Chapter 4

1
Chapter 4 Forms of Business Ownership
2
Chapter 4 Learning Goals

• What are the three main forms of business
  organization, and what factors should a companys
  owners consider when selecting a form?
• What are the advantages and disadvantages of sole
  proprietorships?
• Why would a new business venture choose to
  operate as a partnership, and what downside would
  the partners face?
• How does the corporate structure provide
  advantages and disadvantages to a company and
  what are the major types of corporations?

3
Chapter 4 Learning Goals (contd.)

• Does a company have any business organization
  options besides sole proprietorship, partnership,
  and corporation?
• Why is franchising growing in importance?
• Why would a company use mergers and acquisitions
  to grow?
• What trends will affect business organization in
  the future?

4
Business Organizations

• 3 main types
• Sole Proprietorship
• Partnership
• Corporation
• Considerations for choosing the best type
• Owners liability for firms debts
• The ease and cost of forming the business
• The ability to raise funds
• The taxes
• The degree of operating control the operator can
  retain
• The ability to attract employees

5
Comparisons of Forms of Business Organization
Sole proprietorshipsPartnershipsCorporations
6
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

7
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

8
Partnerships

• 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 companys operations.

9
Partnerships, cont.

• Advantages
• Ease of formation
• Availability of capital
• Diversity of skills expertise
• Flexibility to respond to changing business
  conditions
• Relative freedom from government control
• No special taxes

10
Partnerships, cont.

• Disadvantages
• Unlimited liability for general partners
• Potential for conflict between partners
• Limited life
• Sharing of profits
• Difficulty in leaving a partnership

11
Topics to Coverin a Partnership Agreement

• Purpose duration of partnership
• Roles, responsibilities, compensation
• Contributions
• Procedures for adding/removing partners
• Buy-out procedures
• Dispute resolution
• Financial arrangements
• Dissolving the partnership
• Valuation

Source American Express Small Business Exchange,
home3.americanexpress.com/smallbusiness
12
Corporations

• Legal entities with a separate existence from its
  owners.
• Types of Corporations
• C corporations
• conventional
• S corporations
• Taxed like a partnership

13
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

14
Corporate Structure

• Stockholders
• Own the corporation
• Can sell or transfer shares at any time
• Entitled to receive profits in the form of
  dividends
• Board of Directors
• Elected by stockholders
• Govern the firm
• Officers
• Carry out the goals and policies set by the board

15

• Organizational Structure of Corporations

Stockholders
elect
Directors
hire
Officers (Top Management)
President Vice Treasurer Secretary
President
16
Corporations, cont.

• Advantages
• limited liability
• easy to get financing
• easy to transfer ownership
• unlimited life-span
• tax deductions

17
Corporations, cont.

• Disadvantages
• double taxation of profits
• costly complex to form
• government restrictions

18
Other forms of business organizations

• Limited Liability Companies (LLC)
• Cooperatives
• Joint Ventures
• Franchises

19
Limited Liability Companies

• Offer limited liability to owners
• Easy to set up
• Subject to few restrictions
• Taxed as either a corporation or partnership

20
Some Pros and Cons of LLCs

• Pros
• Protection of personal assets
• Avoid double-taxation of profits
• Flexible management organization
• Good for foreign investors

• Cons
• Often required to have a limited life (lt 30
  years)
• Not corporations, so can not issue stock

Source The Company Corporation,
www.incorporate.com
21
Cooperatives

• Formed by people with similar interests
• 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

22
Cooperatives, cont

• Common in
• Agriculture
• Hardware/Lumber
• Grocery
• Types of Cooperatives
• Seller Cooperatives
• Buyer Cooperatives

23
Joint Ventures

• Alliance formed by 2 or more companies for a
  project
• Allows companies to gain access to new markets,
  products, technology

24
Franchises

• Individually owned companies that operate like
  they are part of chain of companies
• 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 franchisor
• Allows an individual to own a business without
  starting from nothing buys a proven product and
  operating methods

25
Franchises, cont.

• Advantages
• increased opportunity to expand (franchisor)
• recognized name, product, and operating concept
  (franchisee)
• management training and assistance (franchisee)
• financial assistance (franchisee)

26
Franchises, cont.

• Disadvantages
• loss of control (franchisor)
• costs of franchising
• restricted operating freedom (franchisee)

27
Top 10 Franchises for 2005

• Ranking based on factors such as financial
  strength stability, growth rate size
• 1. Subway
• 2. Curves
• 3. Quiznos
• 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 www.entrepreneur.com
28
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

29
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

30
Types of Mergers

• Horizontal Mergers
• Vertical Mergers
• Conglomerate Mergers
• Leveraged Buyout (LBO)

31
Trends

• 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

32

• Review
• Sole Proprietorships
• Partnerships
• Corporations
• LLCs
• Cooperatives
• Joint Ventures
• Franchises
• Mergers Acquisitions
• Looking Ahead
• Entrepreneurship
• Small Businesses