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CHAPTER FIVE
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  1. CHAPTER FIVE Forms of Business Ownership

  2. World’s Largest Public Companies General Electric U.S. Royal/Dutch Shell Britain/Holland Coca-Cola U.S. Nippon Tele. Japan Exxon U.S. Microsoft U.S. Company Country

  3. America’s Oldest Companies J. E. Rhoads & Sons 1702 Conveyer Belts Covenant Life Ins. 1717 Insurance Philadelphia 1752 Insurance Contributorship Dexter 1767 Adhesives & Coatings D. Landreth Seed 1784 Seeds Bank of New York 1784 Banking

  4. Largest U.S. Companies • Microsoft $602,432 • General Electric 507,216 • Cisco Systems 366,498 • Wal-Mart Stores 307,865 • Intel 275,008 Market Capitalization (In Millions) Source: Wall Street Journal

  5. Basic Forms of Ownership • Sole Proprietorship • Partnership • Corporation Number Sales 74% 5% 8% 5% 18% 90%

  6. Forms of Business Ownership

  7. Ease of start/end Be your own boss Pride of ownership 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

  8. Partnership Advantages Disadvantages • More financial resources • Shared mgmt. • Longer survival • Unlimited liability • Division of profits • Disagreements among partners • Difficult to terminate

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

  10. Uniform Partnership Act • Common Ownership • Shared Profits & Losses • Management Participation

  11. Types of Corporations • Regular ‘C’ • Subchapter ‘S’ • Limited Liability Corporation

  12. 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 • Double taxation

  13. No more than 75 shareholders Shareholders Individuals Estates U.S. citizens or residents 1 class of stock <25% of income can be passive Tax rate = +5% Slower-growing companies Benefits change with new tax rules S Corporations

  14. Figure 5.4 How Owners Affect Management

  15. Make-up of Corporate Boards Retired office of another firm 89% CEO at another company 87% Major company shareholder 73% Ex-government official 53% Academicians 50% Corporate boards average 11 Directors. Most Directors by percentage are:

  16. External Corporate Growth • Merger/Acquisition • Horizontal • Vertical • Conglomerate • Leveraged Buyout (LBO)

  17. Types of Mergers/Acquisitions A Horizontal B = AB Conglomerate Vertical

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

  19. Top U. S. Mergers Time Warner AOL $120 Bil World Com MCI $30 Bil Bell Atlantic NYNEX $26 Bil KKR RJR/Nabisco $25 Bil Disney CAP/Cities ABC $19 Bil Acquirer Target Value

  20. Top Growth Franchises #New Stores in 1999 • Kumon Math & Reading Centers 4,586 • McDonald’s 3,288 • 7-Eleven Convenience Stores 1,023 • Jackson Hewitt Tax Service 884 • Taco Bell Corp. 841 • KFC Corp. 567 • Coverall Cleaning Concepts 548 • Yogen Fruz Worldwide 520 Source: Entrepreneur, March 2000

  21. Survival After Startup Franchise vs. Independent

  22. Management & marketing ass’t Personal ownership Recognized name Financial advice & ass’t Lower failure rate High start-up costs Shared Profit Management regulation Coattail effects Restrictions on selling Fraudulent franchisors Franchises Disadvantages Advantages

  23. Franchise System • Franchiser • Franchisee • Franchise Agreement

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

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

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

  27. 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

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