UNIT 5 FORMS OF BUSINESS OWNERSHIP PROPRIETORSHIP, PARTNERSHIP and CORPORATIONS 1
THE FACTS ARE: • Half of all new business fail within the first five to six years. • Most new business fail because of financial reasons. • If you want to compete in the marketplace, you must go global. 1901 -1966 Walt Disney was an avid artist who went into business with his brother, Roy. They set up a studio in their uncle's garage, and made a series of black-and-white cartoons featuring a rabbit named Oswald, produced for Universal Studios. Disney left Universal after they refused to give him a raise and produced the first animated “talkie” firm, Steamboat Willie featuring a mouse, Mickey Mouse. Walt Disney went from sketching “rabbits” to running a multi - billion dollar empire. WHO IS THIS FAMOUS ENTREPRENEUR? 2
ENTREPRENEUR BY DEFINITION: SOMEONE WHO UNDERTAKES THE RISK OF STARTING, OWNING, OPERATING A SMALL BUSINESS FOR THE PURPOSE OF MAKING A PROFIT ANOTHER WAY OF LOOKING AT IT: ENTREPRENEURSHIP BEING IN BUSINESS FOR YOURSELF IS WORKING 8 O HOURS PER WEEK TO AVOID WORKING 40 HOURS FOR SOMEONE ELSE 3
PROPRIETORSHIP Sole Proprietorship Aka Sole Trader – business owned and managed by one person Proprietorship -legal aspect of business -Proprietor – owner/manager Clip. Art, canine coiffure, is Nancy Agababian, professional dog groomer, an artist and designer who has turned her creative passions to beautifying the doggies of New York. Full service grooming includes bath, fluff, styling, ear and teeth cleaned, nails trimmed. Rewards of entrepreneurship: Freedom, Confidence, Contribution. 4
WHY SEEK SELF-EMPLOYMENT? UPSIDE 1. Be your own boss. 2. Make your own decisions. 3. Profit from your hard work. DOWNSIDE 1. Work 80 hours a week. 2. Go years without a vacation. 3. Make less money than you did when you were employed. 4. Lose your life savings if you get sick and can’t 5 work for a long period of time.
Why do people become entrepreneurs? • TO FOLLOW YOUR DREAM • PROVE YOURSELF • BE ALL YOU CAN BE • FED UP WITH POLITICS/POLICIES OF CURRENT JOB • BELIEVE YOU CAN DO IT BETTER • ONCE IS LIFETIME OPPORTUNITY • RECENTLY PROMOTED, DEMOTED, GIVEN WALKING PAPERS DID YOU KNOW: More than half of the companies on the 2009 Fortune 500 list were launched during a recession or bear market, along with nearly half of the firms on the 2008 Inc. list of America’s fastest-growing companies. 6 source: The Economic Future Just Happened, June 2009
ENTREPRENEUR CHARACTERISTICS 1. RISK TAKER – calculated risks 2. DECISIVENESS – --where am I now? --where do I want to be in the future? --how can I reach that goal? 3. ACTION TAKER – initiative to make decisions a reality 4. INNOVATIVE – ability to see a need and fulfill a demand 7
GETTING A BUSINESS STARTED REQUIRES A BUSINESS PLAN --Written document that describes the nature of the business, the company’s goals and objectives, and how they will be achieved. AND THESE FOUR THINGS: Funds Knowledge of business interested in Work experience Opportunity 8
Betty Caskey Balance Sheet Current Date ASSETS LIABILITIES Cash $50, 000. 00 Accounts Payable Merchandise Inventory 75, 000. 00 Other Debts Equipment 63, 000. 00 Total Liabilities Land & Building 182, 000. 00 B. Caskey, Capital $370, 000. 00 TOTAL LIABILITIES & CAPITAL TOTAL ASSETS $47, 000 78, 000 $125, 000. 00 CAPITAL 245, 000. 00 $370, 000. 00
The concept was launched in response to difficulties his girlfriend encountered when she was trying to sell old Pez dispensers and other collectibles. He knew there was a huge community of people interested in selling used merchandise, and the Internet seemed like the logical place to bring them together. Using his personal webpage, he started a sole proprietorship with a prototype called Auction Web in 1995. In a short period of time, the company was incorporated and the name changed to? ? and went public in 1998 - but just three years earlier, it was a small, sole proprietorship. Pierre Omidyar, E-bay founder Net worth 2011 $6. 7 B Net workth: $6. 7 B WHO IS THIS VERY RICH ENTREPRENEUR? 10
This famous sole proprietor purchased a Ben Franklin variety store in Newport, DISADVANTAGES OF Arkansas. The store was a franchise of the Butler Brothers chain. SOLE PROPRIETORSHIP (aka sole trader) Owner may lack special skills and abilities. Owner may lack funds. Owner bears ALL losses. Illness/death may close business. WHO IS OUR FAMOUS ENTREPRENER? He made sure shelves were consistently stocked with a wide range of goods and opened it in 1950 as the "Eagle" department store, but it didn't fare as well. When he bought the franchise the store was doing $72, 000 in sales annually. By 1950, the store was doing $250, 000 in sales annually due to ideas and practices of this entrepreneur. Because of the variety store's enormous success, the landlord, P. K. Holmes, refused to renew the lease when it expired, desiring to pass the store onto his son. The lack of a renewal option, together with the outrageous rent of 5% of sales, were early business lessons for our entrepreneur. 11
WHAT TYPE OF BUSINESS IS SUITED TO BEING A PROPRIETORSHIP? LET’S LIST SOME!! TWO THINGS TO REMEMBER: 1) One that can be managed by the proprietor or those hired by the proprietor 2) Those that do not require a great amount of money. 12
Why do you think many small business fail? 1) lack of capital 2) impatient DID YOU KNOW: A small business is "one that is independently owned and operated and which is not dominant in its field of operation 13 BUT can still have 500 employees and up to $7 M in revenues
PARTNERSHIP UNINCORPORATED BUSINESS ORGANIZATION OWNED BY TWO OR MORE PERSONS CALLED GENERAL PARTNERS AND SHARE EQUALLY IN THE DEBT. PARTNERSHIP AGREEMENT CLEARLY AGREED UPON TERMS OF EACH PERSON’S RESPONSIBILITIES AND ALL CONDITIONS OF CONTRACT. 14
PARTNERSHIP ADVANTAGES Pool skills and abilities Increased sources of capital Improved credit position Contribution of goodwill Increased concern in management of business Elimination of competition Easier to retire from management of company WHO ARE THE ENTREPRENEURS? They took a $5 course on ice-cream making and in 1978 opened their first store in a converted Burlington gas station. They made it a point to connect with the community, hosting a free film festival and giving away free scoops on the first anniversary of the store, a tradition that still continues. In 1980, the duo began making pints to sell to local grocers. In 1981, they expanded this operation. By 1987 sales were at $32 million, operating in 18 15 states.
Betty Caskey & Debora Williams Balance Sheet Current Date ASSETS LIABILITIES Cash $150, 000. 00 Accounts Payable $ 80, 000. 00 Merchandise Inventory 125, 000. 00 Other Debts 125, 000. 00 Equipment 90, 000. 00 Total Liabilities 205, 000. 00 Land & Building 282, 000. 00 B. Caskey, Capital 221, 000. 00 D. Williams, Capital 221, 000. 00 Total Capital 442, 000. 00 TOTAL ASSETS $647, 000. 00 CAPITAL TOTAL LIABILITIES & CAPITAL 16 $647, 000. 00
The duo met working on WHAT IS THE NAME OF their doctorates in computer science at Stanford University in 1995. THE COMPANY? Together, they created a PARTNERS? search engine, with the goal of organizing the vast amount of information available on the Net. Initially called Back. Rub, the software catalogued search results by popularity of pages. In 1998, the pair dropped out of Stanford, changed their startup’s name, set up shop in friend's garage, raised $1 million in capital from friends, family, others. Larry Page and Sergey Brin Today, the world's No. 1 Founded Google, 1998 Internet search engine, earning Personal wealth $19. 6 B 17 2010 $16. 5 billion in sales—mostly through ad sales. Current age of both: 38
COMBINING BUSINESSES Partner A invests $40, 000 Partner B invests $30, 000 Total investment = $_______ Equal partnership? ____ To have an equal partnership, how much would ___ have to invest? $____ What % of the partnership would each partner have if not an equal partnership? (% of ind. invest. /total invest. ) A B ______/____= ______% ____/_______=_____% Assets= Bldg+ what each brings. Total worth=all assets combined What is significant about equal status over non-equal status? 18
UNLIMITED LIABILITY • Business and partners responsible for all debt of the business. • Ability of banks or courts to secure personal assets in cases of bankruptcy. • Ability to seize all personal assets from partners with unlimited liability to satisfy the debt after all business assets have been seized. • Personal assets: what you OWN outside of the business • Examples: house, car, boat, personal savings account, etc. 19
CARLTON – BAKER EQUAL PARTNERSHIP UNLIMITED LIABILITY • Business Fails Amount of debt? ____ • Assets of business: $100, 000 • Liabilities of business: $360, 000 • Baker – Personal Assets of $170, 000 • Carlton – Personal Assets of $30, 000 1. What is each partner’s share of the debt? _______ 2. What will Carlton end up paying? $______ 3. What will Baker end up paying? $______ 4. Why? __________ 20
THREE PARTNERS – EQUAL PARTNERSHIP ABC PARTNERSHIP DISSOLVING $100, 000 still owned to creditors after converting everything to cash. All partners – unlimited liab. Partner A has only $10, 000 in personal assets Partner B and Partner C liable for $______Why? 1)Who will creditors go after to collect $100, 000? 2) As long as unlimited liability, can sue for what? 3) Can partners sue another partner? 21 4) Would B&C sue A? If no, why? If yes, $_____
LIMITED PARTNERSHIP Restricts the liability of the partner to the amount of the partner’s investment THE TERMS OF LIMITED PARTNERSHIPS: 1. One partner must have unlimited liability 2. Name of limited partner not in firm name 3. Legal notice must be given to all creditors of those with limited partnership 4. Advantageous for investment of money but lack of time or interest to actively manage 22
BUSINESS NAME Business Name Rules | DBA - Doing Business As : DBAFiling. Online. com When choosing, list FOUR tips given in video • Proprietorship or partnership –can be conducted under name or names of owner or owners • And Company or & Co. – if two partners, not permissible to use name such as Jones, Smith & Co—name indicates more than two partners. • Names included in “Company” must be identified by registration at public recording office. • Artificial Name (Superior Shoe Store) is fictitious or assumed name, registered as DBA or “Doing Business As” • Proper registration required for creditors to know who is 23 responsible for business.
LIMITED PARTNERSHIP “A” CORPORATION A UNLIMITED LIABILITY $100, 000 INVESTED B/C LIMITED LIABILITY $25, 000 INVESTED “A” CORPORATION: Debt: $200, 000 1) How much will B owe? _________ 2)How much will C owe? _________ Total of B/C toward debt= $______ 3)How much will A owe? ________Why? 4)Why isn’t B & C listed in company name? 24
CORPORATIONS --most common form of business organization. --one which is chartered by a state. --given many legal rights as an entity separate from its owners. WALMART WITHOVER 2 M EMPLOYEES What is the largest corporation in the United States? 25
CORPORATE ADVANTAGE IN MARKETPLACE • • Can supply goods and services to a more people Consumers attracted to well-known brands (Proctor & Gamble) Sales--17 times more than sales from proprietorships; 15 times more than sales from partnerships in the U. S. Can sell their products at lower prices WHY? large volume, small costs per unit sold. Financial resources to conduct research & development Offer more varied job opportunities Higher wages & greater job stability Better health and retirement benefits. 26
In the United States, most large businesses are organized as corporations. Many small businesses that become successful often convert from sole proprietorships and partnerships to corporations as they grow in size. LET’S SEE WHY!! 27
Basic Features of a Corporation DEFINITION: business From left to right: Chad Hurley, Steve Chen, and Jawed Karim DID YOU KNOW: owned by a group of people and authorized by This company began as a venture-funded technology startup, primarily from a $11. 5 the state in which it is million investment by Sequoia Capital located to act as though a between November 2005 and April 2006. WHAT DID THIS single person in: Early headquarters were situated above a TRIO CREATE? pizzeria and Japanese restaurant in San a) making contracts Mateo, California. b) owning property October 2006, Google Inc. announced that c) ability to sue it had acquired this company for $1. 65 d) ability to be sued billion in Google stock. Share of You. Tube sale: HURLEY -34 - $345. 6 M ; CHEN – 33 - $350 M 28 KARIM -32 -$64 M
It all starts with a CHARTER official document granted by a state giving power to run a corporation (aka: Certificate of Incorporation) Certificate of Incorporation NAME OF CORPORATION ARTICLE FIRST The name of the Corporation is ARTICLE SECOND The address ARTICLE THIRD The purpose of the Corporation is to engage in ARTICLE FOURTH Authorized Stock The total number of shares & value. Sample charter for nonprofit Sample Ohio Articles of Incorporation (Non Profit Corporation) 29
Keys to the corporation held by: stockholders, directors, officers Who are the Stockholders a. Owners of the corporation b. Right to stock certificate a. Can transfer ownership b. Right to vote (present or proxy—absentee ballot Sample Proxy Card a. Right to receive dividends based on shares b. Dividends-–profits distributed to shareholders on per share basis c. Right to buy new stock if issued d. Right to share in net proceeds if dissolved 30
Stockholders elect Board of Directors Ruling body of corporation elected by stockholders based on their knowledge in making good policy decisions Responsibilities of Board of Directors: 1. Appoint officers of the company CEO, CFO, Secretary, etc. A corporation must have at least three officers: (1) a president- chief executive officer (CEO) (2) a treasurer or chief financial officer (CFO) and (3) a secretary. 2. Manage the corporation by developing plans and policies to guide corporation. 3. Make major business decisions 4. Oversee general affairs of the corporation Officer Responsibilities • Run the day-to-day operations of the corporation. 31 • Report to Board of Directors
CLOSE CORPORATION WHICH ONE OF THE THREE EXAMPLES OF PRIVATELY (aka PRIVATELY HELD CORPORATION; HELD CORPORATIONS IS THE LARGEST IN TERMS OF aka Closed Corporation) EMPLOYEES AND REVENUE? CARGILL – food, agricultural, financial and industrial 1. Privately held. (Family-run business) products founded in 1865 Ex: Cargill, Mars, LEGO, IKEA MARS – food company founded in 1911 2. Financial activities remain private. LEGO – toy company founded in 1932 3. Stock shares not offered to the public. CARGILL is a privately held, multinational corporation, based in Minnesota. founded in IKEA – home products company founded in 1934 1865, and has grown into the country's largest privately held corporation (in terms of 4. Must file detailed financial information employees(158, 000 employees at 1, 100 locations in 66 countries) 25 percent of all United States grain exports 22 percent of the United States domestic meat & poultry with the federal government once a year market but it does not become public knowledge. CARGILL CONTINUES TO BE OWNED BY THE CARGILL FAMILY. MULTNATIONAL CORPORATION MEANS THEY HAVE COMPANIES OUTSIDE OF THE UNITED STATES BUT ONE HAVE ONE CENTRAL CONTROL LOCATION AND THAT IS IN 32 MINNESOTA.
OPEN CORPORATION (aka PUBLICLY OWNED CORPORATION) 1. Offers shares of stock for public sale. 2. They can raise money and spread risk more easily by offering shares to the broader markets. 3. Must file detailed financial information with the federal government which the federal government and potential investors can examine. (quarterly) 4. Public firms can also reward key employees with shares or options. Ex: Wal. Mart 33
ADVANTAGES OF CORPORATIONS 1. Available Sources of Capital 2. Limited Liability of Stockholders 3. Permanency of Existence 4. Ease in Transferring Ownership What is the biggest and most profitable corporation in the world? WALMART 34
DISADVANTAGES of CORPORATIONS 1) Double Taxation • Taxed as corporation AND • Taxed as stockholder on dividends 2) Government Regulation and Reports 3) Stockholders Records 4) Charter restrictions 35
JOINT VENTURE • Two or more "parent" companies agree to share capital, technology, human resources, risks and rewards in a formation of a new entity under shared control. • Limited time frame (5 -7 years) • 1/3 of fast-growing companies involved in JV (ex: CBS and Reliance Broadcast Network—India) VIRTUAL CORPORATION (aka Virtual Enterprises) • employs electronic means to transact business as opposed to a traditional brick and mortar business examples: Amazon. com; Web 2. 0 LOOK UP WHAT A BRICK AND MORTAR BUSINESS 36 IS – WRITE DEFINITION ON NOTE SHEET.
S-CORPORATION 1) must have no more than 100 stockholders 2) business can’t own more than 80% of stock in another corporation 3) no more than 25% of income of corporation can be from sources other than for the purpose stated in the charter 4) stockholders must be permanent citizens or residents of U. S. 5) taxed as if partnership (limited liability, no double taxation) FYI: S stands for subchapter & type of 37 Federal tax laws that apply
C-Corporation • Similar to S Corporation but unlimited number of owners. • Not restricted as to the types of eligible shareholders like S Corporations. Shareholders can include individuals, other corporations, etc. • Subject to double taxation FYI: When a small business incorporates, it is automatically a C-Corporation (aka regular corporation) The C & S are done 38 for taxation purposes.
Limited Liability Company (LLC) • Owners have limited personal liability for debts and actions of the LLC. • Business is not taxed. Tax is only paid at the shareholder level. • Owners not personally liable for debts or liabilities of the business like a corporation, but have the tax benefits of partnerships. • No maximum number of members. Most states permit “single member” LLCs, those having only one owner. • A few types of businesses generally cannot be LLCs, such as banks and insurance companies. 39
PARTNERSHIP vs CORPORATION vs S-CORPORATION 1) Major weakness of partnership is unlimited liability whereas strength of corporation is limited liability 2) Major strength of partnership is lower income tax rate whereas weakness of corporation is higher income tax rate than that paid by partnership. 3) Stockholders have to pay personal income tax on dividends distributed by corporation (double taxation) S-Corporation offers lower taxes and limited liability, profits from the corporation go directly to the stockholders who include them in their individual income tax returns avoiding double taxation 40
SOCIAL ENTREPRENEURSHIP Social Entrepreneurship has been called the new “Non. Profit which focuses on social and environmental issues. EXAMPLE: Ever Green Environmental story. The program started in 1993 for mental health employees, who worked to recycle paper, aluminum cans and cardboard, all in a workshop. Today, Ever Green Recycling has grown to become a leading environmental business. It presently has three depots in St. John's. Ever Green has seen thousands of products bring transformed in its recycling unit, reducing waste and saving energy. And, even today Ever Green supports physical and mental health programs. They do not pay taxes and do not exist to make a profit Accounts for 6% of GDP 41
QUASI-PUBLIC CORPORATION • Privately-operated corporation supported by the government and whose stock is publicly traded. • Specifically mandated responsibilities spelled out in the corporations charter. • An example of a quasi-public company is Fannie Mae, Sallie Mae, Freddie Mac government sponsored to sell mortgages to ownership among low- to middle-income Americans. Sallie Mac was for student loans; Post Office, Amtrak SEPT. 2008 • FYI: FANNIE AND FREDDIE OWNED $5 T IN U. S. MORTGAGES—HALF THE NATION’S TOTAL. BAILOUT: $600 B in govt. buying of assets of F&F; estimate bailout will grow to $1 T. 42
COOPERATIVES Businesses owned and operated by a group of individuals for their mutual benefit. Purpose is to provide members with cost and profit advantages when purchasing (i. e. inventory) that they would not otherwise have. 43
Did you know: • 40 The average and median age of company founders • 95% of entrepreneurs have a bachelor’s degree • 47% of entrepreneurs have an advanced degree • 69. 9% are married • 59. 7% of entrepreneurs have at least one child when they launch their first business • 43. 5% of entrepreneurs have two or more children when they launch their first business • Less than 1% came from extremely rich or extremely poor backgrounds • 74. 8% indicated desire to build wealth as an important motivation in becoming an entrepreneur. 44
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