Business 100 Introduction to Business Dr. Kathy Broneck

Review Ethics and Legalities Compliance-based vs. Integrity-based ethical codes Responsibilities

Preview Types of business owners Mergers Franchises Cooperatives

3 Types of Businesses Sole Proprietorship Partnership Corporation

Sole Proprietorship  Ease of start/end  Be your own boss  Pride of ownership  Leave Legacy  Retain profit  No special taxes  Unlimited liability  Limited financial resources  Difficulty in mgmt.  Time commitment  Few fringe benefits  Limited growth  Limited life span AdvantagesDisadvantages

Types of Partnerships General GP GP GP GP Limited Limited Partner Limited Partner Limited Partner All are liable GP is liable LPs just loose investment General Partner

New Forms of Partnerships Master Limited Partnership (MLPs) Traded Publicly Can have stocks Acts like a corporation Taxed As A Partnership personal income Increased availability of cash

New Forms of Partnerships Limited Liability Partnership (LLPs) Limits losing own personal assets Liability cannot exceed initial amount invested

Partnership  More financial resources  Shared mgmt.  Longer survival  No Special Taxes  Unlimited liability  Division of profits  Disagreements among partners  Difficult to terminate Advantages Disadvantages

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

Types of Corporations  Regular ‘C’ (Conventional Corporations)  S Corporation  Limited Liability Companies (LLC)

Conventional (C) Corporations State chartered Acts as an independent entity Liability is on company, not owners Share ownership and profits Stocks

Corporation  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 AdvantagesDisadvantages

S Corporations 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

Limited Liability Companies Limited Liability Tax Choice Flexible Ownership Rules Flexible Profit & Loss Distribution Operating Flexibility No Stock Limited Life Span Fewer Incentives Taxes Paperwork AdvantagesDisadvantages

World’s Largest Corporations 1) Wal-Mart Stores $246,525 2) Royal Dutch/Shell235,598 3) Exxon/Mobil204,506 4) General Motors186,763 5) BP178,721 6) Ford Motor163,420 7) DaimlerChrysler156, Revenue (Millions) Source: Zacks Reports & Fortune

Basic Forms of Ownership Sole Proprietorship Partnership Corporation NumberSales 72%6% 8%13% 20% 81% 81%

How Owners Affect Management

Types of MergersHorizontal Vertical Conglomerate

Leveraged Buyout Individual + Loan= Purchase of Company Purchase Loan Company = Collateral

GM’s Ownership In: Source: USA TODAY

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

Franchise System  Franchise Agreement  Franchisor  Franchisee

Franchise Contract Franchisor, Inc. Franchisee Branded Product/Service PerformanceMonitoring $$$$$

Franchisor Assigns Territory May Provide Financial Aid/Advice Offers Merchandise/ Supplies at Competitive Price Provides Training/Support Business Expansion Using O.P.M.

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

CompanySinceType# Stores Curves1995 Women’s Only Fitness 3,778 Subway1974 Submarine Sandwich 14,800 7-Eleven Hr. Convenience 3,761 Taco Bell1964 Mexican Fast Food 5,417 Jani-King1974 Commercial Cleaning 7,843 Fastest Growing Franchises (2002) Source: Entrepreneur, 2003

Cost of Fast-Food Franchise CompanyInitial FeeRoyalty Burger King$50,0008.5% McDonald’s$45,0008% Wendy’s$25,0008% Domino’sNone8.5% Subway$10, % Krispy Kreme$40,0005.5%

Franchises + 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 Advantages Disadvantages

How to Avoid a Franchise 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

Home-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