MultiMedia by Stephen M. Peters© 2001 South-Western College Publishing Chapter 2 Selecting a Form of Business Ownership Introduction to

MultiMedia by Stephen M. Peters© 2001 South-Western College Publishing Learning Objectives  Explain how business owners select a form of business ownership.  Describe methods of owning existing businesses.  Explain how business owners can measure their business performance.

MultiMedia by Stephen M. Peters© 2001 South-Western College Publishing Specific Business Ownership Impact Form of Business Ownership Decisions Business Access to Funding Control of Business Taxes Paid by Business Value of Firm

MultiMedia by Stephen M. Peters© 2001 South-Western College Publishing Three Forms of Business Ownership  Sole Proprietorship  Partnership  Corporation

MultiMedia by Stephen M. Peters© 2001 South-Western College Publishing Sole Proprietorship A business owned by a single owner. Four Characteristics:  Single owner.  Bears all responsibility.  Represents 70% of all firms in U.S.  Generate less than 10 percent of all business revenue.

MultiMedia by Stephen M. Peters© 2001 South-Western College Publishing Sole Proprietorship Advantages Disadvantages Retention of all profits. Ease of formation. Complete control. Lower taxes. Incurs all losses Unlimited liability. Financing limitations. Limited skills. Incurs all losses Unlimited liability. Financing limitations. Limited skills.

MultiMedia by Stephen M. Peters© 2001 South-Western College Publishing Partnerships Advantages Disadvantages Funding. Losses are shared. Specialization. Funding. Losses are shared. Specialization. Control is shared. Unlimited liability. Shared profits. Control is shared. Unlimited liability. Shared profits.

MultiMedia by Stephen M. Peters© 2001 South-Western College Publishing Types of Partnerships  General Partnership General partners run the business on a daily basis. General partners have unlimited liability.  Limited Partnership Limited partners only invest in business. Limited partners are liable up to the amount they invested.

MultiMedia by Stephen M. Peters© 2001 South-Western College Publishing S Corporation Seventy-five or fewer owners. Earnings distributed to owners and taxed at the respective personal income tax rate. Business Online

MultiMedia by Stephen M. Peters© 2001 South-Western College Publishing Limited Liability Company A firm that has all the favorable features of a typical partnership while limiting the liability for their owners.

MultiMedia by Stephen M. Peters© 2001 South-Western College Publishing Limited Liability Company (LLC) Advantages  Corporate advantage of limited liability.  Avoids the double taxation of corporations.  Reduces the liability for the actions of the other owners.  Corporate advantage of limited liability.  Avoids the double taxation of corporations.  Reduces the liability for the actions of the other owners. Business Online First created in Wyoming in 1977

MultiMedia by Stephen M. Peters© 2001 South-Western College Publishing Characteristics of a Corporation Corporate charter. Establishment of bylaws. Stockholders. Board of directors. Business Online

MultiMedia by Stephen M. Peters© 2001 South-Western College Publishing Private vs Publicly Held Corporations Privately Held Ownership is restricted to small group of investors. Stock is not traded publicly. Examples: L. L. Bean, Polo, Ralph Lauren. Publicly Held Larger corporations. Stock is traded publicly. Act of initially issuing stock: “going public.” Business Online

MultiMedia by Stephen M. Peters© 2001 South-Western College Publishing C Corporations State-chartered entity that pays taxes and is distinct from its owners. Advantages Disadvantages Limited liability. Access to funds. Transfer of ownership. Limited liability. Access to funds. Transfer of ownership. May be costly to establish. Financial disclosure. Agency problems. Tax disadvantage. May be costly to establish. Financial disclosure. Agency problems. Tax disadvantage. Business Online

MultiMedia by Stephen M. Peters© 2001 South-Western College Publishing Business Forms by Ownership

MultiMedia by Stephen M. Peters© 2001 South-Western College Publishing Business Forms by Revenue Contributions

MultiMedia by Stephen M. Peters© 2001 South-Western College Publishing Owning Existing Businesses Methods: Assuming ownership of a family business Purchasing an existing business Franchising

MultiMedia by Stephen M. Peters© 2001 South-Western College Publishing Three Types of Franchises  Distributorship Dealer sells products produced by a manufacturer. Example: Car dealers.  Chain-Style Business Firm uses trade name of a company and follows guidelines. Example: McDonalds.  Manufacturing Arrangement Firm manufactures a product using a formula from another company. Example: Microsoft.

MultiMedia by Stephen M. Peters© 2001 South-Western College Publishing Franchising Advantages Disadvantages Proven Management Style Name Recognition. Financial Support. Proven Management Style Name Recognition. Financial Support.  Sharing of profits.  Less control.  Sharing of profits.  Less control. Business Online

MultiMedia by Stephen M. Peters© 2001 South-Western College Publishing Measuring Business Performance Measurements:  Return on Investment (ROI).  Risk of Investment.

MultiMedia by Stephen M. Peters© 2001 South-Western College Publishing Measuring Business Performance Return on Investment: Dollar value of a firm’s after-tax earnings. Preferred method for measuring profitability Return on Equity= Earnings after tax Equity

MultiMedia by Stephen M. Peters© 2001 South-Western College Publishing Measuring Business Performance & Risk Risk: Degree of uncertainty about a firm’s future earnings. Risks can include: Uncertainty about future revenue. Uncertainty about future expenses.