1. ****** 5-1 1-1 MUSOLINO Choosing a Form of Business Ownership 5 CHAPTER

2. ****** 5-2 Basic Forms of Business Ownership Source: US Internal Revenue Service Type of Ownership NumberSales Sole Proprietorship 72%6% Partnership8%13% Corporation20%81%

3. ****** 5-3 Sole Proprietorship Ease of start/endEase of start/end Be your own bossBe your own boss Pride of ownershipPride of ownership Leave a legacyLeave a legacy Retain profitRetain profit No special taxesNo special taxes Unlimited liabilityUnlimited liability Limited financial resourcesLimited financial resources Management difficultyManagement difficulty Time commitmentTime commitment Few fringe benefitsFew fringe benefits Limited growthLimited growth Limited life spanLimited life span AdvantagesDisadvantages

4. ****** 5-4 Types of Partnerships General GP GP GP GP Limited GP PassiveInvestor PassiveInvestor PassiveInvestor

5. ****** 5-5 New Forms of Partnerships Master Limited PartnershipMaster Limited Partnership Traded PubliclyTraded Publicly Taxed As A PartnershipTaxed As A Partnership Limited Liability PartnershipLimited Liability Partnership

6. ****** 5-6 Partnership More financial More financial resources resources Shared Shared management management Longer survival Longer survival No Special Taxes No Special Taxes Unlimited liability Unlimited liability Division of profits Division of profits Disagreements Disagreements among partners among partners Difficult to Difficult to terminate terminate Advantages Disadvantages

7. ****** 5-7 Types of Corporations Conventional ‘C’Conventional ‘C’ S CorporationS Corporation Limited Liability CompaniesLimited Liability Companies

8. ****** 5-8 Corporations Private: Not Traded on Any Stock ExchangePrivate: Not Traded on Any Stock Exchange Public: Shares are Traded on One or More Stock ExchangesPublic: Shares are Traded on One or More Stock Exchanges Non-Profit: Performs Public Service, Has Special Tax Considerations to Encourage FormationNon-Profit: Performs Public Service, Has Special Tax Considerations to Encourage Formation

9. ****** 5-9 Corporation Limited liability Limited liability More money for More money for investment investment Size Size Perpetual life Perpetual life Ease of ownership Ease of ownership change change Ease of drawing Ease of drawing talented employees talented employees Separation of Separation of ownership/mgmt. ownership/mgmt. Extensive paperwork Extensive paperwork Double taxation Double taxation Two tax returns Two tax returns Size Size Termination difficult Termination difficult Conflict with Conflict with Stockholder & Board Stockholder & Board Initial cost Initial cost AdvantagesDisadvantages

10. ****** 5-10 World’s Largest Corporations 1.Citigroup 2.General Electric 3.American Intl Group 4.Bank of America 5.HSBC Group 6.ExxonMobil 7.Royal Dutch/Shell 8.BP 9.ING Group 10.Toyota Motor 11.UBS 12.Wal-Mart Stores 13.Royal Bank of Scotland 14.JP Morgan Chase 15.Berkshire Hathaway 16.BNP Paribas 17.IBM 18.Total 18.Verizon Communication 20.Chevron Texaco Source: Forbes, 2005

11. ****** 5-11 America’s Largest Private Companies 1.Cargill / agricultural commodities, food $66,669 2.Koch Industries / chemicals, energy, tech 60,000 3.Mars / candy, pet food electronics 19,100 4.PricewaterhouseCoopers / accounting 18,700 5.Publix Supermarket / supermarkets 18,686 Revenue 2004 (In Millions) (In Millions) Source: Forbes, 2005

12. ****** 5-12 America’s Oldest Companies Company Year Started Type of Company J. E. Rhoads & Sons 1702 Conveyer Belts Covenant Life Ins. 1717Insurance Philadelphia1752 Insurance Contributorship Dexter1767 Adhesives & Coatings D. Landreth Seed 1784Seeds Bank of New York 1784Banking

13. ****** 5-13 GM’s Ownership In: Source: USA TODAY

14. ****** 5-14 How Owners Affect Management

15. ****** 5-15 S Corporations No more than 100 shareholders No more than 100 shareholders Individual or Estates Individual or Estates U.S. citizens or permanent residents U.S. citizens or permanent residents 1 class of stock 1 class of stock <25% of income can be passive <25% of income can be passive Benefits change with new tax rules Benefits change with new tax rules

16. ****** 5-16 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

17. ****** 5-17 Types of Mergers Conglomerate Vertical Horizontal No Relationship between companies

18. ****** 5-18 Leveraged Buyout Individual + Loan= Purchase of Company Purchase Loan Company = Collateral

19. ****** 5-19 Why Mergers Don’t Work! Companies Overpay to Acquire Another FirmCompanies Overpay to Acquire Another Firm Acquiring Company Overestimates Cost Savings and SynergiesAcquiring Company Overestimates Cost Savings and Synergies Managers Disagree About Managers Disagree About Integrating Operations Integrating Operations Obsession with Cost Cutting Hurts Business, Costing Top Employees & Customers Obsession with Cost Cutting Hurts Business, Costing Top Employees & Customers

20. ****** 5-20 Franchise System Franchise AgreementFranchise Agreement FranchisorFranchisor FranchiseeFranchisee

21. ****** 5-21 Franchise Contract Franchisor, Inc. Franchisee Branded Product/Service PerformanceMonitoring $$$$$

22. ****** 5-22 Franchisor Assigns TerritoryAssigns Territory May Provide Financial Aid/AdviceMay Provide Financial Aid/Advice Offers Merchandise/ Supplies at Competitive PriceOffers Merchandise/ Supplies at Competitive Price Provides Training/SupportProvides Training/Support Business Expansion Using O.P.M.Business Expansion Using O.P.M.

23. ****** 5-23 Franchisee Pays Up-Front CostsPays Up-Front Costs Makes Monthly Payment to FranchisorMakes Monthly Payment to Franchisor Runs Business by Franchisor’s Rules/ProceduresRuns Business by Franchisor’s Rules/Procedures Buys Materials from Franchisor/ Approved SupplierBuys Materials from Franchisor/ Approved Supplier

24. ****** 5-24 Franchises Management & marketing assistance Management & marketing assistance Personal ownership Personal ownership Recognized name Recognized name Financial advice & assistance Financial advice & assistance Lower failure rate Lower failure rate High start-up costs High start-up costs Shared Profit Shared Profit Management regulation Management regulation Coattail effects Coattail effects Restrictions on selling Restrictions on selling Fraudulent franchisors Fraudulent franchisors Advantages Disadvantages

25. ****** 5-25 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$10,00011.5% Krispy Kreme $40,0005.5%

26. ****** 5-26 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

27. ****** 5-27 Benefits of a Home-Based Franchise Flexible work hoursFlexible work hours Quality lifestyleQuality lifestyle Doing the work of your choiceDoing the work of your choice Opportunity to expand using technologyOpportunity to expand using technology Self-motivationSelf-motivation

28. ****** 5-28 Franchising & E-Commerce Technology- Faster Customer ServiceTechnology- Faster Customer Service Access to International MarketsAccess to International Markets

29. ****** 5-29 Cooperatives Farm CooperativeFarm Cooperative Owned & Controlled by People Who Use ItOwned & Controlled by People Who Use It Pool of ResourcesPool of Resources Economic PowerEconomic Power