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Chapter Choosing a Form of Business Ownership 5 5-1
Basic Forms of Ownership The THREE MAJOR FORMS OF BUSINESS OWNERSHIP are: 1. A SOLE PROPRIETORSHIP is a business that is owned, and usually managed, by one person; it is the most common form. 2. A PARTNERSHIP is a legal form of business with two or more owners. 3. A CORPORATION is a legal entity with authority to act and have liability separate from its owners.
Basic Forms of Ownership • Sole Proprietorship Most common form, 17.6 Million; p142 • Partnership • Corporation Make up 81% of total receipts, $11.7 Billion. Number Sales 72% 6% 8% 13% 20% 81%
World’s Largest Corporations 2002 Revenue (Millions) • Wal-Mart Stores $246,525 • Royal Dutch/Shell 235,598 • Exxon/Mobil 204,506 • General Motors 186,763 • BP 178,721 • Ford Motor 163,420 • DaimlerChrysler 156,838 Source: Zacks Reports & Fortune
Ease of start/end Be your own boss Pride of ownership Leave Legacy Retain profit No special taxes Unlimited liability - Personally liable for the debts of the business! Limited financial resources Difficulty in mgmt. Time commitment Few fringe benefits Limited growth Limited life span Sole Proprietorship Advantages Disadvantages
Types of Partnerships General Limited GP Passive Investor Passive Investor GP GP GP GP Passive Investor
New Forms of Partnerships • Master Limited Partnership: • Traded Publicly (& acts like a Co.) • Taxed As A Partnership: meaning, no corporate income tax. • Limited Liability Partnership: LLPs limit partners risk of losing personal assets to only their own acts, etc. Note: Partnership Agreements are virtually a must prior to forming the partnership, etc.
Partnership Advantages Disadvantages • More financial resources available. • Shared mgmt. • Longer survival • No Special Taxes – Owners are taxed at personal income level; not taxed twice, etc. • Unlimited liability Each general partner is liable for the debt of the firm, etc. • Division of profits • Disagreements among partners • Difficult to terminate
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
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
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
Largest U.S. Companies Revenue 2002 (In Millions) • Wal-Mart Stores $246,525 • Exxon/Mobil 204,506 • General Motors 186,763 • Ford Motor 163,420 • General Electric 131,698 • IBM 81,186 Source: Web100 & Fortune
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
Limited Liability Tax Choice (Company v Partnership) Flexible Ownership Rules Flexible Profit & Loss Distribution Operating Flexibility No Stock Limited Life Span (no more than 30 yrs, etc.) Fewer Incentives (no stock options, etc.) Taxes (Self-employ, e.g. FICA on profits, etc.) Paperwork Limited Liability Companies Advantages Disadvantages
Types of Mergers Horizontal Vertical Conglomerate
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
GM’s Ownership In: Source: USA TODAY
Leveraged Buyout Individual + Loan = Purchase of Company Purchase Loan Company = Collateral
Franchise System • Franchise Agreement • Franchisor • Franchisee
Franchise Contract Franchisor, Inc. Branded Product/Service Performance Monitoring $$$$$ Franchisee
Assigns Territory May Provide Financial Aid/Advice Offers Merchandise/ Supplies at Competitive Price Provides Training/Support Business Expansion Using O.P.M. (other peoples’ money) Franchisor
Franchisee • Pays Up-Front Costs • Makes Monthly Payment to Franchisor • Runs Business by Franchisor’s Rules/Procedures • Buys Materials from Franchisor/ Approved Supplier
Fastest Growing Franchises (2002) Source: Entrepreneur, 2003
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
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
Benefits of aHome-Based Franchise • Flexible work hours • Quality lifestyle • Doing the work of your choice • Opportunity to expand using technology • Self-motivation .
Franchising & E-Commerce • Technology- Faster Customer Service • Access to International Markets
Cooperatives • Farm Cooperative • Owned & Controlled by People Who Use It • Pool of Resources • Economic Power