Chapter 5 THE FUTURE OF BUSINESS Gitman & McDaniel 5 th Edition THE FUTURE OF BUSINESS Gitman & McDaniel 5 th Edition Chapter 5 Forms of Business Ownership Prepared by Deborah Baker Texas Christian University Prepared by Deborah Baker Texas Christian University

Chapter 5 Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 2 1What are the strengths and weaknesses of the sole proprietorship form of business organization? 2What are the advantages of operating as a partnership, and what downside risks should partners consider? 3How does the corporate structure provide advantages and disadvantages to a company, and what are the major types of corporations? 4Does a company have other business organization options in addition to sole proprietorships, partnerships, and corporations? Learning Goals

Chapter 5 Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 3 5What makes franchising an appropriate form of organization for some types of business, and why is it growing in importance? 6Why are mergers and acquisitions important to a company’s overall growth? 7How will current trends affect the business organizations of the future? Learning Goals

Chapter 5 Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 4 Principles of Business Ownership Financing? Employees? Business taxes? Debt liability? Operating control? Ownership?

Chapter 5 Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 5 Learning Goal 1 What are the strengths and weaknesses of the sole proprietorship form of business organization? 1

Chapter 5 Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 6 SOLE PROPRIETORSHIPS 1 A business that is established, owned, operated, and often financed by one person. A business that is established, owned, operated, and often financed by one person. Sole Proprietorship

Chapter 5 Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 7 SOLE PROPRIETORSHIPS 1 AdvantagesAdvantages  Easy and inexpensive to form  Profits go to the owner  Direct control of the business  Freedom from government regulations  No special taxation  Ease of dissolution DisadvantagesDisadvantages  Unlimited liability  Difficulty in raising capital  Limited managerial expertise  Trouble finding qualified employees  Personal time commitment  Unstable business life  Losses are owner’s responsibility

Chapter 5 Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 8 2 Learning Goal 2 What are the advantages of operating as a partnership, and what downside risks should partners consider?

Chapter 5 Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 9 PARTNERSHIPS 2 An association of two or more individuals who agree to operate a business together for profit. Partnership

Chapter 5 Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 10 PARTNERSHIPS 2 AdvantagesAdvantages  Ease of formation  Availability of capital  Diversity of skills and expertise  Flexibility  No special taxes  Relative freedom from government control  Unlimited liability  Potential for conflicts between partners  Sharing of profits  Difficulty exiting or dissolving DisadvantagesDisadvantages

Chapter 5 Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 11 3 Learning Goal 3 How does the corporate structure provide advantages and disadvantages to a company, and what are the major types of corporations?

Chapter 5 Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 12 CORPORATIONS 3 A legal entity with an existence and life separate from its owners, who are not personally liable for the entity’s debts. Corporation

Chapter 5 Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 13 The 10 Largest U.S. Corporations 3

Chapter 5 Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 14 The Incorporation Process 3 Select company’s name Write articles of incorporation Pay required fees and taxes Hold organizational meeting Adopt bylaws, elect directors, pass operating resolutions

Chapter 5 Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 15 The Corporate Structure 3 Stockholders Directors PresidentVPTreasurerSecretary Officers Elect Hire

Chapter 5 Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 16 CORPORATIONS 3 AdvantagesAdvantages  Limited liability  Ease of transferring ownership  Unlimited life  Tax deductions  Ability to attract financing  Double taxation of profits  Cost and complexity of formation  More government restrictions DisadvantagesDisadvantages

Chapter 5 Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 17 Types of Corporations C Corporation Conventional or basic corporate form of organization S Corporation A hybrid entity that is organized like a corporation, but taxed like a partnership Limited Liability Company (LLC) A hybrid organization that offers the same liability protection as a corporation but may be taxed as either a partnership or a corporation 3

Chapter 5 Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 18 4 Does a company have other business organization options in addition to sole proprietorships, partnerships, and corporations? Learning Goal 4

Chapter 5 Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 19 4 Cooperatives Legal entities formed by people with similar interests, to reduce costs and gain economic power. Cooperatives Seller Cooperatives Individual producers join together to compete more effectively with large producers Buyer Cooperatives A group of cooperative members who unite for combined purchasing power

Chapter 5 Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 20 What makes franchising an appropriate form of organization for some types of business, and why is it growing in importance? 5 Learning Goal 5

Chapter 5 Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 21 5 A form of business organization based on a business arrangement between a franchisor, which supplies the product concept and the franchisee, who sells the goods or services of the franchisor in a certain geographic area. A form of business organization based on a business arrangement between a franchisor, which supplies the product concept and the franchisee, who sells the goods or services of the franchisor in a certain geographic area. Franchising

Chapter 5 Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 22 5 AdvantagesAdvantages  Increased ability for franchisor to expand  Recognized name, product, and operating concept  Management training and assistance  Financial assistance  Loss of control  Cost of franchising  Restricted operating freedom DisadvantagesDisadvantages Franchises

Chapter 5 Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 23 5 Top 10 Fastest-Growing Franchises

Chapter 5 Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 24 6 Why are mergers and acquisitions important to a company’s overall growth? Learning Goal 6

Chapter 5 Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 25 6 The combination of two or more firms to form a new company, which often takes on a new corporate identity. The combination of two or more firms to form a new company, which often takes on a new corporate identity. Merger The purchase of a corporation by another corporation or investor group. The purchase of a corporation by another corporation or investor group. Acquisition MERGERS AND ACQUISITIONS

Chapter 5 Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 26 6 Horizontal Merger Vertical Merger Conglomerate Merger Leveraged Buyout Types of Mergers

Chapter 5 Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 27 6 Selected Megamergers

Chapter 5 Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 28 7 How will current trends affect the business organizations of the future? Learning Goal 7

Chapter 5 Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 29 7 ChangingDemographicsChangingDemographics Franchise Innovations MergersMergers Trends in Business Ownership

Chapter 5 Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 30 7 Franchise Differentiation Cross-brandingCross-branding Multiple-concept franchises Expanded product offerings Expanded New ideas Franchise Innovations

Chapter 5 Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 31 7 A purchase price that is low enough A target that is smaller than the buyer, and that the buyer understands Evidence the deal isn’t the brainchild of an egocentric CEO Evidence the deal isn’t the brainchild of an egocentric CEO A buyer who pays in cash and not overinflated stock Identifying Merger Opportunities