5-1 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. NickelsMcHughMcHugh And Kendra 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. Learning Goals 1.Sole proprietorships 2.Partnerships 3.Corporations 4.Corporate mergers 5.Franchises 6.Cooperatives

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. 1) Sole Proprietorship  Sole Proprietorship – A business that is owned, and usually managed, by one person.  Unlimited Liability- The responsibility of business owners for all of the debts of the business.

5-6 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

5-7 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. 2.) Partnership  Partnership- A legal form of business with two or more owners.  General partnership- partnership in which all owners share an operating business and in assuming liability for the business’s debt.  General Partner- An owner who has unlimited liability and is active in managing the firm.  Limited Partnership- A partnership with one or more general partners and one or more limited partners.

5-8 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Partnerships (continued)  Limited Partner- An owner who invests money in the business but does not have any management responsibility or liability for losses beyond the investment.  Limited Liability- Responsibility of a business’s owners for losses only up to the amount they invest; limited partners and share holders have limited liability.

5-9 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

5-10 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Partnership Cont.  Limited Liability- Responsibility of a business’s owners for losses only up to the amount they invest; limited partners and share holders have limited liability.  Master Limited Partnership (MLP)- A partnership that looks much like a corporation (in that it acts like a corporation and is traded on a stock exchange) but is taxed like a partnership and thus avoids a corporate income tax.  Limited Liability Partnership (LLP)- A partnership that limits partner’s risk of losing personal assets to only their own acts and omissions and to the acts to the omissions of people under their supervision.

5-11 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

5-12 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

5-13 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. 3.) Corporation Corporation- A legal entity with authority to act and have liability separate from its owners.Corporation- A legal entity with authority to act and have liability separate from its owners. S corporation- A unique government creation that looks like a corporation but is taxed like sole proprietorships and partnerships.S corporation- A unique government creation that looks like a corporation but is taxed like sole proprietorships and partnerships. Limited Liability Company (LLC)- A company similar to an S corporation but without the special eligibility requirements.Limited Liability Company (LLC)- A company similar to an S corporation but without the special eligibility requirements.

5-14 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

5-15 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. How Owners Affect Management

5-16 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

5-17 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

5-18 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

5-19 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

5-20 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

5-21 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

5-22 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. 4.) Corporate Expansion Merger- The result of two firms forming one company.Merger- The result of two firms forming one company. Acquisition- One company’s purchase of the property and obligations of another company.Acquisition- One company’s purchase of the property and obligations of another company. Vertical Merger- The joining of two companies involved in different stages of related businesses.Vertical Merger- The joining of two companies involved in different stages of related businesses. Horizontal Merger- The joining of two firms in the same industry.Horizontal Merger- The joining of two firms in the same industry.

5-23 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Types of Mergers Horizontal Vertical Conglomerate

5-24 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Mergers (continued) Conglomerate Merger- The joining of firms in completely unrelated industries.Conglomerate Merger- The joining of firms in completely unrelated industries. Leveraged Buy-out (LBO)- An attempt by employees, management, or a group of investors to purchase an organization primarily through borrowing.Leveraged Buy-out (LBO)- An attempt by employees, management, or a group of investors to purchase an organization primarily through borrowing.

5-25 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

5-26 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

5-27 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. GM’s Ownership In: Source: USA TODAY

5-28 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. 5.) Franchises Franchise- The right to use a specific business’s name and sell its products or services in a given territory.Franchise- The right to use a specific business’s name and sell its products or services in a given territory. Franchise Agreement- An arrangement where by someone with a good idea for business sells the right to use the business name and sell a product or service to others in a given territory.Franchise Agreement- An arrangement where by someone with a good idea for business sells the right to use the business name and sell a product or service to others in a given territory. Franchisor- A company that develops a product concept and sells others the rights to make and sell the products.Franchisor- A company that develops a product concept and sells others the rights to make and sell the products. Franchisee- A person who buys a franchise.Franchisee- A person who buys a franchise.

5-29 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Franchise System  Franchise Agreement  Franchisor  Franchisee

5-30 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 $$$$$

5-31 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.

5-32 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

5-33 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

5-34 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

5-35 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%

5-36 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

5-37 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.

5-38 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

5-39 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. 6.) Cooperatives Cooperative- A business owned and controlled by the people who use it- producers, consumers, or workers with similar needs who pool their resources for mutual gain.Cooperative- A business owned and controlled by the people who use it- producers, consumers, or workers with similar needs who pool their resources for mutual gain.

5-40 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