Business Ownership Chapter 8 Its just paper All

Business Ownership Chapter 8 It’s just paper. All I own is a pickup truck and a little Walmart stock. ………………. . Sam Walton

Sole Proprietorship A business owned and managed by one individual; the business and the owner are one and the same in the eyes of the law

Sole Proprietorship Advantages q Easy to start up q Ease of management q Owner keeps the profits q Owner does not have to pay separate business income tax q Psychological satisfaction q Easy to discontinue

Sole Proprietorship Disadvantages q Unlimited liability q Limited access to raising financial capital q Small size-may have limited inventory q Limited managerial experience q Difficulty of attracting qualified employees q Limited life

Partnership An association of two or more people who coown a business for the purpose of making a profit A partnership agreement or the Uniform Partnership Act

Partnership Advantages q Ease of start up q Ease of management q Lack of special taxes on partnership’s income q Larger pool of capital q Ability to attract limited partners q More efficient operations that come from larger size

Partnership Disadvantages q q Unlimited liability of at least one partner Limited life Lack of continuity Potential for personality and authority conflicts

Special Partnerships n n n Limited partnership-one or more partners are not active in the running of the business, and whose liability for the partnership’s debt is restricted to the amount invested in the business General partnership- all partners are jointly responsible for management and debts(most common form) Articles of Partnership: contract between partners spelling out the rules of partnership. Dividing profit Dividing responsibility Admitting new partners Buying out partners

Corporations A separate legal entity apart from its owners which receives the right to exist from the state in which it is incorporated q q q Domestic Foreign Alien Publicly held Closely held

Corporations- 20% of Business 74%-profits

Corporations Certificate of Incorporation q Name q Statement of purpose q Time horizon q Names and addresses of incorporators q Place of business q Capital stock authorization’ q Capital required at time of incorporation q Provisions for preemptive rights q Restrictions on transferring shares q Names and addresses of officers q By-laws

Corporate Structure

Stock Common stock – (owners are voters) gives a voice in how the corporation is run and a share in variable dividends – high dividends if profits are high. The Board of Directors may wish to withhold all dividends if the money is needed for plant expansion or payment on debts. Because they can vote, they determine how a corporation is managed. They get one vote for every share they own. In a good year, they will receive a higher dividend than preferred stockholders. (Preferred stock dividends are fixed, common stock is not, so they are taking more risk. )

Stock (cont) n Preferred Stock – (non-voters) guaranteed dividends that are paid from profits before the company pays any dividends on common stock. If the company is unable to pay this fixed dividend in full, it makes up the difference when the company’s profits increase. They are like a silent partner because they can not vote and have no say in how the business is run.

10 -19 -87 508 points 24% drop in one day On this day, Sam Walton, Walton the richest man in the world, had a paper loss of $1. 5 billion.

Corporations Advantages q q q Ease of raising financial capital Limited liability for its owners Board of directors can hire professional managers to run the firm Unlimited life Ease of transferring ownership of the corporation

Corporations Disadvantages n n Double taxation of corporate profits Difficulty and expense of getting a charter Shareholders (owners) have little voice in how the business is run Subject to more government regulations than others forms of business

Franchises n n Franchising is a form of business organization in which a firm that already has a successful product or service (franchisor) licenses its trademark and method of doing business to another business or individual (franchisee) in exchange for a franchise fee and an ongoing royalty payment. Some franchisors are established firms (like Mc. Donald’s) while others are first-time enterprises being launched by entrepreneurs. Franchisor- actual owner of the business that lets other investors rent or lease its name, business profile, and way of doing business Franchisee- investor who rents or leases the business model from the franchisor and then hope to recoup his/her investments by selling the franchisor’s goods or service

Advantages and Disadvantages of Buying a Franchising Advantages Disadvantages • A proven product or service • • . Cost of the franchise. • within an established market. • An established trademark or business system. • Restrictions on creativity. • Franchisor’s training, technical support, and managerial expertise. • Risk of fraud, misunderstandings, or of franchisor commitment. • Duration and nature of commitment. • An established marketing • Poor performance on the part of other franchisees. network. • Potential for failure. • Availability of financing (varies). • Potential for business growth. 15 -21

Stop and Think If you started your own business what would it be? n What are some of the 4 Factors of production you would need. n n 2 examples for each

Growth through Reinvestments n Business revenue can be used for n n Before reinvestments: n n Investment in factories Machinery Technologies Must estimate its cash flow. First records its total sales and then subtracts all expenses, taxes, and depreciation = net income Net income + depreciation = cash flow (or the bottom line) real measure of business profit. Decide to reinvest part of cash flow or additional sales and more profits

Growth Through Mergers (cont) n n Horizontal mergers: joining of firms that make the same product (Nextel and Sprint) Vertical Merger: joining of firms involved in different stages of manufacturing or marketing

Growth Through Mergers n n Firms merge, one gives up it separate legal identity Company may merge with another to n n n Grow faster Become more efficient (synergy) Economies of scale (larger size) Acquire or deliver a better product (diversification) Eliminate a rival Change or lose its corporate identify

Growth Through Mergers (cont) • Conglomerate: composed of four or more businesses • Marketing unrelated products • None are responsible for a majority of sales • Multinational: corporation with manufacturing and service operations in several countries -Subject to each nation’s business regulations

Entrepreneurial Startup: Incubators n Incubator: Program designed to support successful development of startups by providing business resources. n business, marketing, and networking advice n computing resources (computers, net access, servers) n financial advisors n management teams n access to loans and banks n access to angel investors and/or venture capitalists n legal advisors (such as for intellectual property rights)

Venture Capitalists n venture capital ("VC"): Financial resources given to early-stage companies. n given to startups by VC firms (groups) n VC firm gets % of profits or equity (stock) n different from bank loans; does not need to be paid back

Venture Capitalists n (cont) Stages of VC financing: n seed funding: initial minimal funds; often given by angels n start-up: early funds from VC firm for marketing/dev n growth ("series A"): large investment ($1 -2 M) for preferred stock n second round: company is successful, but not profiting n expansion ("mezzanine"): $ given to a newly profitable company n exit/bridge: VC firm sells stock once company matures

Angel Investors n Angel investor: An affluent individual who provides initial capital for a business start-up. n amount is generally smallish (~$10 -30 k) n gets company off the ground to prototype stage n often decided quickly and on a fairly informal proposal n angels are accredited investors to comply with SEC regulations n in US, many angels (≥ 40%) are in Silicon Valley n other sources: NYC, Seattle, Austin, Boston, NC Research Triangle

Angel Investors n (cont) angels are compensated with: n ownership equity (a percentage of ownership of the company) n implies company's value (e. g. $10 k for 5% stock => $200 k value) n convertible debt (options to buy stock in the company later)

Crowdfunding? Crowdfunding is a method for obtaining project funding, by soliciting contributions from a large group of people, and especially from an online community.

Why does it work? Small donations from many people can raise a lot of money. By tapping into your online social connections, you can reach a much broader audience in less time than traditional fundraising processes.

Be a thinker n With a neighbor develop 2 examples of each type of merger n. Vertical n. Horizontal n. Conglomerate n. Why would companies ever want to merge? ?

Community and Civic Organizations n Nonprofit Organization: business to promote its members’ collective interest, not seek financial gain (Bill Gates foundations) n n Incorporate to take advantage of a corporation’s unlimited life and limited liability If money remains after expenses are paid, the B. O. D. may apply to other projects

Cooperatives n Voluntary association of people who carry on an economic activity that benefits members n Consumer Cooperatives: buy food and other necessities in bulk n Members donate time to the co-op n Members pay lower prices for goods n Service Co-ops: credit unions, offer services to its members at lower rates n Producer Co-ops: help members, farmers, promote or sell their products

Labor, Professional, and Business Organizations n n n Labor unions: represent workers’ interest and negotiate with management through collective bargaining Professional association: set standards for those in the profession and influence government policies on issues concern members’ interest (NCSS) Business Associations: industries or trade associations that represent specific businesses (BBB)

Government n n Direct Role n Agencies produce and distribute goods and services to consumers such as the TVA (electricity) or US Postal Service Gov’t Corp: n Board of directors n Congress’ money v. investors’ money n Indirect Role: n Regulates public utilities n Grants money to people in form of Social Security and student financial aid