Choosing a Form of Business Ownership Nickels Mc

* * * Choosing a Form of Business Ownership Nickels Mc. Graw-Hill/Irwin Understanding Business, 8 e * Mc. Hugh * * CHAPTER ** 5 Mc. Hugh 1© 2008 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

* * * Basic Forms of Business Ownership Type of Ownership Number Sales Sole Proprietorship 72% 6% Partnership 8% 13% Corporation 20% 81% Source: US Internal Revenue Service 2

* * * Sole Proprietorship Advantages • • • Ease of start/end Be your own boss Pride of ownership Leave a legacy Retain profit No special taxes Disadvantages • • Unlimited liability Limited financial resources Management difficulty Time commitment Few fringe benefits Limited growth Limited life span 3

* * * Types of Partnerships General Limited GP GP GP Passive Investor 4

* * * New Forms of Partnerships • Master Limited Partnership • Traded Publicly • Taxed As A Partnership • Limited Liability Partnership

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

* * * Types of Corporations • Conventional ‘C’ • S Corporation • Limited Liability Companies

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

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

* * * World’s Largest Corporations 1. Citigroup 2. General Electric 3. American Intl Group 4. Bank of America 5. HSBC Group 6. Exxon. Mobil 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 10

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

* * * America’s Oldest Companies Company Year Started Type of Company J. E. Rhoads & Sons 1702 Conveyer Belts Covenant Life Ins. 1717 Insurance 1752 Insurance Contributorship Dexter 1767 Adhesives & Coatings D. Landreth Seed 1784 Seeds Bank of New York 1784 Banking Philadelphia 12

* * * GM’s Ownership In: Source: USA TODAY 13

* * * How Owners Affect Management 14

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

* * * Limited Liability Companies Advantages • Limited Liability • Tax Choice • Flexible Ownership Rules • Flexible Profit & Loss Distribution • Operating Flexibility Disadvantages • No Stock • Limited Life Span • Fewer Incentives • Taxes • Paperwork 16

* * * Types of Mergers Horizontal Vertical Conglomerate No Relationship between companies

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

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

* * * Franchise System • Franchise Agreement • Franchisor • Franchisee 20

* * * Franchise Contract Franchisor, Inc. Branded Product/Service Performance Monitoring $$$$$ Franchisee 21

* * * Franchisor • Assigns Territory • Provides • May Provide • Business Financial Aid/Advice • Offers Merchandise/ Training/Support Expansion Using O. P. M. Supplies at Competitive Price 22

* * * Franchisee • Pays Up-Front Costs • Makes Monthly Payment to Franchisor • Runs Business by Franchisor’s Rules/Procedures • Buys Materials from Franchisor/ Approved Supplier

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

* * * Cost of Fast-Food Franchise Company Initial Fee Royalty Burger King $50, 000 8. 5% Mc. Donald’s $45, 000 8% Wendy’s $25, 000 8% Domino’s None 8. 5% Subway $10, 000 11. 5% Krispy Kreme $40, 000 5. 5% 25

* * * 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

* * * Benefits of a Home-Based Franchise • Flexible work hours • Quality lifestyle • Doing the work of your choice • Opportunity to expand using technology • Self-motivation