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Chapter

Chapter. Choosing a Form of Business Ownership. 5. 5- 1. Basic Forms of Ownership. Sole Proprietorship Partnership Corporation. Number. Sales. 72%. 6%. 8%. 13%. 20%. 81%. Ease of start/end Be your own boss Pride of ownership Leave Legacy Retain profit No special taxes.

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  1. Chapter Choosing a Form of Business Ownership 5 5-1

  2. Basic Forms of Ownership • Sole Proprietorship • Partnership • Corporation Number Sales 72% 6% 8% 13% 20% 81%

  3. Ease of start/end Be your own boss Pride of ownership Leave Legacy Retain profit No special taxes Unlimited liability Limited financial resources Difficulty in mgmt. Time commitment Few fringe benefits Limited growth Limited life span Sole Proprietorship Advantages Disadvantages

  4. Types of Partnerships General Limited GP Passive Investor Passive Investor GP GP GP GP Passive Investor

  5. New Forms of Partnerships • Master Limited Partnership • Traded Publicly • Taxed As A Partnership • Limited Liability Partnership

  6. Partnership Advantages Disadvantages • More financial resources • Shared mgmt. • Longer survival • No Special Taxes • Unlimited liability • Division of profits • Disagreements among partners • Difficult to terminate

  7. Types of Corporations • Regular ‘C’ • S Corporation • Limited Liability Companies

  8. Corporations • Private- Not Traded on Any Stock Exchange • Public- Shares Are Traded on 1 or More Stock Exchanges • Non-Profit- Performs Public Service, Has Special Tax Considerations To Encourage Formation

  9. Corporation Advantages Disadvantages • More money for investment • Limited liability • Separation of ownership/mgmt. • Ease of ownership change • Perpetual life • Size • Initial cost • Paperwork • Two tax returns • Termination difficult • Stockholder & Board Conflict • Double taxation

  10. How Owners Affect Management

  11. No more than 75 shareholders Individual or Estates U.S. citizens or residents 1 class of stock <25% of income can be passive Slower-growing companies Benefits change with new tax rules S Corporations

  12. Limited Liability Tax Choice Flexible Ownership Rules Flexible Profit & Loss Distribution Operating Flexibility No Stock Limited Life Span Fewer Incentives Taxes Paperwork Limited Liability Companies Advantages Disadvantages

  13. Why Mergers Don’t Work • Companies Overpay to Acquire Another Firm • Acquiring Company Overestimates Cost Savings and Synergies • After Merger, Managers Disagree About Integrating Operations • After Merger, Cost Cutting Obsession Hurts Business Costing Top Employees & Customers

  14. Types of Mergers Horizontal Vertical Conglomerate

  15. Leveraged Buyout Individual + Loan = Purchase of Company Purchase Loan Company = Collateral

  16. Franchise System • Franchise Agreement • Franchisor • Franchisee

  17. Franchise Contract Franchisor, Inc. Branded Product/Service Performance Monitoring $$$$$ Franchisee

  18. Assigns Territory May Provide Financial Aid/Advice Offers Merchandise/ Supplies at Competitive Price Provides Training/Support Business Expansion Using O.P.M. Franchisor

  19. Franchisee • Pays Up-Front Costs • Makes Monthly Payment to Franchisor • Runs Business by Franchisor’s Rules/Procedures • Buys Materials from Franchisor/ Approved Supplier

  20. Fastest Growing Franchises (2002) Source: Entrepreneur, 2003

  21. Management & marketing assistance Personal ownership Recognized name Financial advice & assistance Lower failure rate High start-up costs Shared Profit Management regulation Coattail effects Restrictions on selling Fraudulent franchisors Franchises Advantages Disadvantages

  22. Cost of Fast-Food Franchise

  23. How to Avoid aFranchise Lemon • Research officers & their business experience • Get summary of any bankruptcy & litigation • Estimate all costs to set up franchise • Review franchise contract & three most recent financial statements

  24. Benefits of aHome-Based Franchise • Flexible work hours • Quality lifestyle • Doing the work of your choice • Opportunity to expand using technology • Self-motivation .

  25. Franchising & E-Commerce • Technology- Faster Customer Service • Access to International Markets

  26. Cooperatives • Farm Cooperative • Owned & Controlled by People Who Use It • Pool of Resources • Economic Power

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