 7 7 What current trends will affect the business organizations of the future? 39

CONCEPT check What are some of the demographic trends currently impacting American business? As a prospective business owner what could you do to capitalize on these trends? What other economic trends are influencing today’s business organizations? 7 40