Chapter 5 Forms of Business Ownership and Organization

Learning Goals 1 Distinguish between small and large businesses. 7 Outline three main legal forms of business ownership and summarize the features of businesses owned by employees and families, as well as not-for-profit organizations. 2 Discuss the contributions of small businesses to the economy. 3 Discuss the survival rate of small businesses. 8 Describe public and collective (cooperative) business ownership. 4 Describe the features of an effective business plan. 9 Identify types of corporations and the levels of corporate management. 5 6 Describe funding opportunities for small businesses, including the role of the Small Business Administration. Explain how franchising can provide opportunities for both franchisors and franchisees. 10 Describe mergers, acquisitions, and joint ventures.

Most Businesses are Small Businesses � 90% of firms with employees have fewer than 20 people on staff. � � More than 20 million people in the United States earn business income without employees. � � � 98% have fewer than 100 employees Almost ½ the sales in the United States are made by small businesses. Small businesses generated 60%--80% of new jobs over the last decade. Small businesses are a launching pad for entrepreneurs and encourage the prevalence of minorities.

What is Small Business? � The Small Business Administration defines a small business to be a firm that is independently owned and operated and is not dominant in the field. � � � Manufacturing business: fewer than 500 workers Wholesalers: fewer than 100 workers Retailers: less than $6 million in annual sales Agricultural business: less than $750, 000 Small businesses’ sizes range from $500, 000 to $25 million in sales and from 100 to 1, 500 employees.

Typical Small-Business Ventures

Major Industries Dominated by Small Businesses

Home-Based Businesses � 52% of small businesses � 16 million Allows for more control of business � Allows for more control of personal time � Keeps start-up and operating expenses low � Owner can feel isolated and business has less visibility to customers �

Contributions of Small Business Create New Jobs � Account for 30% of U. S. Exports � Offer Customized Services � Create New Industries � Encourage Innovation �

Small Business Failure 3 in 10 businesses close permanently within two years. � 50% of businesses fail within five years. � By the 10 -year mark, 82% of all small businesses have closed permanently. �

Reasons Why Small Business Fail � Management � Inadequate Shortcomings Financing � Government Regulation

Increasing the Likelihood of Small Business Success � Creating � Written a Business Plan documentation that provides orderly statement of goals, methods, and purpose � Discusses the company’s mission and vision � Analyzes unique advantage, customers, and competition

Sources of Small Business Financing

Small Business Administration � Government agency concerned with helping small business firms � Financial Assistance � Loan Guarantees � Microloans � Small Business Investment Companies (SBICs) � Active Capital: SBA Loans

Other Specialized Assistance � Set-Aside Programs � Government � 5% for women and minorities � Assistance � Contracts (over 23%) in Financing Government Procurement Business Incubators � Local community initiatives to share resources for small start-ups SCORE: Counselors to America’s Small Business � Small Business Development Centers (SBDC) �

Opportunities for Women & Minorities More than 40% of U. S. businesses are owned by women (10 million businesses) � The number of businesses owned by minorities outpaced the growth in the number of U. S. businesses overall. � Women and minorities still face challenges: � � Smaller-scale operations Challenges finding investors Access to capital

Minority-Owned Businesses

The Franchising Alternative � A contractual business agreement between a manufacturer or another supplier and a dealer to produce and market the supplier’s good or service. � Links to franchising opportunities: � � Subway Entrepreneur

The Franchising Agreement � � � � Franchising agreements exist between franchisee and franchisor. 50% of all retail sales 760, 000 businesses 18 million jobs $500 billion in payroll Near $2 trillion in sales New franchise opens every 8 minutes Franchising overseas is a growing trend

Benefits and Problems of Franchising ADVANTAGES � � � Prior Performance Record Recognizable Company Name (Brand) Proven Business Model Tested Management Program Savings through Volume Purchases DISADVANTAGES � � � Franchise Fees Future Payments (Royalties) Linked to Reputation and Management Franchise Agreement Restrictions Tight Control

Alternatives for Organizing a Business

Forms of Private Ownership

Legal Structures to Meet Changing Needs Financial Situation � Management Skills and Limitations � Management Styles and Capabilities � Exposure to Liability �

Types of Corporations Domestic, foreign, alien � S Corporation � Limited Liability Companies � Employee-Owned Corporations � Not-for-Profit Corporations �

Public and Collective Ownership � Public ownership – a unit or agency of government owns and operates an organization. Parking structures, water systems, turnpike authority. � Customer-Owned Businesses – collective ownership of a production, storage, transportation or marketing organization is a cooperative.

Corporate Management � Stockholders – acquire stocks in exchange for ownership � � Preferred Stock Common Stock Board of Directors – elected by stockholders to oversee corporation Corporate Officers & Management – make major corporate decisions and handle ongoing operations

When Businesses Join Forces � Mergers and Acquisitions (M&A) � Merger – combination of two or more firms to form one company � � � Vertical Horizontal Conglomerate Acquisition – procedure in which one firm purchases the property and assumes the obligations of another Joint Venture – partnership between companies for a specific purpose