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Forms ofBusiness
Ownership
CH
AP
TE
R 4
The Future of BusinessThe Essentials 4th EditionGitman & McDaniel
Prepared byDeborah Baker
Chapter 4Copyright ©2009 by South-Western, a division of Cengage Learning. All rights reserved
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2
Learning Goals
CH
AP
TE
R 41 What are the advantages and disadvantages of
the sole proprietorship form of business organization?
2 What are the advantages of operating as a partnership, and what downside risks should partners consider?
3 How does the corporate structure provide advantages and disadvantages to a company, and what are the major types of corporations?
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Learning Goals (continued)
CH
AP
TE
R 44 What other options for business organization
does a company have in addition to sole proprietorships, partnerships, and corporations?
5 What makes franchising an appropriate form of organization for some types of business, and why does it continue to grow in importance?
6 Why are mergers and acquisitions important to a company’s overall growth?
7 What current trends will affect the business organizations of the future?
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Sole proprietorships
Partnerships
Corporations
Business Ownership
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Sole Proprietorships
1
What are the advantages and disadvantages of the sole proprietorship form of business organization?
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sole proprietorship
A business that is established, owned, operated, and often financed by one person.
1
Sole Proprietorships
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AdvantagesAdvantages
Easy and inexpensive to form
Profits go to the owner Direct control of the
business Freedom from government
regulations No special taxation Ease of dissolution
DisadvantagesDisadvantages
Unlimited liability Difficulty raising capital Limited managerial
expertise Trouble finding
qualified employees Personal time commitment Unstable business life Losses are owner’s
responsibility
Sole Proprietorships
1
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CONCEPT check
1
What is a sole proprietorship?
Why is this a popular form of business organization?
What are the drawbacks to being a sole proprietor?
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Partnerships
2
What are the advantages of operating as a partnership, and what downside risks should partners consider?
2
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partnership
An association of two or more individuals who agree to operate a business together for profit.
Partnerships
2
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Partnerships
AdvantagesAdvantagesAdvantagesAdvantages
Ease of formation Availability of capital Diversity of skills and
expertise Flexibility No special taxes Relative freedom from
government control
Unlimited liability Potential for conflicts
between partners Complexity of profit-sharing Difficulty exiting or
dissolving partnership
DisadvantagesDisadvantagesDisadvantagesDisadvantages
2
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CONCEPT check
How does a partnership differ from a sole proprietorship?
Describe the three main types of partnerships and explain the difference between a limited partner and a general partner.
What are the main advantages and disadvantages of a partnership?
2
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Corporations
3
How does the corporate structure provide advantages and disadvantages to a company, and what are the major types of corporations?
3
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corporation
A legal entity with an existence and life separate from its owners, who are not personally liable for the entity’s debts.
A corporation is chartered by the state in which it is formed and can own property, enter into contracts, sue and be sued, and engage in business operations under the terms of its charter.
Corporations
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The 10 Largest U.S. Corporations
1. Wal-Mart Stores
2. ExxonMobil
3. Chevron Texaco
4. General Motors
5. ConocoPhillips
6. General Electric
7. Ford Motor
8. Citigroup
9. Bank of America Corp.
10. AT&T
Ranked by 2007 Sales
Source: “The 2008 Fortune 500,” Fortune, http://money.cnn.com/magazines/fortune
(April 2008)©Time Inc. All rights reserved.
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Articles of Incorporation
3
Name of corporation
Company’s goals
Types of stock and number of shares issued
Life of the corporation
Minimum investment by owners
Methods for transferring shares
Address of the corporate office
Names and addresses of the first board of directors
Exhibit 4.4
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Corporations
AdvantagesAdvantagesAdvantagesAdvantages
Limited liability Ease of transferring
ownership Unlimited life Tax deductions Ability to attract
financing
Double taxation of profits
Cost and complexityof formation
More government restrictions
DisadvantagesDisadvantagesDisadvantagesDisadvantages
3
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Types of Corporations
C CorporationC Corporation A conventional or basic corporate form of organization
A conventional or basic corporate form of organization
S CorporationS Corporation A hybrid entity that is organized like a corporation, but taxed like a partnership
A hybrid entity that is organized like a corporation, but taxed like a partnership
Limited LiabilityCompany (LLC)
Limited LiabilityCompany (LLC)
A hybrid organization that offers the same liability protection as a corporation but may be taxed as either a partnership or a corporation
A hybrid organization that offers the same liability protection as a corporation but may be taxed as either a partnership or a corporation
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CONCEPT check
What is a corporation? Describe how corporations are formed and structured.
Summarize the advantages and disadvantages of corporations. Which features contribute to the dominance of corporations in the business world?
Why do S corporations and limited liability companies (LLCs) appeal to small businesses?
3
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Specialized Forms of Business Organization
4
What other options for business organization does a company have in addition to sole proprietorships, partnerships, and corporations?
4
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cooperative
A legal entity typically formed by people with similar interests, such as suppliers or customers, to reduce costs and gain economic power.
A cooperative has: limited liability an unlimited life span an elected board of directors an administrative staff profit distribution to member-owners
Specialized Forms of Business Organization
4
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Cooperatives
SellerCooperatives
SellerCooperatives
Individual producers join togetherto compete more effectively withlarge producers
Individual producers join togetherto compete more effectively withlarge producers
Buyer Cooperatives
Buyer Cooperatives
A group of cooperative members unite for combined purchasing power
A group of cooperative members unite for combined purchasing power
4
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Benefits of Cooperatives
4
Empower people to improve their quality of life Enhance economic opportunities through self-help Provide members with services, including:
credit finance energy consumer goods housing telecommunications
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Cooperative Principles
4
Voluntary and open membership Democratic member control Member economic participation Autonomy and independence Education, training, and information Cooperation among cooperatives Concern for community
Source: “What Are Cooperatives,” Press Kit, National Cooperative Business Association, http://www.ncba.coopCopyright ©NCBA. All rights reserved. Reproduced by permission.
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joint venture
Two or more companies that form an alliance to pursue a specific project usually for a specified time period.
Joint Ventures
4
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CONCEPT check
Describe the two types of cooperatives and the advantages of each.
What are the benefits of joint ventures?
4
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Franchising
5
What makes franchising an appropriate form of organization for some types of business, and why does it continue to grow in importance?
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franchising
A form of business organization based on a business arrangement between a franchisor, which supplies the product concept and the franchisee, who sells the goods or services of the franchisor in a certain geographic area.
Franchising
5
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Top Franchises for 2008
1. 7-Eleven Inc.
2. Subway
3. Dunkin’ Donuts
4. Pizza Hut
5. McDonald’s
6. Sonic Drive In Restaurants
7. KFC Corp.
8. InterContinental Hotels Group
9. Domino’s Pizza LLC
10.RE/MAX Int’l. Inc.
Exhibit 4.8Source: Top 10 Franchises in 2008 excerpted from “2008 Franchise 500 Rankings.” Reprinted from http://entrepreneur.com/franchises/rankings/franchise500-115608/2008.html with permission of Entrepreneur.com, Inc. Entrepreneur.com, Inc. All rights reserved.
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Franchise Agreements
5
FranchiseeAgreement
FranchiseeAgreement
FranchisorAgreement
FranchisorAgreement
Follow operating rules Buy standard equipment Keep up sales/service
levels Take part in franchisor
promotions Maintain a relationship
with franchisor
Use of proven company brand
Help finding a site Building plans Training and management
assistance Managerial and accounting
procedures Employee training Wholesale prices for
supplies Financial assistance
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Franchises
AdvantagesAdvantagesAdvantagesAdvantages
Increased ability for franchisor to expand
Recognized name, product, and operating concept
Management training and assistance
Financial assistance
Loss of control Cost of franchising Restricted operating freedom
DisadvantagesDisadvantagesDisadvantagesDisadvantages
5
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Franchise Purchase Tips
Act fast, yet proceed with caution
Put the franchisor to the test
Know what you’re getting into
Don’t invest more than you can afford to lose
Don’t fall in love with a trend
Exhibit 4.11Source: Franchise Purchase Tips excerpted from “All the Rage—Tech & eBay.” Reprinted from http://entrepreneur.com/magazine/entrepreneur/2005/January/74990 -2.html with permission of Entrepreneur.com, Inc.
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CONCEPT check
Describe franchising and the main parties to the transaction.
Summarize the major advantages and disadvantages of franchising.
Why has franchising proved so popular?
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Mergers and Acquisitions
6
Why are mergers and acquisitions important to a company’s overall growth?
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merger
The combination of two or more firms to form a new company, which often takes on a new corporate identity.
Mergers and Acquisitions
6
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acquisition
The purchase of a corporation by another corporation or by an investor group; the identity of the acquired company may be lost.
Mergers and Acquisitions
6
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Merger Motives
Improve overall performance of the merged firms through cost savings, elimination of overlapping operations, improve purchasing power, increase market share, or reduce competition.
Company growth Broaden product lines Acquire technology / skills Acquire new markets
Financial restructuring: cutting costs selling off units laying off employees refinancing company
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CONCEPT check
Differentiate between a merger and an acquisition.
What are the most common motives for corporate mergers and acquisitions?
Describe the different types of corporate mergers.
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Trends in Business Ownership
7
What current trends will affect the business organizations of the future?
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CONCEPT check
What are some of the demographic trends currently impacting American business?
As a prospective business owner what could you do to capitalize on these trends?
What other economic trends are influencing today’s business organizations?
7