5-1 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. NickelsMcHughMcHugh Nickels Cover

5-2 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Chapter 55 Choosing a Form of Business Ownership 5-2

5-3 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. 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

5-4 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Basic Forms of Ownership Sole ProprietorshipSole Proprietorship PartnershipPartnership CorporationCorporation NumberSales 72%6% 8%13% 20%81%

5-5 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. 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

5-6 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Types of Partnerships General GP GP GP GP Limited GP PassiveInvestor PassiveInvestor PassiveInvestor

5-7 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. New Forms of Partnerships Master Limited PartnershipMaster Limited Partnership –Traded Publicly –Taxed As A Partnership Limited Liability PartnershipLimited Liability Partnership

5-8 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Partnership  More financial resources  Shared mgmt.  Longer survival  No Special Taxes  Unlimited liability  Division of profits  Disagreements among partners  Difficult to terminate Advantages Disadvantages

5-9 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Types of Corporations  Regular ‘C’  S Corporation  Limited Liability Companies

5-10 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. America’s Oldest Companies J. E. Rhoads & Sons1702 Conveyer Belts Covenant Life Ins Insurance Philadelphia1752 Insurance Contributorship Contributorship Dexter1767 Adhesives & Coatings D. Landreth Seed1784 Seeds Bank of New York1784 Banking

5-11 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. 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

5-12 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. 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

5-13 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Largest U.S. Companies 1.Wal-Mart Stores$246,525 2.Exxon/Mobil 204,506 3.General Motors 186,763 4.Ford Motor 163,420 5.General Electric 131,698 6.IBM 81,186 Revenue 2002 (In Millions) (In Millions) Source: Web100 & Fortune

5-14 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. How Owners Affect Management

5-15 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. S Corporations S No more than 75 shareholders S Individual or Estates S U.S. citizens or residents S 1 class of stock S <25% of income can be passive S Slower-growing companies S Benefits change with new tax rules

5-16 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Limited Liability Companies Limited Liability Limited Liability Tax Choice Tax Choice Flexible Ownership Rules Flexible Ownership Rules Flexible Profit & Loss Distribution Flexible Profit & Loss Distribution Operating Flexibility Operating Flexibility No Stock No Stock Limited Life Span Limited Life Span Fewer Incentives Fewer Incentives Taxes Taxes Paperwork Paperwork AdvantagesDisadvantages

5-17 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Why Mergers Don’t Work Companies Overpay to Acquire Another Firm Companies Overpay to Acquire Another Firm Acquiring Company Overestimates Cost Savings and Synergies Acquiring Company Overestimates Cost Savings and Synergies After Merger, Managers Disagree About Integrating Operations After Merger, Managers Disagree About Integrating Operations After Merger, Cost Cutting Obsession Hurts Business Costing Top Employees & Customers After Merger, Cost Cutting Obsession Hurts Business Costing Top Employees & Customers

5-18 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. GM’s Ownership In: Source: USA TODAY

5-19 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Types of Mergers Horizontal Vertical Conglomerate

5-20 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Leveraged Buyout Individual + Loan= Purchase of Company Purchase Loan Company = Collateral

5-21 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Franchise System  Franchise Agreement  Franchisor  Franchisee

5-22 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Franchise Contract Franchisor, Inc. Franchisee Branded Product/Service PerformanceMonitoring $$$$$

5-23 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Franchisor Assigns Territory Assigns Territory May Provide Financial Aid/Advice May Provide Financial Aid/Advice Offers Merchandise/ Supplies at Competitive Price Offers Merchandise/ Supplies at Competitive Price Provides Training/Support Provides Training/Support Business Expansion Using O.P.M. Business Expansion Using O.P.M.

5-24 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Franchisee Pays Up-Front Costs Pays Up-Front Costs Makes Monthly Payment to Franchisor Makes Monthly Payment to Franchisor Runs Business by Franchisor’s Rules/Procedures Runs Business by Franchisor’s Rules/Procedures Buys Materials from Franchisor/ Approved Supplier Buys Materials from Franchisor/ Approved Supplier

5-25 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. CompanySinceType # Stores Curves1995 Women’s Only Fitness 3,778 Subway1974 Submarine Sandwich 14,800 7-Eleven Hr. Convenience 3,761 Taco Bell 1964 Mexican Fast Food 5,417 Jani-King1974 Commercial Cleaning 7,843 Fastest Growing Franchises (2002) Source: Entrepreneur, 2003

5-26 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. 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

5-27 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. 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%

5-28 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. 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

5-29 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Benefits of a Home-Based Franchise  Flexible work hours  Quality lifestyle  Doing the work of your choice  Opportunity to expand using technology  Self-motivation.

5-30 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Franchising & E-Commerce Technology- Faster Customer ServiceTechnology- Faster Customer Service Access to International MarketsAccess to International Markets

5-31 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Cooperatives  Farm Cooperative  Owned & Controlled by People Who Use It  Pool of Resources  Economic Power