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2. Business in a Changing World McGraw-Hill/Irwin Copyright © 2009 by the McGraw-Hill Companies, Inc. All rights reserved. Chapter 5 Options for Organizing Business 2

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4. 5-4 Zingerman’s Deli- Zingerman’s Deli- Innovation, quality, & growth Thanks to the Internet, haggling has never been easier, especially in the area of online apparel sales.

5. 5-5 Forms of Business Ownership Sole proprietorship Partnership Corporation

6. Comparing the Forms of Business Ownership Source: U.S. Bureau of the Census, Statistical Abstract of the U.S. 2003, (Washington, D.C.: U.S. Government Printing Office, 2004), p. 459. 5-6

7. 5-7 7 Various Forms of Business Ownership Forms of Business Ownership

8. 5-8 Forms of Business Ownership Businesses owned and operated by one individual; the most common form of business organization in the United States Sole Proprietorship

9. 5-9 Forms of Business Ownership Many restaurants Hair salons Flower shops Dog kennels Independent grocery stores Sole Proprietorship

10. 5-10 Forms of Business Ownership Sole Proprietorship -- Facts 15-20 million in the U.S. 80% of all businesses Men 2x more likely than women to start own business 10

11. 5-11 Forms of Business Ownership Ease and cost of formation Secrecy Distribution and use of profits Flexibility and control of the business Government regulation Taxation Advantages of a Sole Proprietorship

12. 5-12 Forms of Business Ownership Unlimited liability Limited sources of funds Limited skills Lack of continuity Lack of Qualified Employees Taxation Disadvantages of a Sole Proprietorship

13. 5-13 Forms of Business Ownership A form of business organization defined by the Uniform Partnership Act as “an association of two or more persons who carry on as co-owners of a business for profit” Partnership

14. 5-14 Forms of Business Ownership General partnership Limited partnership Types of Partnerships

15. 5-15 Forms of Business Ownership A partnership that involves a complete sharing in both the management and the liability of the business General partnership

16. 5-16 Forms of Business Ownership A business organization that has at least one general partner, who assumes unlimited liability, and at least one limited partner whose liability is limited to his or her investment in the business. Limited partnership

17. 5-17 Articles of Partnership Legal documents that set forth the basic agreement between partners.

18. 5-18 Articles of Partnership 1.Name, purpose, location 2.Duration of the agreement 3.Authority and responsibility of each partner 4.Character of partners (i.e., general or limited, active or silent) 5.Amount of contribution from each partner 6.Division of profits or losses 7.Salaries of each partner

19. 5-19 Articles of Partnership 8.How much each partner is allowed to withdraw 9.Death of partner 10.Sale of partnership interest 11.Arbitration of disputes 12.Required and prohibited actions 13.Absence and disability 14.Restrictive covenants 15.Buying and selling agreements

20. 5-20 Partnerships Advantages & Disadvantages Advantages Ease of organization Capital & credit Knowledge & skills Decision making Regulatory controls Disadvantages Unlimited liability Business responsibility Life of the partnership Distribution of profits Limited sources of funds Taxation of partnerships

21. 5-21 Keys to Success in Business Partnerships 1.Keep profit sharing and ownership at 50-50 2.Partners should have different & complementary skill sets 3.Honest is critical 4.Maintain face-to-face communications 5.Transparency – sharing information 6.Awareness of funding constraints and limited resources 7.To be successful, you need experience 8.Family is priority; limit associated problems 9.Do not become too infatuated with “the idea” think implementation 10.Couple optimism with realism in sales and growth expectations

22. 5-22 Forms of Business Ownership Legal entities created by the state whose assets and liabilities are separate from its owners.. Corporations

23. 5-23 Forms of Business Ownership Typically owned by many individuals and/or organizations who own shares of the business – stock (shareholders or stockholders) Corporations

24. 5-24 Corporations Stock – shares of a corporation that may be bought or sold Dividends – profits of a corporation that are distributed in the form of cash payments to stockholders. Stock & Dividends

25. 5-25 Corporations A Corporation is created (incorporated) under the laws of the state in which it incorporates. The individuals creating the corporation are called incorporators. Creating a Corporation

26. 5-26 Corporations Legal documents filed with basic information about the business with the appropriate state office (often the secretary of state). Articles of Incorporation

27. 5-27 Articles of Incorporation Common Elements 1.Name & address of corporation 2.Objectives of the corporation 3.Classes of stock (common, preferred, voting, nonvoting) 4.Number of shares of each class of stock 5.Financial capital required at time of incorporation 6.Provisions for transferring shares of stock 7.Regulation of internal corporate affairs 8.Address of business office 9.Names and addresses of the initial board of directors 10.Names and addresses of the incorporators

28. 5-28 Corporations Private corporation Public corporation Quasi-public corporation Non-profit corporation Types of Corporations

29. 5-29 Corporations Private corporation – a corporation owned by just one or a few people who are closely involved in managing the business Types of Corporations

30. 5-30 Corporations Public Corporation– a corporation whose stock anyone may buy, sell, or trade. Types of Corporations

31. 5-31 Corporations Initial Public Offering (IPO) – A private corporation who wishes to go “public” to raise additional capital and expand. The IPO is selling a corporation’s stock on public markets for the first time. Types of Corporations

32. 5-32 Corporations Quasi-public corporation – Corporation owned and operated by the federal, state, or local government -- (NASA, U.S. Postal Service).NASAU.S. Postal Service Types of Corporations

33. 5-33 The Largest U.S. Corporations Fortune’s 2007 rankings of America’s largest corporations RankCompany Revenues ($millions) 1Wal-Mart$378,799 2Exxon Mobil$372,824 3Chevron$210,783 4General Motors$182,347 5Conoco Phillips$178,558 6General Electric$176,656 7Ford Motor$172,468 8Citigroup$159,229 9Bank of America$119,190 10AT&T$118,928 33

34. 5-34 Corporations Non-profit corporation – focuses on providing a service rather than earning a profit but are not owned by a government entity (American Red Cross)American Red Cross Types of Corporations

35. 5-35 Corporations Board of directors Preferred stock Common stock Elements of a Corporation

36. 5-36 Corporations Board of Directors – a group of individuals elected by the stockholders to oversee the general operation of the corporation who set the corporation’s long-range objectives. Board of Directors

37. 5-37 Corporations Inside Directors – individuals who serve on the board and are employed by the corporation (usually executives of the corporation). Outside Directors – individuals who serve on the board who are not directly affiliated with the corporation (usually Executives of other corporations). Board of Directors

38. 5-38 Corporations Preferred stock – a special type of stock whose owners, though not generally having a say in running the company, have a claim to profits before other stockholders do. Common Stock – stock whose owners have voting rights in the corporation, yet do not receive preferential treatment regarding dividends. Stock Ownership

39. 5-39 Corporations 39 Advantages: – Limited liability – Transfer of ownership – Perpetual life – External sources of funds – Expansion potential Disadvantages: – Double taxation – Forming a corporation – Disclosure of information – Employee-owner separation

40. 5-40 Other Types of Business Ownership Joint Ventures S Corporations (S-Corp) Limited Liability Companies (LLC’s) Cooperatives (Co-op’s)

41. 5-41 Other Types of Business Ownership Joint Venture -- a partnership established for a specific project or for a limited time (Audi & Volkswagen joint venture)Audi & Volkswagen joint venture JointVenture

42. 5-42 Other Types of Business Ownership S-Corporation (S-Corp) – corporation taxed as though it were a partnership with restrictions on shareholders. Very popular with entrepreneurs.

43. 5-43 Other Types of Business Ownership Limited Liability Company (LLC)– form of ownership that provides limited liability and taxation like a partnership but places fewer restrictions on members. (Segway)Segway

44. 5-44 Other Types of Business Ownership Cooperative (Co-Op)– an organization composed of individuals or small businesses that have banded together to reap the benefits of belonging to a larger organization.

45. 5-45 Trends in Business Ownership Mergers Acquisitions

46. 5-46 Other Types of Business Ownership Merger – the combination of two companies (usually corporations) to form a new company Acquisition – the purchase of one company by another, usually by buying its stock and/or assuming its debt.

47. 5-47 Types of Business Ownership RankYearAcquirerTarget Transaction Value 12000AOLTime Warner$164,747 22000Glaxo WelcomeSmithKline Beecham PLc$75,961 32004Royal Dutch Petroleum Shell Transport & Trading$74,559 42006AT&TBellSouth Corp$72,671 52001ComcastAT&T Broadband$72,041 47 Major Mergers and Acquisitions Worldwide Transaction in millions of U.S. dollars

48. 5-48 Other Types of Business Ownership Leveraged buyout (LBO) – a purchase in which a group of investors borrows money from banks and other institutions to acquire a company (or a division of one) using the assets of the purchased company to guarantee repayment of the loan.