*

*
*

CHOOSING A

CHAPTER
FORM OF
BUSINESS
OWNERSHIP 5

1-1
5-1
*
* Basic Forms of
* Business Ownership

Type of Ownership Number Sales

Sole Proprietorship 72% 6%

Partnership 8% 13%

Corporation 20% 81%

Source: US Internal Revenue Service

5-2
*
* Sole Proprietorship
*
Advantages Disadvantages
• Ease of start/end • Unlimited liability
• Limited financial
• Be your own boss resources
• Pride of ownership • Management difficulty
• Leave a legacy • Time commitment
• Few fringe benefits
• Retain profit
• Limited growth
• No special taxes • Limited life span

5-3
*
* Types of Partnerships
*
General Limited

GP
Passive Passive
GP GP Investor Investor
GP
GP

Passive
Investor

5-4
*
* New Forms of Partnerships
*

• Master Limited Partnership

• Traded Publicly
• Taxed As A Partnership

• Limited Liability Partnership

5-5
*
* Partnership
*
Advantages Disadvantages
• More financial • Unlimited liability
resources
• Shared • Division of profits
management
• Disagreements
• Longer survival among partners

• No Special Taxes • Difficult to

terminate

5-6
*
* Types of Corporations
*

• Conventional ‘C’

• S Corporation

• Limited Liability Companies

5-7
*
* Corporations
*
• Private: Not Traded on Any
Stock Exchange

• Public: Shares are Traded on

One or More Stock Exchanges

• Non-Profit: Performs Public

Service, Has Special Tax
Considerations to Encourage
Formation

5-8
*
* Corporation
*
Advantages Disadvantages
• Limited liability • Extensive paperwork
• More money for • Double taxation
investment • Two tax returns
• Size • Size
• Perpetual life • Termination difficult
• Ease of ownership • Conflict with
change Stockholder & Board
• Ease of drawing • Initial cost
talented employees
• Separation of
ownership/mgmt.

5-9
*
* World’s Largest
* Corporations
1. Citigroup 11. UBS
2. General Electric 12. Wal-Mart Stores
3. American Intl Group 13. Royal Bank of Scotland
4. Bank of America 14. JP Morgan Chase
5. HSBC Group 15. Berkshire Hathaway
6. ExxonMobil 16. BNP Paribas
7. Royal Dutch/Shell 17. IBM
8. BP 18. Total
9. ING Group 18. Verizon Communication
10. Toyota Motor 20. Chevron Texaco
Source: Forbes, 2005

5-10
*
* America’s Largest
* Private Companies
Revenue 2004
(In Millions)
1. Cargill / agricultural commodities, food $66,669
2. Koch Industries / chemicals, energy, tech 60,000
3. Mars / candy, pet food electronics 19,100
4. PricewaterhouseCoopers / accounting 18,700
5. Publix Supermarket / supermarkets 18,686

Source: Forbes, 2005

5-11
*
* America’s Oldest
* Companies
Company Year Started Type of Company

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

5-12
*
* GM’s Ownership In:
*

Source: USA TODAY

5-13
*
* How Owners Affect
* Management

5-14
*
* S Corporations
*
• No more than 100 • 1 class of stock
shareholders • <25% of income
• Individual or can be passive
Estates • Benefits change
• U.S. citizens or with new tax rules
permanent
residents

5-15
*
* Limited Liability Companies
*
Advantages Disadvantages
• Limited Liability
• No Stock
• Tax Choice
• Flexible Ownership • Limited Life Span
Rules • Fewer Incentives
• Flexible Profit &
Loss Distribution
• Taxes
• Operating Flexibility • Paperwork

5-16
*
* Types of Mergers
*

Horizontal

Vertical

Conglomerate No
Relationship
between
companies

5-17
*
* Leveraged Buyout
*

Individual + Loan = Purchase of Company

Purchase Loan

Company = Collateral
5-18
*
* Why Mergers Don’t Work!
*
• Companies Overpay to
Acquire Another Firm
• Acquiring Company
Overestimates Cost Savings
and Synergies
• Managers Disagree About
Integrating Operations
• Obsession with Cost Cutting Hurts Business,

Costing Top Employees & Customers

5-19
*
* Franchise System
*
• Franchise
Agreement

• Franchisor

• Franchisee

5-20
*
* Franchise Contract
*
Franchisor, Inc.
Branded
Product/Service

Performance
Monitoring

$$$$$

Franchisee

5-21
*
* Franchisor
*
• Provides
• Assigns Territory
Training/Support

• May Provide • Business

Financial Aid/Advice Expansion Using
O.P.M.
• Offers Merchandise/
Supplies at
Competitive Price

5-22
*
* Franchisee
*
• Pays Up-Front Costs
• Makes Monthly Payment to
Franchisor
• Runs Business by Franchisor’s
Rules/Procedures
• Buys Materials from Franchisor/
Approved Supplier

5-23
*
* Franchises
*
Advantages Disadvantages

• Management & • High start-up costs

marketing assistance • Shared Profit
• Personal ownership • Management regulation

• Recognized name • Coattail effects

• Restrictions on selling
• Financial advice &
assistance
• Fraudulent franchisors

• Lower failure rate

5-24
*
* Cost of Fast-Food
* Franchise
Company Initial Fee Royalty
Burger King $50,000 8.5%
McDonald’s $45,000 8%
Wendy’s $25,000 8%
Domino’s None 8.5%
Subway $10,000 11.5%
Krispy Kreme $40,000 5.5%

5-25
*
* How to Avoid a
* Franchise Lemon!
1. Research officers & their
business experience
2. Get summary of any bankruptcy
& litigation
3. Estimate all costs to set up
franchise
4. Review franchise contract & three
most recent financial statements

5-26
*
* Benefits of a
* Home-Based Franchise
• Flexible work hours
• Quality lifestyle
• Doing the work of your
choice
• Opportunity to expand
using technology
• Self-motivation

5-27
*
* Franchising & E-Commerce
*
• Technology- Faster
Customer Service

• Access to International
Markets

5-28
*
* Cooperatives
*
• Farm Cooperative
• Owned & Controlled by People
Who Use It
• Pool of Resources
• Economic Power

5-29