Transcript 5-1 Business in a Changing World Chapter 5 Options for Organizing Business McGraw-Hill/Irwin Copyright © 2009 by the McGraw-Hill Companies, Inc.

5-1
Business in a
Changing World
Chapter 5
Options for Organizing Business
2
McGraw-Hill/Irwin
Copyright © 2009 by the McGraw-Hill Companies, Inc. All rights reserved.
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Zingerman’s DeliInnovation, quality, & growth
Thanks to the Internet, haggling has never been
easier, especially in the area of online apparel
sales.
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Forms of Business Ownership
•Sole proprietorship
•Partnership
•Corporation
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Comparing the Forms of
Business Ownership
Source: U.S. Bureau of the Census, Statistical Abstract of the U.S. 2003,
(Washington, D.C.: U.S. Government Printing Office, 2004), p. 459.
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Forms of Business Ownership
Various Forms of Business Ownership
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Forms of Business Ownership
Sole Proprietorship
Businesses owned and operated by one
individual; the most common form of business
organization in the United States
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Forms of Business Ownership
Sole Proprietorship
•Many restaurants
•Hair salons
•Flower shops
•Dog kennels
•Independent grocery stores
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Forms of Business Ownership
Sole Proprietorship -- Facts
• 15-20 million in the U.S.
• 80% of all businesses
• Men 2x more likely than
women to start own
business
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Forms of Business Ownership
Advantages of a Sole Proprietorship
•Ease and cost of formation
•Secrecy
•Distribution and use of profits
•Flexibility and control of the business
•Government regulation
•Taxation
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Forms of Business Ownership
Disadvantages of a Sole Proprietorship
•Unlimited liability
•Limited sources of funds
•Limited skills
•Lack of continuity
•Lack of Qualified Employees
•Taxation
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Forms of Business Ownership
Partnership
A form of business organization defined by the
Uniform Partnership Act as “an association of
two or more persons who carry on as co-owners
of a business for profit”
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Forms of Business Ownership
Types of
Partnerships
•General partnership
•Limited partnership
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Forms of Business Ownership
General partnership
A partnership that involves a complete sharing
in both the management and the liability of the
business
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Forms of Business Ownership
Limited partnership
A business organization that has at least one
general partner, who assumes unlimited liability,
and at least one limited partner whose liability is
limited to his or her investment in the business.
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Articles of Partnership
Legal documents that set forth the basic
agreement between partners.
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Articles of Partnership
1.Name, purpose, location
2.Duration of the agreement
3.Authority and responsibility of each partner
4.Character of partners (i.e., general or limited,
active or silent)
5.Amount of contribution from each partner
6.Division of profits or losses
7.Salaries of each partner
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Articles of Partnership
8.
9.
10.
11.
12.
13.
14.
15.
How much each partner is allowed to withdraw
Death of partner
Sale of partnership interest
Arbitration of disputes
Required and prohibited actions
Absence and disability
Restrictive covenants
Buying and selling agreements
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Partnerships Advantages & Disadvantages
Advantages
•Ease of organization
•Capital & credit
•Knowledge & skills
•Decision making
•Regulatory controls
Disadvantages
•Unlimited liability
•Business responsibility
•Life of the partnership
•Distribution of profits
•Limited sources of
funds
•Taxation of
partnerships
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Keys to Success in Business Partnerships
1.
2.
3.
4.
5.
6.
7.
8.
9.
Keep profit sharing and ownership at 50-50
Partners should have different & complementary skill sets
Honest is critical
Maintain face-to-face communications
Transparency – sharing information
Awareness of funding constraints and limited resources
To be successful, you need experience
Family is priority; limit associated problems
Do not become too infatuated with “the idea” think
implementation
10. Couple optimism with realism in sales and growth
expectations
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Forms of Business Ownership
Corporations
Legal entities created by the state whose assets
and liabilities are separate from its owners..
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Forms of Business Ownership
Corporations
Typically owned by many individuals and/or
organizations who own shares of the business –
stock (shareholders or stockholders)
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Corporations
Stock & Dividends
Stock – shares of a corporation that may be bought or
sold
Dividends – profits of a corporation that are distributed
in the form of cash payments to stockholders.
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Corporations
Creating a Corporation
A Corporation is created (incorporated) under
the laws of the state in which it incorporates.
The individuals creating the corporation are
called incorporators.
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Corporations
Articles of Incorporation
Legal documents filed with basic information
about the business with the appropriate state
office (often the secretary of state).
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Articles of Incorporation
Common Elements
1.
2.
3.
Name & address of corporation
Objectives of the corporation
Classes of stock (common, preferred, voting,
nonvoting)
4. Number of shares of each class of stock
5. Financial capital required at time of incorporation
6. Provisions for transferring shares of stock
7. Regulation of internal corporate affairs
8. Address of business office
9. Names and addresses of the initial board of directors
10. Names and addresses of the incorporators
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Corporations
Types of Corporations
Private corporation
Public corporation
Quasi-public corporation
Non-profit corporation
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Corporations
Types of Corporations
Private corporation – a corporation owned
by just one or a few people who are closely
involved in managing the business
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Corporations
Types of Corporations
Public Corporation– a corporation whose
stock anyone may buy, sell, or trade.
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Corporations
Types of Corporations
Initial Public Offering (IPO) – A private
corporation who wishes to go “public” to raise
additional capital and expand. The IPO is
selling a corporation’s stock on public markets
for the first time.
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Corporations
Types of Corporations
Quasi-public corporation – Corporation
owned and operated by the federal, state,
or local government -(NASA, U.S. Postal Service).
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The Largest U.S. Corporations
Fortune’s 2007 rankings of America’s largest corporations
Rank
Company
Revenues
($millions)
1
Wal-Mart
$378,799
2
Exxon Mobil
$372,824
3
Chevron
$210,783
4
General Motors
$182,347
5
Conoco Phillips
$178,558
6
General Electric
$176,656
7
Ford Motor
$172,468
8
Citigroup
$159,229
9
Bank of America
$119,190
10
AT&T
$118,928
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Corporations
Types of Corporations
Non-profit corporation – focuses on
providing a service rather than earning a
profit but are not owned by a government
entity (American Red Cross)
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Corporations
Elements of a
Corporation
•Board of directors
•Preferred stock
•Common stock
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Corporations
Board of Directors
Board of Directors – a group of individuals
elected by the stockholders to oversee the
general operation of the corporation who
set the corporation’s long-range objectives.
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Corporations
Board of Directors
Inside Directors – individuals who serve on the board
and are employed by the corporation (usually executives
of the corporation).
Outside Directors – individuals who serve on the board
who are not directly affiliated with the corporation
(usually Executives of other corporations).
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Corporations
Stock Ownership
Preferred stock – a special type of stock whose owners,
though not generally having a say in running the company,
have a claim to profits before other stockholders do.
Common Stock – stock whose owners have voting rights in
the corporation, yet do not receive preferential treatment
regarding dividends.
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Corporations
• Advantages:
– Limited liability
– Transfer of ownership
– Perpetual life
– External sources of
funds
– Expansion potential
• Disadvantages:
– Double taxation
– Forming a corporation
– Disclosure of
information
– Employee-owner
separation
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Other Types of Business Ownership
•Joint Ventures
•S Corporations (S-Corp)
•Limited Liability Companies (LLC’s)
•Cooperatives (Co-op’s)
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Other Types of Business Ownership
Joint
Venture
Joint Venture -- a partnership established
for a specific project or for a limited time
(Audi & Volkswagen joint venture)
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Other Types of Business Ownership
S-Corporation (S-Corp) – corporation taxed as
though it were a partnership with restrictions on
shareholders. Very popular with entrepreneurs.
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Other Types of Business Ownership
Limited Liability Company (LLC)– form of
ownership that provides limited liability and
taxation like a partnership but places fewer
restrictions on members. (Segway)
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Other Types of Business Ownership
Cooperative (Co-Op)– an organization composed
of individuals or small businesses that have
banded together to reap the benefits of
belonging to a larger organization.
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Trends in Business Ownership
•Mergers
•Acquisitions
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Other Types of Business Ownership
Merger – the combination of two companies (usually
corporations) to form a new company
Acquisition – the purchase of one company by another,
usually by buying its stock and/or assuming its debt.
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Types of Business Ownership
Major Mergers and Acquisitions Worldwide
Transaction in millions of U.S. dollars
Acquirer
Target
Transaction
Value
Rank
Year
1
2000
AOL
Time Warner
2
2000
Glaxo Welcome
SmithKline Beecham PLc
$75,961
3
2004
Royal Dutch
Petroleum
Shell Transport & Trading
$74,559
4
2006
AT&T
BellSouth Corp
$72,671
5
2001
Comcast
AT&T Broadband
$72,041
$164,747
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Other Types of Business Ownership
Leveraged buyout (LBO) – a purchase in which a
group of investors borrows money from banks and
other institutions to acquire a company (or a division
of one) using the assets of the purchased company
to guarantee repayment of the loan.
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