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McGraw-Hill/ Irwin © 2002 by The McGraw-Hill Companies, Inc. All Rights Reserved. 5-1 CHAPTERFIVE Forms of Business Ownership
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McGraw-Hill/ Irwin © 2002 by The McGraw-Hill Companies, Inc. All Rights Reserved. 5-2 World’s Largest Public Companies General Electric U.S. Royal/Dutch Shell Britain/Holland Coca-Cola U.S. Nippon Tele.Japan ExxonU.S. MicrosoftU.S. CompanyCountry
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McGraw-Hill/ Irwin © 2002 by The McGraw-Hill Companies, Inc. All Rights Reserved. 5-3 America’s Oldest Companies J. E. Rhoads & Sons 1702 Conveyer Belts Covenant Life Ins. 1717 Insurance Philadelphia 1752 Insurance Contributorship Contributorship Dexter 1767 Adhesives & Coatings & Coatings D. Landreth Seed 1784 Seeds Bank of New York 1784 Banking
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McGraw-Hill/ Irwin © 2002 by The McGraw-Hill Companies, Inc. All Rights Reserved. 5-4 Largest U.S. Companies 1. Microsoft$602,432 2. General Electric 507,216 3. Cisco Systems 366,498 4. Wal-Mart Stores 307,865 5. Intel 275,008 Market Capitalization (In Millions) Source: Wall Street Journal
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McGraw-Hill/ Irwin © 2002 by The McGraw-Hill Companies, Inc. All Rights Reserved. 5-5 Basic Forms of Ownership Sole Proprietorship Sole Proprietorship Partnership Partnership Corporation Corporation NumberSales 74%5% 8%5% 18%90%
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McGraw-Hill/ Irwin © 2002 by The McGraw-Hill Companies, Inc. All Rights Reserved. 5-6 Forms of Business Ownership Forms of Business Ownership
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McGraw-Hill/ Irwin © 2002 by The McGraw-Hill Companies, Inc. All Rights Reserved. 5-7 Sole Proprietorship Ease of start/end Be your own boss Pride of ownership Retain profit No special taxes Unlimited liability Limited financial resources Difficulty in mgmt. Time commitment Few fringe benefits Limited growth Limited life span AdvantagesDisadvantages
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McGraw-Hill/ Irwin © 2002 by The McGraw-Hill Companies, Inc. All Rights Reserved. 5-8 Partnership More financial resources Shared mgmt. Longer survival Unlimited liability Division of profits Disagreements among partners Difficult to terminate AdvantagesDisadvantages
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McGraw-Hill/ Irwin © 2002 by The McGraw-Hill Companies, Inc. All Rights Reserved. 5-9 Types of Partnerships General GP GP GP GP Limited GP PassiveInvestor PassiveInvestor PassiveInvestor
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McGraw-Hill/ Irwin © 2002 by The McGraw-Hill Companies, Inc. All Rights Reserved. 5-10 Uniform Partnership Act Common Ownership Common Ownership Shared Profits & Losses Shared Profits & Losses Management Participation Management Participation
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McGraw-Hill/ Irwin © 2002 by The McGraw-Hill Companies, Inc. All Rights Reserved. 5-11 Types of Corporations Regular ‘C’ Subchapter ‘S’ Limited Liability Corporation
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McGraw-Hill/ Irwin © 2002 by The McGraw-Hill Companies, Inc. All Rights Reserved. 5-12 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 Double taxation AdvantagesDisadvantages
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McGraw-Hill/ Irwin © 2002 by The McGraw-Hill Companies, Inc. All Rights Reserved. 5-13 S Corporations S No more than 75 shareholders S Shareholders S Individuals S Estates S U.S. citizens or residents S 1 class of stock S <25% of income can be passive S Tax rate = +5% S Slower-growing companies S Benefits change with new tax rules
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McGraw-Hill/ Irwin © 2002 by The McGraw-Hill Companies, Inc. All Rights Reserved. 5-14 Figure 5.4 How Owners Affect Management
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McGraw-Hill/ Irwin © 2002 by The McGraw-Hill Companies, Inc. All Rights Reserved. 5-15 Make-up of Corporate Boards Retired office of another firm89% CEO at another company87% Major company shareholder73% Ex-government official53% Academicians50% Corporate boards average 11 Directors. Most Directors by percentage are:
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McGraw-Hill/ Irwin © 2002 by The McGraw-Hill Companies, Inc. All Rights Reserved. 5-16 External Corporate Growth Merger/Acquisition Merger/Acquisition Horizontal Horizontal Vertical Vertical Conglomerate Conglomerate Leveraged Buyout (LBO) Leveraged Buyout (LBO)
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McGraw-Hill/ Irwin © 2002 by The McGraw-Hill Companies, Inc. All Rights Reserved. 5-17 Types of Mergers/Acquisitions HorizontalA B = AB Vertical Conglomerate
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McGraw-Hill/ Irwin © 2002 by The McGraw-Hill Companies, Inc. All Rights Reserved. 5-18 Leveraged Buyout Individual + Loan= Purchase of Company Purchase Loan Company = Collateral
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McGraw-Hill/ Irwin © 2002 by The McGraw-Hill Companies, Inc. All Rights Reserved. 5-19 Top U. S. Mergers Time Warner AOL $120 Bil World ComMCI$30 Bil Bell AtlanticNYNEX$26 Bil KKRRJR/Nabisco$25 Bil DisneyCAP/Cities ABC$19 Bil AcquirerTargetValue
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McGraw-Hill/ Irwin © 2002 by The McGraw-Hill Companies, Inc. All Rights Reserved. 5-20 Top Growth Franchises Kumon Math & Reading Centers4,586 McDonald’s3,288 7-Eleven Convenience Stores1,023 Jackson Hewitt Tax Service 884 Taco Bell Corp. 841 KFC Corp. 567 Coverall Cleaning Concepts 548 Yogen Fruz Worldwide 520 #New Stores in 1999 Source: Entrepreneur, March 2000
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McGraw-Hill/ Irwin © 2002 by The McGraw-Hill Companies, Inc. All Rights Reserved. 5-21 Survival After Startup Franchise vs. Independent
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McGraw-Hill/ Irwin © 2002 by The McGraw-Hill Companies, Inc. All Rights Reserved. 5-22 Franchises + Management & marketing ass’t + Personal ownership + Recognized name + Financial advice & ass’t + Lower failure rate - High start-up costs - Shared Profit - Management regulation - Coattail effects - Restrictions on selling - Fraudulent franchisors Advantages Disadvantages
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McGraw-Hill/ Irwin © 2002 by The McGraw-Hill Companies, Inc. All Rights Reserved. 5-23 Franchise System Franchiser Franchisee Franchise Agreement
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McGraw-Hill/ Irwin © 2002 by The McGraw-Hill Companies, Inc. All Rights Reserved. 5-24 Franchise Contract Franchisor, Inc. Franchisee Branded Product/Service PerformanceMonitoring $$$$$
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McGraw-Hill/ Irwin © 2002 by The McGraw-Hill Companies, Inc. All Rights Reserved. 5-25 Franchisor Assigns Territory Assigns Territory Provides Financial Aid/Advice Provides 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.
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McGraw-Hill/ Irwin © 2002 by The McGraw-Hill Companies, Inc. All Rights Reserved. 5-26 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
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McGraw-Hill/ Irwin © 2002 by The McGraw-Hill Companies, Inc. All Rights Reserved. 5-27 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
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McGraw-Hill/ Irwin © 2002 by The McGraw-Hill Companies, Inc. All Rights Reserved. 5-28 Benefits of a Home-Based Business Flexible work hours Quality lifestyle Doing the work of your choice Opportunity to expand using technology Self-motivation.
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