Prepared by Management Department | | CHOOSING A FORM OF BUSINESS OWNERSHIP Week 4

Basic Forms of Business Ownership Source: US Internal Revenue Service Type of Ownership NumberSales Sole Proprietorship 72%6% Partnership8%13% Corporation20%81%

 Ease of start/end  Be your own boss  Pride of ownership  Leave a legacy  Retain profit  No special taxes  Unlimited liability  Limited financial resources  Management difficulty  Time commitment  Few fringe benefits  Limited growth  Limited life span AdvantagesDisadvantages

Contoh Sole Proprietorships

Types of Partnerships General GP GP GP GP Limited GP PassiveInvestor PassiveInvestor PassiveInvestor

New Forms of Partnerships  Master Limited Partnership Traded Publicly Taxed As A Partnership  Limited Liability Partnership

Contoh Limited Liability Partnership

Partnership More financial More financial resources resources Shared Shared management management Longer survival Longer survival No Special Taxes No Special Taxes Unlimited liability Unlimited liability Division of profits Division of profits Disagreements Disagreements among partners among partners Difficult to Difficult to terminate terminate AdvantagesDisadvantages

Types of Corporations  Conventional ‘C’  S Corporation  Limited Liability Companies

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

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

How Owners Affect Management

World’s Largest Corporations 1.Citigroup 2.General Electric 3.American Intl Group 4.Bank of America 5.HSBC Group 6.ExxonMobil 7.Royal Dutch/Shell 8.BP 9.ING Group 10.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

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

Comparison of FORMS OF BUSINESS OWNERSHIP, see p.131 from Nickels, McHugh, Understanding Business, 8 th Edition. McGraw Hill

Types of Mergers Conglomerate Vertical Horizontal No Relationship between companies

satu contoh horizontal merger. *suer ini tadinya beda gerobak.

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

Why Mergers Don’t Work!  Companies Overpay to Acquire Another Firm  Acquiring Company Overestimates Cost Savings and Synergies Managers Disagree About Managers Disagree About Integrating Operations Integrating Operations Obsession with Cost Cutting Hurts Business, Costing Top Employees & Customers Obsession with Cost Cutting 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

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 AdvantagesDisadvantages

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

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

Benefits of a 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

Cooperatives  Farm Cooperative  Owned & Controlled by People Who Use It  Pool of Resources  Economic Power

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