Transcript Document

*
*
*
Choosing a
Form of
Business
Ownership
Nickels
*
McGraw-Hill/Irwin
Understanding Business, 8e
McHugh
*
*
CHAPTER
**
5
McHugh
1-1
5-1
© 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
*
*
*
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
• Ease of start/end
• Be your own boss
• Pride of ownership
• Leave a legacy
• Retain profit
• No special taxes
Disadvantages
• Unlimited liability
• Limited financial
resources
• Management difficulty
• Time commitment
• Few fringe benefits
• Limited growth
• Limited life span
5-3
*
*
*
Types of Partnerships
General
Limited
GP
GP
GP
Passive
Investor
GP
Passive
Investor
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
resources
• Unlimited liability
• Shared
management
• Division of profits
• Longer survival
• No Special Taxes
• Disagreements
among partners
• 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
• More money for
investment
• Size
• Perpetual life
• Ease of ownership
change
• Ease of drawing
talented employees
• Separation of
ownership/mgmt.
• Extensive paperwork
• Double taxation
• Two tax returns
• Size
• Termination difficult
• Conflict with
Stockholder & Board
• Initial cost
5-9
*
*
*
World’s Largest
Corporations
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
Citigroup
General Electric
American Intl Group
Bank of America
HSBC Group
ExxonMobil
Royal Dutch/Shell
BP
ING Group
Toyota Motor
11. UBS
12. Wal-Mart Stores
13. Royal Bank of Scotland
14. JP Morgan Chase
15. Berkshire Hathaway
16. BNP Paribas
17. IBM
18. Total
18. Verizon Communication
20. Chevron Texaco
Source: Forbes, 2005
5-10
America’s Largest
Private Companies
*
*
*
Revenue 2004
(In Millions)
$66,669
1.
Cargill / agricultural commodities, food
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
1752
Insurance
Contributorship
Dexter
1767
Adhesives & Coatings
D. Landreth Seed
1784
Seeds
Bank of New York
1784
Banking
Philadelphia
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
permanent
residents
with new tax rules
5-15
*
*
*
Limited Liability Companies
Advantages
• Limited Liability
• Tax Choice
• Flexible Ownership
Rules
• Flexible Profit &
Loss Distribution
• Operating Flexibility
Disadvantages
• No Stock
• Limited Life Span
• Fewer Incentives
• Taxes
• 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
• Assigns Territory
• May Provide
Financial Aid/Advice
• Offers Merchandise/
Supplies at
Competitive Price
• Provides
Training/Support
• Business
Expansion Using
O.P.M.
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
•
Management &
marketing assistance
•
•
•
Personal ownership
•
Lower failure rate
Recognized name
Financial advice &
assistance
Disadvantages
•
•
•
•
•
•
High start-up costs
Shared Profit
Management regulation
Coattail effects
Restrictions on selling
Fraudulent franchisors
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